IRS Set to Kill Pseudonymity in Crypto? Tax Form Proposal Raises Alarms

A draft version of an IRS form spread fear and uncertainty across the crypto industry this week, with sections of the document leading some to believe that American DeFi users may soon be required to report their self-custodial wallet addresses to the federal government.

Come 2025, the document, Form 1099-DA, will become a mandatory filing for any crypto transaction deemed by the IRS to have sourced from a broker. What exactly that means is still unclear. Crypto exchanges will all but certainly be considered brokerages by the IRS; in November, crypto lobbying groups expressed concern that the tax enforcer could also be angling to classify DeFi traders as brokers as well.

That fear now appears to be confirmed. The draft IRS 1099-DA form features a box where filers must clarify what type of broker was involved in the crypto transaction being reported. One box reads “Unhosted Wallet Provider”—meaning a self-custodial crypto address not affiliated with any third party.

Legal experts in the crypto community immediately took the news to mean that the IRS is fully planning to classify DeFi protocols—which run on automated software and were designed in part to protect user privacy—as brokerage firms akin to Charles Schwab or Robinhood.

The prospect that Uniswap users might soon have to disclose as much personal information as customers of traditional brokerage firms quickly unsettled many in the crypto industry, causing builders and traders alike to fret that the move could kill the concept of pseudonymity

“The inclusion of open source wallet software providers who in no way broker transactions as ‘brokers’ is unconstitutional under both the First and Fourth Amendments,” a spokesperson for crypto lobbying group Coin Center told Decrypt. “We hope future versions of the form exclude that.”

It’s unclear whether the IRS will change course before next January. After the tax service first announced its intention to expand its definition of “broker” to incorporate many crypto firms and projects last fall, the proposal opened to a months-long period of public comment.

During that time, crypto lobbying groups implored the IRS to change the “broker” definition, or risk effectively killing DeFi in the United States—as it would likely be impossible for decentralized exchanges (DEXs) to acquire identifying personal information from their anonymous user bases.

And yet, the draft 1099-DA form appears to indicate that those concerns fell on deaf ears at the IRS.

“I don’t think crypto will be pseudonymous or privacy-preserving anymore, at least in the U.S.,” Shehan Chandrasekera, head of tax strategy at crypto tax service CoinTracker, wrote after the draft IRS form was released.

I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US.

Yesterday, the IRS issued the long-awaited draft Form 1099-DA, the first tax form specifically designed to collect your ID and detailed transaction data at scale from “brokers”.… pic.twitter.com/H4aTtm5fp9

— Shehan (@TheCryptoCPA) April 19, 2024

Not all crypto legal experts were fully glum in wake of the news, however. Jake Chervinsky, Chief Legal Officer of crypto venture firm Variant Fund, reminded Twitter followers this week that the IRS ultimately doesn’t have the last word on whether DeFi users should be considered brokers.

Like so many unresolved questions in crypto, the matter will likely (eventually) be resolved in court.

“Good news: Rules that make literally no sense at all rarely survive scrutiny in the courts,” Chervinsky wrote. “Great news: We really like filing lawsuits.”

Edited by Andrew Hayward

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