The IRS proposal to track your wallet will put pressure on the crypto industry

The United States Internal Revenue Service (IRS) is considering a proposal that could have far-reaching consequences for the cryptocurrency industry. Investors should be concerned, because it could have a significant impact on the way individuals — both inside and outside the U.S. — are allowed to engage with digital assets.

The IRS has proposed an initiative under Tax Code Section 6045 to establish new tax rules for the treatment of cryptocurrency providers. Specifically, the agency is looking to amend the law to expand the definition of “brokers” to include almost all crypto-service providers — such as decentralized exchanges (DEXs) and wallet providers. Those providers will be required to collect personal information from consumers beginning in 2025 and begin sending the (still unreleased) Form 1099-DA to the IRS in 2026. This will be a crypto-specific version of the 1099-MISC.

The IRS' move to redefine “brokerage” is not only a regulatory adjustment, but a fundamental change that could shape the entire US cryptocurrency landscape. By including multiple crypto service providers under this definition, the IRS is significantly expanding its reach. This proliferation means that many parties involved in digital asset transactions, from wallet providers to small developers, may need to report user data and transaction details to the government.

For users and investors in the cryptocurrency space, this change could translate into increased reporting and compliance obligations – bringing back the anonymity and flexibility currently afforded to users. For service providers, it requires adopting new systems and procedures that require consumers to request their personal information. While the IRS is technically trying to target US users, service providers have no way to determine citizenship before collecting user data.

Related: IRS proposes unprecedented data collection on crypto users

The move will be an important step in aligning the world of digital assets with traditional financial systems in terms of regulatory oversight and transparency. It is critical that the average American understands the implications of the proposal, as it represents a significant pivot point in how digital assets are perceived and managed by regulators.

The industry's response

The industry's response to these regulatory changes has been critical and proactive. The major players, including Coinbase, have expressed concern about intrusion into personal privacy, whose chief legal counsel, Paul Grewal, said the change “sets a dangerous precedent for monitoring users' daily financial activities, requiring almost every digital asset transaction. The purchase of a cup of coffee – should be reported.”

In essence, the proposed registries exceed Congress's authority to establish tax reporting rules on par with traditional finance, harming digital assets and threatening to harm a nascent industry. 2/4

— paulgrewal.eth (@iampaulgrewal) October 18, 2023

The broader industry is similarly concerned about the potential for regulations to hinder the growth of digital assets. The main issue is the proper implementation of formal regulatory frameworks for decentralized systems, ensuring the protection of investor privacy and creating an environment that supports innovation while maintaining market stability.

The change will have huge implications for individual investors and developers in the cryptocurrency realm. For investors, clearer regulatory guidelines could boost market confidence, which could lead to greater investment activity. However, overly strict regulations risk stifling innovation and diminishing cryptocurrencies as an alternative to traditional financial systems. For developers, especially those in the DeFi sector, these regulatory changes present both compliance challenges and opportunities to influence legislation that recognizes the unique capabilities of blockchain technology.

Related: Expect new IRS crypto surveillance to come with a slew of controls

Navigating the complexity of these regulatory propositions requires a balanced approach. The cryptocurrency industry must actively engage with regulators to ensure fair, practical and innovation-friendly regulations are created. Balancing regulatory oversight with ecosystem core values ​​is critical to the future of digital finance. The industry's ability to adapt to these regulatory changes and maintain its innovative nature is critical.

The need for regulatory adjustment and industry evolution is clearer than ever. The cryptocurrency sector is encouraged to improve its practices to meet new regulatory requirements while maintaining its innovative and decentralized nature. At the same time, regulators are challenged to understand the unique aspects of digital assets and decentralized systems in order to develop effective, intelligent and forward-thinking regulations.

Lobbying and political contributions

The cryptocurrency industry is increasingly involved in lobbying and political contributions. In the year By 2022, the industry's lobbying efforts and political contributions have skyrocketed, reflecting its desire to shape regulatory frameworks. This political engagement is a clear indication of the industry's commitment to influencing policy decisions that affect its future. It also highlights the need for a regulatory environment that understands and accommodates the unique features of digital assets and blockchain technology.

Expanding the definition of “broker” will stifle innovation for the industry, especially on American soil. The cryptocurrency community's unwavering response in favor of fair and supportive regulatory measures highlights the delicate balance between effective regulation and fostering technological progress.

As the industry actively participates in shaping these regulations, its participation is critical to balancing regulatory regulations with innovation and growth for the US cryptocurrency sector to continue to thrive in a competitive global landscape.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.