IRS’s New Tax Reporting Rules: The End of Crypto as We Know It?

While French crypto users are busy tearing their hair out at the mere idea of implementing an income tax from cryptocurrency staking, U.S. crypto users are quacking in their cowboy boots due to the possible new crypto tax reporting rules.

Taxes brought down Al Capone to his knees, will it do the same to the Crypto industry?

While French crypto users are busy tearing their hair out at the mere idea of implementing an income tax from cryptocurrency staking, U.S. crypto users are quacking in their cowboy boots due to the possible new crypto tax reporting rules.

Rules which have the potential of transfiguring the whole crypto industry.

Forcefully propelling the crypto space into a new paradigm, and killing the crypto of old in its wake.

The New Tax Rules

This all sounds very dramatic when one learns that what the U.S. Internal Revenue Service (IRS) wishes to implement is just a mirroring of traditional financial reporting.

Under those new rules, crypto brokers would be required to report any relevant information on sales and exchanges of digital assets on their platforms to “simplify” tax filing by sending Form 1099-DA to the IRS and investors alike.

Crypto brokers are defined as “any party who facilitates crypto sales while in a position to know the identity of the seller and the nature of the transaction;” which includes centralized and decentralized exchanges, certain online wallets and crypto payment processors.

Crypto brokers will be required to begin sending Form 1099-DA to the IRS and investors in January 2026, and “report any information on sales and exchanges of digital assets” in 2025.

Although these new tax reporting rules may not seem significant at first glance, they could unravel the whole crypto industry.

The End of Crypto as We Know It

The crypto industry is quite like no other.

It’s an industry that prides itself on its ability to escape scrutiny, creating freedom in anonymity and shadows.

It’s an industry rooted in Cypherpunk ideals, offering the alluring promise of a virtual realm of freedom and serving as a foundational element for achieving independence from any form of authority by providing individuals with complete access and control over their finances.

Crypto users love nothing more than feeling shrouded by the mist offered by the crypto space, lulling them into a false sense of security.

Those new tax rules are akin to ripping the veil of anonymity.

And in doing so, ripping apart the crypto space.

Coinbase’s Chief Legal Officer, Paul Singh Grewal, took to X to denounce the IRS’s new crypto tax reporting rules.

For him, it creates a “dangerous precedent for surveillance of the everyday financial activities of consumers by requiring nearly every digital asset transaction — even the purchase of a cup of coffee — to be reported.”

In his sign-on letter for the ‘Proposed Broker Reporting Regulations for Digital Asset Transactions,’ he adds:

“Sweeping all digital asset transactions into tax reporting requirements raises significant privacy issues for consumers who would be forced to report simple transactions to the IRS that would not be reported if completed by cash or credit card.”

By requiring crypto brokers to ‘report any information on sales and exchanges of digital assets,’ the IRS effectively demands the disclosure of about every transaction on the blockchain.

A nightmare come true for crypto users.

When first came the taxes — the encapsulation of everything the space stood against — they were fought tooth and nail.

But ultimately crypto users could do away with them.

Because really, as long as you avoided KYC-ing centralized crypto exchanges, who was doing what, where and with whom? Who knew?

If a taxpayer decided to cash out his staking rewards as simple capital gains and escape staking taxes because he needed the cash, who was going to stop him? Who could prove what he just did?

He could hold his staking rewards in stablecoins and release them gradually in a manner that concealed their origins.

In the crypto space, there is no lack of obfuscation techniques available, from mixers to private currencies, to ensure that no one will ever be able to trace back to them taxable funds.

Although taxes complicated the whole crypto journey, in themselves, they were not deterrent enough to have a negative impact on the industry.

For them to be an effective deterrent, the Tax department would have needed a vast number of highly skilled crypto tracers capable of tracking every crypto user in the country.

Now, if the IRS crypto tax reporting rules are voted on, well, they have the potential to reshape the entire industry.

The IRS, in their own words, aims to “close the tax gap,” created by the tax evasion culture that inhabits the crypto space.

Cracking down on ‘tax cheats while helping law-abiding taxpayers’ is expected to generate nearly $28 billion over 10 years. Notwithstanding the growth and adoption of the crypto market or potential increases in crypto tax rates.

The IRS wishing to “ensure that everyone plays by the same set of rules.”

In other words, there will be no escaping those rules.

No more escaping the IRS.

The Birth of A New Space(s)?

In the crypto space from then on everyone would have to play nicely, and become a law-abiding subject, willingly or not.

One can then only imagine how this new status quo will deeply impact the habits of crypto users.

Who will feel tracked, tailed, stalked every steps of their crypto journey.

A new era will be called forth.

A brand new crypto space will take form.

Actually two.

Some will continue with business as usual, unfazed. Others may choose to leave the space altogether. Some, perhaps many, will drop off the radar, opting to interact only with protocols and currencies that offer anonymity, effectively removing themselves entirely from government scrutiny.

The new crypto space experience painted by the IRS is such a far cry from Satoshi Nakamoto’s vision, that it could potentially lead to a significant split within the crypto space, resulting in two distinct communities coexisting in two different hermetic spaces.

The first space will be considered ‘crypto’ in name only. It will use the blockchain, there will be cryptocurrencies, but it will be a betrayal of the very values on which it was built.

The second space will detach itself entirely from the first one. The actors and users inhabiting it will fight for its ideals, and will stay far away from any government-touched activities.

It might seem quite far-fetched to encompass the whole of crypto based on a decision made in the United States, but the U.S. has been setting the worldwide regulatory standards in recent years.

Many countries have been busy asserting tight control over crypto since the 2021 crypto boom.

If it happens in the U.S. today, it could become a reality in most countries tomorrow and turn a national rule into a new international standard.

And it could happen even sooner than announced.

U.S. Senators Elizabeth Warren, alongside other senators, have asked the Administration to expedite their plan and avoid waiting until 2026 as they are ‘alarmed by the self-inflicted two-year delay for the rule’s implementation, which would contravene the requirements of the bipartisan Infrastructure Investment and Jobs Act, disadvantage law-abiding Americans, and cause the federal government to lose out on billions of dollars in tax revenue.’

While everything is still up in the air, one thing is for sure: the public hearings scheduled for November 7, 2023, and November 8, 2023, are sure to keep the whole crypto industry seated.