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The IRS has made it official—new regulations are rolling out for decentralized finance (DeFi) tax reporting, and they’re not playing around. With the introduction of Form 1099-DA, digital asset transactions will now be tracked more closely than ever. While this new rule aims to bring clarity to crypto tax compliance, it also means more reporting obligations for brokers, traders, and platforms operating in the DeFi space.
So, what does this mean for you? Let’s break it down.
The IRS’s New Rules for Crypto Tax Reporting
Starting January 1, 2025, centralized crypto exchanges and platforms must report gross proceeds from digital asset sales to both taxpayers and the IRS. But here’s the catch—DeFi brokers, those offering “Trading Front-End Services,” have a bit more time. They won’t have to comply until January 1, 2027. The delay is a recognition that many DeFi platforms simply don’t have the infrastructure yet to track customer identities, transactions, and tax withholdings.
And if you think you can ignore these new rules, think again. By January 1, 2028, backup withholding will kick in for non-compliant brokers who fail to verify taxpayer information. The IRS is essentially saying, “Get your systems in place now, or you’ll pay the price later.”
Who’s on the Hook?
The IRS initially cast a wide net when defining “brokers,” but they’ve narrowed it down to entities facilitating transactions through Trading Front-End Services. That means actual DeFi platforms that help users trade assets will fall under this category, but blockchain protocols, validators, and internet service providers won’t—at least for now.
Temporary Relief for Taxpayers (But Not for Long)
There’s a small window of relief, though. The IRS understands that switching to a new tax reporting structure won’t happen overnight, so they’ve made some concessions. Notice 2025-07 allows taxpayers to use alternative accounting methods—like Highest In, First Out (HIFO) or Specific Identification—to minimize their taxable gains instead of defaulting to the standard FIFO (First In, First Out) method.
But don’t get too comfortable—this relief expires December 31, 2025.
What Business Owners Need to Know
If you own a business that deals with digital assets—whether through investments, crypto payments, or DeFi lending—these changes directly impact you.
For starters, you must keep detailed records of all crypto transactions. With increased IRS scrutiny, missing or incomplete transaction records could lead to hefty penalties. If you use a DeFi broker or centralized exchange, make sure they’re complying with Form 1099-DA reporting requirements. Failing to verify your broker’s compliance could land you with unexpected tax liabilities.
And then there’s backup withholding. If your business engages in crypto transactions, you need to understand whether you’re required to withhold taxes from certain counterparties. Verifying taxpayer identification details will be crucial to staying compliant.
Finally, take advantage of the temporary relief on accounting methods before it disappears. FIFO might not be your best option—strategic use of HIFO or Specific Identification could help reduce your tax burden before the rules become stricter in 2026.
The Bigger Picture: More IRS Oversight on the Way
While the IRS is allowing some time for businesses and DeFi brokers to adapt, make no mistake—this is just the beginning of heightened enforcement. Several lawsuits have already challenged these regulations, and depending on the outcome of future elections and policy debates, further revisions may be on the horizon.
But waiting around to see how things play out? That’s a risky move. The IRS is making it clear that compliance is no longer optional, and penalties for missteps will be costly.
Stay Ahead of the IRS Crackdown
For business owners handling digital assets, these IRS regulations mark a turning point for tax compliance in the crypto world. While transitional relief offers a temporary cushion, the time to prepare is now. Understanding your reporting obligations, updating accounting practices, and ensuring compliance will help protect your business from unnecessary fines and audits.
Feeling overwhelmed? You don’t have to navigate these new tax rules alone. IRSProb.com is here to help you stay compliant and keep the IRS off your back. Reach out today and get the expert guidance you need to tackle these crypto tax changes head-on.
