US progress bill to repeal controversial digital asset tax rule

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Lawmakers from the House of Representatives voted on February 26 to overturn a controversial tax rule requiring “custodial brokers” to collect and report user data to the Internal Revenue Service (IRS), the federal agency that enforces tax law in the United States.

During last week’s markup session, the House Ways and Means Committee voted 26 to 16 to advance a resolution from Rep. Mike Carey (R-OH) repealing the IRS reporting rule, which was finalized late last year. A rule Carey argued would “overwhelm” the IRS with forms. 

“We must pass this resolution to avoid this nightmare for American taxpayers and for the IRS, while ensuring that the United States is in fact in a position to lead the world in innovation with digital assets and in the crypto sector,” said Carey. 

The Ohio Republican introduced the legislative measure alongside Sen. Ted Cruz (R-TX) in February following the IRS’s move to finalize the much-criticized tax reporting rules.

An unpopular tax

Approved on December 5 and set to take effect in 2027, the IRS regulation would expand existing reporting requirements to include decentralized exchanges and require brokers to disclose gross proceeds from digital asset sales, including—crucially—information regarding taxpayers involved in the transactions.

Specifically, the IRS said it would require “DeFi brokers” to act like traditional securities brokers, who must collect information about their users’ trades and send their customers “Form 1099 tax returns” to complete.

“The IRS stretched its directives from Congress in the 2021 infrastructure law to enact a cryptocurrency agenda and unnecessarily regulate the providers of digital wallets,” said House Ways and Means Committee Chairman Jason Smith (R-MO) before Wednesday’s vote on the repeal resolution.

He added, “not only is it unfair, but it’s unworkable. DeFi brokers do not even collect the information from users needed to implement this rule.”

Rep. Carey’s resolution will now head to the full House of Representatives for a vote. If passed, it will then move to the Senate and finally to President Donald Trump to either veto or sign into law—in which case, based on the President’s pro-digital asset sector leanings, it would almost certainly be approved.

Objections and praise

After the IRS’s introduction of the revised 1099-DA form, many industry figures were critical of the new reporting requirements, particularly the practicality of DeFi brokers having to record “the name and address of each customer”—a level of transparency for which the sector is not renown.

The same day the new rules were published, the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council—three industry advocacy and lobbying organizations—filed a joint lawsuit against the IRS and the Department of the Treasury.

“During the rule’s comment period, the public warned the IRS and Treasury that moving forward with the rule would cripple the digital asset industry. But the government ignored this feedback, leaving the digital asset sector with a rule that puts unlawful compliance burdens on software developers who build so-called “trading front-end services.” This midnight rule will stifle innovation and burden American entrepreneurs—if it stands,” the Blockchain Association argued in its press release announcing the suit.

Despite the industry protestations and lawsuits, this week’s repeal resolution wasn’t met with universal approval.

Ranking member of the House Ways and Means Committee, Rep. Richard Neal (D-MA), defended the IRS reporting rule, arguing that repealing it would weaken tax enforcement and allow digital asset investors to evade reporting their earnings.

“The bill before us will repeal sensible and important treasury regulation, ensuring that taxpayers meet their tax filing obligations and do not skirt the law by selling cryptocurrency without reporting the gains. It’s really that simple,” said Neal.

The IRS v digital currency

In the last few years, the IRS has ramped up its efforts to wrangle the digital asset space within the U.S. tax framework.

In January 2024, amended tax rules signed into law by former U.S. President Joe Biden in 2021—as part of a bipartisan infrastructure bill—came into effect, requiring many digital asset transactions worth more than $10,000 to be reported to the IRS.

Taxpayers had previously been required to report digital assets transactions on their federal income tax returns, but the amended section 6050I of the tax code added reporting requirements traditionally associated with cash transactions, such as the sender’s name, address, and social security number.

A few months later, in April 2024, the IRS revealed its first draft of tax Form 1099-DA, “Digital Asset Proceeds from Broker Transactions,” giving members of the public 30 days to provide feedback and input.

Under the draft, anyone considered a digital asset broker must prepare Form 1099-DA for every customer who sells or exchanges digital assets and then submit the form to customers and the IRS.

The draft was based on a notice of proposed rulemaking posted in the Federal Register on August 29, 2023, by the U.S. Treasury Department. In it, the Treasury stated that digital assets, non-fungible tokens (NFTs) and stablecoins are all reportable, and digital asset brokers, including exchanges and payment processors, must tell the IRS about users’ trades of digital assets.

On June 28, 2024, the IRS issued its “final regulations” requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency. These brokers included custodial digital asset trading platform operators, certain digital asset-hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments.

Due to a certain amount of industry and political backlash, a couple of months later, the IRS released a revised version, aiming to offer more “ease and clarity” to tax filers with digital asset investments, omitting certain requirements from its previous iteration, including a requirement for filers to submit their digital asset wallet addresses and transaction IDs.

These final regulations did not include reporting requirements for brokers “that do not take possession of the digital assets being sold or exchanged,” such as decentralized exchanges and non-custodial brokers, with the IRS saying that it intended to provide rules for these brokers in a different set of regulations.

On December 27, these rules finally came, but rather than providing different reporting rules, the IRS released new rules simply classifying certain DeFi exchanges as brokers if they facilitate the exchange or sale of digital assets—whether through smart contracts or other means—and exercise sufficient control or influence on the transaction process.

This essentially placed these platforms under the same obligations required of the custodial brokers, such as requiring them to disclose information about taxpayers involved in digital asset transactions and report their gross proceeds from digital asset sales. 

The new reporting rules are supposed to take effect in 2027, and the IRS estimated that between 650 and 875 DeFi brokers and up to 2.6 million taxpayers would be affected.

“DeFi service providers use distributed ledger technologies to offer investment and other financial services, similar to those provided in the securities industry by securities brokers and exchanges, that enable customers to carry out trades of digital assets using applications,” the IRS document stated.

However, as of Wednesday’s House Ways and Means Committee markup, it is uncertain if Form 1099-DA and the new reporting rules associated with it will ever see the light of day, at least in their current form.

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