Chainalysis Analysis: Which Entities Should Pay Attention to the New U.S. Cryptocurrency Reporting Regulations?
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Chainalysis Analysis: Which Entities Should Pay Attention to the New U.S. Cryptocurrency Reporting Regulations?
A digital asset intermediary is actually anyone who provides facilitation services for the sale of any digital asset.
Navigating Web3 tides with focused insightsCompiled by: TaxDAO
Host: Ian Andrews (Chief Marketing Officer at Chainalysis)
Guest Speaker: Roger Brown (Global Head of Tax Strategy at Chainalysis)
Date: October 31, 2023
This is the transcript of Episode 80 of the Chainalysis podcast. In this episode, Roger defines key terms in new cryptocurrency tax reporting regulations—such as brokers, digital asset intermediaries—and who will be affected by proposed legislation. He also analyzes how new tax rules will impact crypto exchanges, DeFi, and DAOs. Ian and Roger further discuss how Travel Rule requirements may suffice for tax reporting compliance and emphasize the importance of assessing effective KYC obligations.
Ian:
Hello everyone, welcome back to the show. This is your host, Ian Andrews. Joining me today is Roger Brown, Global Head of Tax Strategy at Chainalysis. Welcome to the program.
Roger:
Thank you so much, Ian. I appreciate it.
Ian:
Now, you were our guest on Episode 41, which was about preparing for crypto tax season. I think most of us survived it—at least you and I did. We’re still here. When you first appeared, we talked about your background. You spent seven years at the Office of Chief Counsel at the IRS, ten years at Ernst & Young focusing on domestic and international business tax law, and recently became, in my view, one of the foremost experts in the digital asset space.
As previously mentioned, you've felt that tax policy has been complex and ever-changing over the past few years, but today I really want to dive into some of the latest developments in U.S. tax policy. First off, what’s new with the IRS?
Roger:
The latest from the IRS is that they are heavily relying on information reporting. In 2021, Congress passed the Infrastructure Investment and Jobs Act (IIJA), which effectively amended the information reporting rules applicable to cryptocurrency. In short, the regulation requires brokers to report basic transaction information for sellers and those facilitating sales of crypto assets. This is a 282-page regulatory proposal set to take effect after January 1, 2025.
Ian:
So we have a little time to prepare.
Roger:
It's just a bit of time, but for those who need to build systems, it’s quite long—most would tell you it takes a year to build and implement. 2024 is coming up, but the proposal hasn’t yet become final rules. So I believe the IRS will hold public hearings in November to collect comments and consider them. They must then take those comments into account and issue final or interim regulations with legal force. Only then will people know exactly what’s required.
People have already discussed asking to “push back the 2025 effective date,” and we’ll see whether the IRS shows sympathy or offers some kind of temporary relief—like “report it, but don’t worry about full details.” But whether we’ll actually see that remains to be seen.
Ian:
Alright, perhaps we should first understand—who exactly do these regulations affect? Ultimately, it’s you, me, and U.S. citizens who must consider this when filing. But I think, as you said, the burden of these regulations actually falls on brokers. In the context of digital assets, who qualifies as a broker?
Roger:
That’s a great question. The most obvious example of a broker is an exchange—cryptocurrency exchanges are what most people think of as brokers. Although we don’t call them brokers, their quotes influence the sale of digital assets. Clearly, this falls within the scope of being a broker.
Then we talk about other brokers like payment processors and ATMs/kiosks. But much of the action lies in the term “digital asset intermediary” used in the regulations—a crucial phrase that needs deeper examination. A digital asset intermediary is essentially anyone—I’ll come back to the meaning of “person”—anyone who provides facilitative services for any digital asset sale. You might wonder, what is a facilitative service? The regulation defines it: a person—who, again, I stress, is still very important—is able to know the identity of the party conducting the sale (i.e., the customer). This person has the capability to know.
The second aspect of a digital asset intermediary is that the entity must be able to understand the nature of the transaction generating the proceeds from the sale. Again, a digital asset intermediary is someone providing facilitative services, and facilitative services mean being able to know both the identity of the party and the nature of the transaction. I could explain what that means if you’d like, but I want to emphasize “person” first, because I’m playing with that term a bit. A person doesn’t just refer to centralized exchanges; it can also refer to decentralized platforms offering trading services, or even effectively DAOs that provide such facilitative services.
Ian:
You’re surprising me a bit here. Let’s go through the first part. On the exchanges I’ve logged into, they know my identity—I’ve completed KYC, they’ve taken pictures of my ID. Long ago, I bought some Bitcoin. Today I log in and decide to sell some. In this case, it makes perfect sense to me that the exchange fits this definition. They enabled me to sell it. They know my cost basis (since I bought it there) and the proceeds, and they know my identity. So it seems to meet all the listed criteria.
When I think about decentralized protocols, I’ve used some before, but I don’t recall ever providing identity information. In many cases, I definitely didn’t provide it, though maybe I did somewhere. More commonly, it’s swapping one asset I hold for another, and in most trades, I originally acquired these assets elsewhere. So you often lack cost basis information, and certainly identity information. What would protocols do under these rules? It seems to imply more than just “oh, now I need to start sending forms to my customers.” It would fundamentally change how these protocols operate. Or am I overthinking this?
Roger:
You're right, and it’s important to say—the regulations aren’t really concerned with their current state. They’re telling you what you’ll need to do going forward. That’s the first point.
Second, it’s about identity and the ability to know. So the regulation says—I’ll clarify—if you’re a decentralized protocol—and in the regulation, they’re clearly thinking about DAOs and decentralized platforms—you have the ability to know the person’s identity because you provide access to that specific protocol. If you provide access to an automated market maker or trading platform, you have the ability to know. Then you satisfy the requirement that you’re able to know the identity.
The second aspect is that you can also know the nature of the transaction is a sale, because when you swap one asset for another, under tax rules, that’s a sale. So you clearly recognize gain or loss on the swap. You get a new basis in the new asset, but you’re selling the first one. “But the broker—or decentralized platform—might not know, because I bought it elsewhere,” you say. You're absolutely right, but that’s not how they see it. However, you can’t report what you don’t know. If you don’t know it, then at least in the first year of implementation, you wouldn’t have to report it. I suspect that when the final rules are issued, if you don’t know—and in some cases you won’t—you won’t be required to report.
But one of the most important points is in the preamble of the regulation: ideally, the IRS wants to receive Form 1099s. For Americans listening, this is basically what exchanges or brokers provide to their customers. It simply tells you what your gains and losses are. At minimum, it provides a number for sales proceeds. It tells the IRS that Ian Andrews or Roger Brown had a taxable transaction. You get a copy, and the government gets a copy, so now you’re incentivized to report that income because you know the IRS has the same information. This is critically important.
The IRS states that in cases where information reporting is insufficient or absent, non-reporting rates exceed 50%. This is aimed at closing the tax gap—without third-party reporting, people don’t self-report income. In fact, a Government Accountability Office study found that between 2013 and 2015, only 900 people nationwide reported cryptocurrency gains out of 150 million taxpayers—just 900. Coinbase alone publicly stated they had 2 million customers, and clearly Coinbase doesn’t have all the customers in the world. Less than 0.5% of U.S. taxpayers reported crypto. These regulations are a direct response to that lack of effective third-party reporting, prompting Congress to act. These rules are essentially the substance of the framework Congress introduced in 2021.
Ian:
That makes perfect sense for addressing the tax gap. I fully support the idea that in a functioning civil society, everyone should pay their fair share to support the common good. But I keep coming back to: practically speaking, how can certain entities that fall under this broker definition actually meet these requirements? DeFi platforms are one example. I wonder, does this include network validators, or people running Bitcoin or Ethereum nodes?
Roger:
Yes, that’s a great question, Ian, and one people are very concerned about. In legislative history, two senators had a conversation saying, “Our intent is to exclude node miners, stakers, etc.” The IRS respects that in the proposed regulations. If all you’re doing is providing services around consensus mechanisms, then you’re not within the scope of these rules. You may need to consider whether other information reporting rules apply, but these particular rules do not. That’s the first point.
Second, how would it be applied? In the preamble, the IRS requested comments on technological solutions brokers could use to meet information reporting requirements, whether centralized or decentralized. Essentially, this involves customer onboarding, collecting tax IDs, knowing who you are, and then reporting that information to the government. Importantly, this applies to both foreign and domestic brokers. They cannot make high-level distinctions. So they’ll impose these obligations broadly.
Technological solution? I bet you’ve had this experience—when you dine at your favorite restaurant, you might not even need to speak to a person to check in.
Ian:
Yes.
Roger:
You have a fully technical experience—filling in your name, verifying your identity, and authorizing the transaction. I suspect a similar experience will exist for decentralized exchanges. I can talk about what might emerge, but for today’s decentralized exchanges—most trading happens on the top five DEXs. In their current form, I believe these exchanges will be subject to the rules and will effectively offer a login experience similar to what you see on centralized exchanges.
Ian:
If you think about it, it’s truly remarkable. We’ve seen gridlock in Congress and various attempts to break it to make meaningful progress on digital asset regulation. Yet the IRS seems to be sidestepping all of that and potentially bringing DeFi into real, Know-Your-Customer-type implementation. That’s powerful.
Roger:
I want to touch on that because you raised a very important point, Ian. We’ve seen numerous regulatory actions around decentralized trading platforms, especially from the CFTC. Many of these actions say, “You’re an exchange, you’re a person, you must comply with CFTC rules.” To my knowledge, the IRS has not brought any enforcement actions against decentralized exchanges using existing rules or information reporting. They haven’t done so. In the proposed regulations, they say: “These are the rules that will apply to you in the future. We welcome comments, but for now, we won’t sue you for non-compliance.”
So regardless of whether they could enforce under current law, they’re regulating via notice-and-comment rulemaking rather than enforcement. This is actually something some in the industry complain about with other regulators: “You don’t issue guidance, yet you sue me.” So I think the IRS can’t be accused of that. In fact, I think the opposite should be praised—they’re proposing what they believe is the right approach first, then seeking input, before taking enforcement action.
Ian:
That’s a good approach. I think it reflects broad consensus on how government should operate. I’m curious—in your blog, there’s a section about what must be reported. Most of it is familiar—if you’ve seen a 1099 form, anyone in the U.S. who’s bought or sold stocks has likely received one. They’re quite standardized. Of course, it adds things like wallet addresses and transaction hashes, so it traces back to on-chain activity. But what stood out to me is that transactions involving stablecoins must also be reported. That feels unusual to me because stablecoin prices shouldn’t fluctuate, so it’s not necessarily a taxable event. But maybe I’m missing something—I’m not a tax expert, but you are. Why are stablecoin transactions included in reporting?
Roger:
I think there are several reasons. First, stablecoins can fluctuate—look at Terra and Luna, which caused people real losses. They need complete reporting of taxable gains and losses. Second, when calculating gains and losses, many retail tax products allow users to compute their crypto profits through company platforms, and they need full data. Stablecoins are simply another type of digital asset. When you swap Bitcoin for a stablecoin, a stablecoin for Ethereum, then XRP back to a stablecoin, you need a coherent system. The IRS will need some effective data matching and reconciliation process—just like existing commercial tax calculators that pull in all this data.
To me, it’s about data integrity. Even if your stablecoin doesn’t fluctuate, and you’re just swapping one stablecoin for another or buying retail goods, you may have no gain or loss. But most people are doing more complex things with other cryptos and stablecoins. So I think it’s about data completeness. Frankly, I’m not surprised by this.
Ian:
I wonder if this is more about the future than the present. But if I use USDC or Tether to buy a coffee at Starbucks—maybe when they start accepting crypto for retail payments—under these proposed regulations, would that make Starbucks a broker in that scenario? Or would the intermediary payment processor become the broker and need to report the transaction?
Roger:
Good question. The rules are clear: retailers themselves are not brokers. They literally say that if you pay a landscaper with volatile Bitcoin, that transaction is clearly outside the scope of these rules.
Ian:
Great, okay.
Roger:
So they’ve made that clear. For payment processors, they may have information reporting obligations under these rules, and that’s their role anyway. But for normal retail purchases, the retailer itself isn’t subject to these rules. So I think this is actually supportive of crypto adoption.
I believe people will definitely comment on stablecoins during the notice-and-comment period. Again, these are proposed rules, not yet law. Will the IRS exclude them? Possibly. Or perhaps the ecosystem—and brokers affected—won’t want to be in the position of distinguishing assets, so they’ll just report everything. It might be easier to say: if they support payments in Bitcoin, Ethereum, USDT, etc., writing one universal reporting rule is simpler. Clearly, all reporting is done by computers, not humans pressing buttons to determine what’s reportable. So it’ll be interesting to see how people react.
Ian:
Yes, good point. It might be easier to report every interaction I have with an exchange—every time I trade, buy, or sell—just include it. When I first asked, I was actually thinking about retail or commercial use cases—if this suddenly burdens people who currently don’t report anything, it could hinder adoption of digital assets as payment. So it’s good to know they don’t have to do this.
I’m curious—how are payment processors reacting? Because I’m thinking of Visa and MasterCard today. I don’t currently get tax reports from Visa or MasterCard, but I can imagine that whether native digital asset payment processors or existing players in the ecosystem, I can’t imagine they’re eager to take on this burden.
Roger:
Actually, there’s an existing rule in tax law: if you use more than $10,000 in cash to buy goods from a retailer, they must report it to the IRS and conduct KYC on you. That’s an existing rule in existing regulations. That rule was also amended in 2021 to apply to cryptocurrency. So if you’re a retailer accepting more than $10,000 in cash or crypto today, to my knowledge, the IRS hasn’t yet issued rules specifically for crypto exceeding $10,000, but they do have rules for cash.
So that’s part one—there will be certain large transactions. For purchases under $10,000, retailers don’t need to report cash or crypto. We’ll see what happens with payment processors, because they effectively—when you join them—already have links to your bank, so they’ve effectively done KYC on you and are facilitating interbank payments.
From my perspective, I haven’t had a chance to talk to them, but will they leverage existing information—knowing your identity and bank details—and use those records for crypto payments? If they’re facilitating payments beyond stablecoins, and existing payment processors allow Bitcoin and other non-stable assets, the IRS will want the full picture. Ideally, our tax system shouldn’t force individual examiners to bear the burden of manually reviewing each taxpayer’s detailed calculations. You want the IRS’s computers to do that work.
So I think they want—if someone uses Bitcoin to buy a Tesla, and they don’t get that info, the IRS system won’t have it, someone might not report gains/losses, or use built-in crypto profits to buy retail goods. So from a neutral standpoint, the government would say: “Whether gain or loss, we just want to know, so the computer can calculate it.”
Ian:
Yes. How does the Travel Rule intersect with this? I know there are various interpretations and timelines for the Travel Rule across jurisdictions, but it feels like the Travel Rule ultimately collects the kind of identity and end-user information that’s currently missing. Am I thinking about this correctly?
Roger:
I think you’re right, Ian.
Roger:
In our blog, we cited an insightful article by Notabene on the current state of the Travel Rule, and I encourage people to read it—it discusses actual global adoption and requirements. To comply with the Travel Rule, exchanges, VASPs, and payment processors must not only effectively know their own customers but also the beneficial owners of the accounts they’re sending to. So it’s actually broader than tax rules, which only ask, “Who is your current customer?” That’s the first part.
The second part is that the personal identification information required for KYC under the Travel Rule may vary by jurisdiction. But if you collect tax ID, address, and documents, you effectively meet that standard. Tax rules might go further—for example, suppose Ian has a cousin in Belgium who says, “Hi, I’m Belgian. I’m a customer of this European exchange.” But if your cousin sends crypto to a U.S. crypto address or U.S. VASP, or accesses their account from the U.S. via a U.S. ISP, those are signs of U.S. presence. Now tax rules kick in. So now you must effectively obtain a W-8 BEN form stating: “Hi, I’m actually a foreigner. I certify under penalty of perjury that I am indeed a foreigner.”
So in short, to answer your question, there’s significant overlap between Travel Rule information and tax reporting requirements, but I can see tax rules going further. I think the technological solutions for compliance will converge. There are vendors working on this, and I believe exchanges, payment processors, and even decentralized exchanges will need to adopt these integrated solutions—killing two birds with one stone, satisfying both Travel Rule and tax reporting.
Ian:
Yes. Next question—how should we think about peer-to-peer exchanges, or me sending crypto from my wallet to your wallet? Depending on the reports and analyses you read, this is a significant portion of crypto transaction activity. It doesn’t involve DeFi protocols or centralized exchanges—just two people exchanging funds. Do these regulations address that?
Roger:
I think it comes down to whether it qualifies as a facilitative service. If a platform can know identities—because it provides access to view others’ wallets, understand what they’re about to do—and can recognize it’s a transaction because it sees one asset being exchanged for another, then yes, I think P2P exchanges could be considered brokers.
The IRS is casting a wide net on who qualifies as a broker. In my view, what truly doesn’t qualify are people who merely write software and release it into the ecosystem without continuing to provide access or gateways. So if that’s all you do—you’re a pure software developer releasing a protocol you no longer maintain, don’t receive ongoing fees from, and don’t set terms for user behavior—then interacting parties aren’t brokers. There will be clearly decentralized DeFi platforms in the future, and I think many existing platforms will evolve toward that, and some activity will migrate to DeFi, exiting the broker category when DeFi becomes sufficiently decentralized. This aligns with FATF (Financial Action Task Force) guidance, referenced in the regulation’s preamble, which allows for some DeFi to exit.
Ian:
Yes. The topic of decentralization versus centralization in DeFi is fascinating. We see many protocols doing extensive work on compliance and screening—keeping bad wallets off the platform—implementing technology at the web application layer, but not at the protocol layer. So if you’re a technically savvy user, you can bypass the web app and interact directly with the contract. Less sophisticated users might use the web app, get caught in it, and have to go through compliance checks. Could a similar model emerge in tax—where if I use the web app, I may need to provide my personal ID and tax ID for KYC reporting, but if I’m savvy enough to access the contract directly, I can bypass it all?
Roger:
I think you're correct. I return to the key question—who do these rules apply to? They don’t apply to software developers if that’s all they do. And they don’t apply to computer code. They apply to people—and centralized companies controlling the web interface who provide access. So they’ll be bound by it. As you said, if someone accesses a smart contract directly without a computer, that’s an argument seen in lawsuits involving non-IRS regulators—arguing computer code isn’t a person. That might be true, but under U.S. tax concepts, a DAO could be a partnership. There’s long-standing law that a group acting together in a business enterprise is a partnership—or better put, a business entity—and a business entity is a (legal) person.
Ian:
Yes, you’ve provided a wealth of information. Final question—we have many people working in compliance or running crypto businesses. There seems to be time before these rules take effect, but what do you recommend as the next step?
Roger:
My advice is to assess effective KYC obligations. I don’t think it’s a question of whether it applies—I think it’s a question of when. Make sure you engage with the IRS and Treasury at the right time—it’ll be a long process. Whether from tax or non-tax regulatory perspectives, policy clearly trends toward imposing KYC requirements on them. So I think you should align with that trend—do KYC on users and focus on your core business, rather than letting regulatory obligations like this, or the Travel Rule, dictate your operations. Approaches could include developing a technical solution that puts identity information into an NFT in the wallet, or adopting existing KYC tech solutions—like those already used in CeFi. Get ahead of the curve and ensure you have time to implement these technologies.
Ian:
Excellent advice. Thank you so much for joining my show.
Roger:
Thank you, my pleasure. Goodbye.
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