Background
A bit of history about cryptocurrency. Bitcoin was the first cryptocurrency created and was launched in January 2009 by a computer programmer using the pseudonym Satoshi Nakamoto. A 2008 white paper by Bitcoin’s creator revealed what would be known as the blockchain. Cryptocurrencies are exchanged on decentralized computer networks between people with virtual wallets. These transactions are recorded publicly on distributed ledgers (blockchains) to prevent the duplication of coins and eliminate the need for banks to validate transactions.
Increasing Popularity of Cryptocurrencies
Investors tend to favor the use of cryptocurrency over other currency for several reasons:
- Decentralization (i.e., no need for a bank or intermediary and the ability to transfer cryptocurrency relatively quickly across borders)
- Lower fees than typical payment options
- Potentially more secure than some official government currencies
- Potential for large profits
- Ease of use (“smart contracts”)
- Anonymity (i.e., blockchains do not record real names or physical addresses)
The prices of bitcoin and many other cryptocurrencies vary based on global supply and demand. However, the values of some cryptocurrencies are fixed because they are backed by other assets (e.g., stablecoins).
Cryptocurrencies and blockchains have resulted in what is referred to as decentralized finance, offering people access to financial services—borrowing, lending, and trading—without the need for legacy institutions such as banks and brokerages, which often take large commissions and other fees. Instead, smart contracts automatically execute transactions when certain conditions are met.
While decentralized cryptocurrency and digital asset transactions offer benefits, they also pose risks due to the lack of Know Your Customer (KYC) compliance, which traditional financial institutions are required to follow to prevent fraud. To mitigate these risks, regulatory requirements for digital asset transactions are increasing globally, aiming to prevent money laundering, fraud, and terrorism financing, to maintain the integrity of the digital asset marketplace.
Compliance Requirements
On January 10, 2025, Treasury and the IRS released the final version of the 2025 Form 1099-DA (Digital Asset Proceeds From Broker Transactions). The instructions to the Form provide information to help brokers complete Form 1099-DA for each sale effected in 2025. For now, brokers are not required to report basis information with respect to sales effected in 2025. However, separate rules apply for sales on or after January 1, 2026, regarding mandatory reporting of gross proceeds and of basis information for covered securities, as well as voluntary reporting of basis information for noncovered securities. Generally, only a U.S. digital asset broker is required to report on Form 1099-DA. A digital asset broker is a person that: (1) regularly offers to redeem digital assets that were created or issued by them; or (2) disposes of customers’ digital assets as an agent, dealer, or digital asset middleman.
On December 27, 2024, Treasury and the IRS released final regulations, TD 10021, to include in the definition of “brokers” trading front-end service providers who interact directly with customers on digital asset transactions, often referred to as “DeFi brokers.” Under the new rules, DeFi brokers of digital assets are subject to the same information reporting rules as brokers for securities and operators of custodial digital asset trading platforms. The owner of a digital asset who engages in DeFi transactions will receive a Form 1099 from brokers. The final regulations do not treat operators of digital protocols or developers of protocol software as brokers.
In Notice 2025-3 the IRS provided transitional relief from penalties for certain brokers who fail to report sales of digital assets on information returns (e.g., Form 1099-DA), or who fail to furnish payee statements. The penalty relief is available for brokers providing trading front-end services (DeFi brokers) and is available for information returns required to be filed and payee statements required to be furnished in 2028 for sales of digital assets effected in calendar year 2027.
FBAR Filing Requirement?
According to the Filing Requirement for Virtual Currency FinCEN Notice 2020-2, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not currently define a foreign account holding virtual currency as a type of reportable account. As a result, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account because it holds reportable assets separate from virtual currency). Based on the report, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding FBAR to include virtual currency as a type of reportable account.
Although taxpayers may not yet be required to report their cryptocurrency transactions on the FBAR, they may be required to file Form 8938 (Statement of Specified Foreign Financial Assets). The Instructions to Form 8938 state the following: “Unless an exception applies, you must file Form 8938 if you are a specified person…that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold”.
An exception applies where the asset is subject to the mark-to-market accounting rules for dealers in securities or commodities or an election under section 475(e) or (f) is made for the asset.
Regulatory Considerations
In January, President Trump issued an Executive Order establishing the Presidential Working Group on Digital Asset Markets. This group is tasked with developing a federal regulatory framework governing digital assets, including stablecoins, and evaluating the creation of a national digital assets stockpile.
In addition, the U.S. Securities and Exchange Commission (SEC) is responsible for protecting investors in crypto markets and from cyber-related threats. The Crypto Assets and Cyber Unit focuses on investigating securities law violations related to the following:
- Crypto asset offerings
- Crypto asset exchanges
- Crypto asset lending and staking products
- Decentralized finance (DeFi) platforms
- NFTs
- Stablecoins.
The unit has brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents.
U.S. State Regulations
U.S. states have taken different approaches to regulating cryptocurrency and digital assets, leading to a lack of uniformity across the board.
Foreign Regulations
Brazil. Brazil established cryptocurrency regulation in June 2023, when it made the central bank the supervisor for crypto assets. The Cryptoassets Act sets rules for any company providing services linked to virtual assets, with a central aim of preventing scams related to cryptocurrency. The regulation outlines what constitutes criminal practices in the use of crypto, and outlines penalties that will be enforced if crypto is used in fraud or money laundering.
European Union. In May 2023, the European Union (EU) introduced cryptocurrency regulations, known as the Markets in Crypto-Assets Regulation (MiCA). Under the regulations, any company issuing or trading cryptocurrency will need a license, and beginning in January 2026, all service providers will have to obtain the name of senders and beneficiaries, regardless of the amount transferred. Any self-hosted wallets holding over 1,000 euros will require wallet ownership verification for transactions.
China. China has instituted bans on cryptocurrency exchanges, trading, and crypto mining.
Japan. Japan’s crypto and yen transactions are both managed by the country’s Financial Services Agency, and Japanese citizens can own or invest in crypto. The country toughened its rules on sharing customer information between crypto exchanges to tackle money laundering.
South Korea. South Korea is progressing with regulation for crypto and other virtual assets after the Virtual Asset Users Protection Act was passed in 2023. The regulation creates stronger protections for users by adding requirements around record keeping and transparency.
The UK has mandated that any company offering a digital currency must be authorized by the country’s Financial Conduct Authority (FCA).
Conclusion
According to the World Economic Forum, countries should begin to negotiate new types of trade agreements to enable market access for private issuers of digital currencies, to facilitate the flow of payments, and to allow data to flow freely. Singapore, Australia, the UK, Chile, and New Zealand have expressed their approval of these new trade agreements. There are technical and regulatory challenges that will need to be addressed, including interoperability, anti-money laundering, counter-terrorism financing, and consumer protection.
Editor’s Note: An earlier version of this article is available in the Practitioner’s Tax Action Bulletin, as National Tax Advisory Memo (NTA-1267), Issue 12, June 18, 2024, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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