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Chainalysis Responds to US Proposed Tax Regulations Outlining Information Reporting Requirements for Cryptocurrency Exchanges

Chainalysis, a leading blockchain analysis company, has highlighted the proposed regulations released by the U.S. Internal Revenue Service (IRS) on August 25, 2023. These regulations would require both domestic and foreign exchanges, as well as other types of brokers, to collect identifying information on customers and report trading activity of U.S. customers to the IRS.

These regulations aim to provide the same level of transparency for digital assets as traditional financial assets like stocks and bonds. The regulations are expected to take effect in 2025, as they need to go through a stakeholder comment period and be implemented in temporary or final form.

According to Chainalysis, brokers who facilitate the sales of digital assets will have documentation and reporting obligations. This includes exchanges, digital asset payment processors, digital asset kiosks, and even digital asset middlemen. The definition of a middleman is broad and can encompass individuals or entities supporting decentralized exchanges.

However, the proposed regulations exempt certain activities from broker status, such as those limited to validating transactions as part of blockchain consensus mechanisms.

Under these regulations, brokers must report sales of digital assets and provide identifying information for U.S. taxpayers involved in the transaction. The reporting requirements include both fungible and non-fungible tokens.

Starting from January 1, 2025, brokers would be required to report proceeds from digital asset sales, while reporting of tax basis would begin on January 1, 2026. However, if a U.S. customer acquired a digital asset in a broker’s account after January 1, 2023, the reporting of basis would apply from January 1, 2026, if the asset was continuously held in the broker’s account.

Overall, this tax reporting framework is seen as a positive development by many in the public and private sectors. It aims to address tax compliance challenges and bring digital assets on par with traditional financial assets, potentially reducing taxpayer challenges in computing taxable income.

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