The cryptocurrency landscape is rapidly evolving, and with it comes an increasing necessity for regulatory oversight. Starting in 2025, the Internal Revenue Service (IRS) will implement new reporting requirements that place additional responsibilities on centralized exchanges (CEX) and their users. This article will break down what these changes mean for digital asset investors, the implications for compliance, and how these requirements might impact the broader cryptocurrency market.
For the first time, transactions on centralized cryptocurrency exchanges such as Coinbase and Gemini will require third-party reporting to the IRS. Starting in 2025, these exchanges will be categorized as “brokers,” along with other entities like certain crypto wallets and digital asset kiosks. This categorization means that centralized exchanges will be responsible for reporting purchases and sales of digital assets on a new tax form known as the 1099-DA. The IRS will send this information to both taxpayers and itself by early 2026, mandating that investors include this data when filing their 2025 tax returns.
The introduction of this reporting mechanism represents a substantial change in the relationship between cryptocurrency and federal tax obligations. As previously unregulated exchanges navigate the intricacies of government reporting, taxpayers must ensure their records align with the IRS’ data to avoid discrepancies that could attract unwanted scrutiny or audits.
One significant aspect of the new requirements involves cost basis reporting—the calculation of an asset’s original purchase price, which is crucial for determining profits or losses. Notably, brokers will not be required to report cost basis information until the tax year 2026. This delay could pose challenges for investors aiming to accurately assess their taxable gains, as they will be left without official guidance on their cost basis until the following year.
Jessalyn Dean, a vice president at Ledgible, highlighted this challenge, suggesting that taxpayers might struggle to calculate taxable outcomes accurately without immediate access to the necessary cost basis information from their brokers. For investors who regularly buy and sell digital assets, this gap could create considerable complications during tax season, necessitating diligent record-keeping practices.
The IRS’s timeline for reporting varies significantly between centralized and decentralized platforms. While transactions on centralized exchanges will start reporting in 2025, peer-to-peer transactions on decentralized platforms like Uniswap and Sushiswap will not have this requirement in place until 2027. Moreover, these decentralized platforms will only report gross proceeds from transactions, lacking the ability to trace the cost basis for individual assets. This difference arises from the fundamental nature of decentralized finance (DeFi), where user anonymity and the lack of custodial oversight complicate traditional reporting structures.
As DeFi continues to grow in popularity, regulatory bodies will likely need to develop nuanced strategies for integrating these platforms into the existing framework. For now, users on decentralized platforms should take heed of the timeline differences and maintain their records to prepare for future requirements.
Another critical facet of these new guidelines is their effect on Bitcoin exchange-traded funds (ETFs). These funds will also fall under new reporting requirements as early as this year. Individuals investing in ETF products will receive forms such as the 1099-B or 1099-DA that outline proceeds from sales and outline any taxable events occurring within these funds. Dean emphasizes that ETF investors should consult tax professionals to navigate these complexities, especially as the management of ETF assets could yield taxable gains and losses irrespective of whether the underlying Bitcoin is held long-term.
Just a month prior to these announcements, the IRS introduced automatic relief measures for users engaged in centralized finance (CeFi). Acknowledging the complexities faced by taxpayers under the new Section 6045 custodial broker rules, the IRS has opted for a non-compliance approach initially, while also advising that users select a method of accounting to avoid the default “first-in, first-out” (FIFO) principle which could inflate tax liabilities. Taxpayers are encouraged to employ their records or utilize advanced crypto tax software to circumvent automatic adjustments that could adversely affect their tax obligations.
The introduction of IRS reporting requirements in 2025 marks a pivotal moment in the realm of cryptocurrency taxation. With increased reporting comes the imperative for greater transparency and accountability among investors. As regulations evolve, maintaining detailed records and seeking professional guidance will become essential for compliance. The shifting landscape presents challenges but also signifies maturity in the cryptocurrency industry, as it adapts to the regulatory environment and continues to pave the way for future growth.