Concerns rippled through the cryptocurrency sector last week as an early version of an IRS document surfaced, sparking anxiety and confusion. Portions of the document hinted at the possibility that individuals engaged in American decentralized finance (DeFi) might soon need to disclose their self-managed wallet details to the federal government.
By 2025, the document, titled Form 1099-DA, is set to become obligatory for any crypto transaction that the U.S. Internal Revenue Service (IRS) deems to have originated from a brokerage. However, the exact implications of this requirement remain murky. While it’s widely expected that crypto exchanges will fall under the IRS’s brokerage definition, there’s worry that decentralized finance traders could also be swept into this classification.
These fears seem to have materialized with the appearance of the draft IRS 1099-DA form, which includes a section prompting filers to specify the type of brokerage involved in the reported crypto transaction. One category listed is “Unhosted Wallet Provider,” referring to a self-managed crypto address not associated with any third party.
The legal community within the crypto sphere quickly interpreted this development as a signal that the IRS intends to categorize DeFi protocols — operating on automated systems and crafted to safeguard user anonymity — as brokerage firms akin to traditional financial entities such as Robinhood or Charles Schwab.
Expressing concern over this potential redefinition, the Blockchain Association cautioned that if adopted, the regulation could spell the end for DeFi projects in the U.S., potentially forcing them offshore or into permanent closure.
The notion that users of platforms such as Uniswap might soon be required to divulge personal information akin to clients of conventional brokerage firms alarmed many within the crypto industry. Builders and traders alike worried that such a move could undermine the concept of pseudonymity, a fundamental aspect of the crypto ethos.
Critics also argued that labeling open-source wallet providers as brokers violates constitutional rights, particularly the First and Fourth Amendments. They urged the IRS to reconsider its approach in subsequent versions of the form.
Despite these pleas, it remains uncertain whether the IRS will alter its course before the deadline in January. Despite extensive public commentary urging a revision to the definition of “broker,” the draft 1099-DA form suggests that these concerns have gone unheeded.
In response to the release of the draft form, CointTrackers’ tax strategy head, Shehan Chandrasekera, lamented the potential loss of pseudonymity and privacy within the U.S. crypto space. However, not all legal experts within the crypto community viewed the situation with despair. Variant Fund’s Jake Chervinsky pointed out that the IRS’s stance isn’t definitive and may ultimately be challenged in court, as is often the case with unresolved issues in the crypto industry.
Major industry actors such as Riot Blockchain Inc. (NASDAQ: RIOT) are likely to take a keen interest in this proposed IRS form because it could have major ramifications for those who use cryptos for various purposes, including investments.
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