Crypto Tax Update – April 2025

In light of the approaching April 15 tax filing deadline, this week’s update highlights recent developments in U.S. federal tax policy that may impact crypto firms and crypto holders.

Decentralized Finance Broker Reporting of Digital Asset Transactions Repealed

In December 2024, the Treasury Department finalized regulations under Section 6045 of the Internal Revenue Code (the Code) to require certain decentralized finance (DeFi) industry participants to file and furnish information returns as brokers for transactions beginning on January 1, 2027 (the DeFi Broker Rule).

In March, the Senate voted 70-28 to approve a House resolution (H.J. Res. 25) to repeal the DeFi Broker Rule. Supporters of the resolution asserted that the reporting requirement was unworkable because DeFi brokers are decentralized and thus do not collect or have access to the information from users needed to implement this rule.

Importantly, centralized exchanges and other brokers in digital assets will still be required to report digital asset transactions as of January 1, 2025. These transactions will be reported on IRS Form 1099-DA starting in early 2026 for the calendar year 2025.

Crypto Gains and Losses Still Must Be Reported

Even though Congress has granted a reprieve for the DeFi industry from reporting transactions on DeFi exchanges, if a taxpayer has realized gains (or losses) on those transactions, those gains or losses must still be reported on the taxpayer’s income tax return.

The character of the digital asset income will depend on the nature of the transaction in which the taxpayer receives or disposes of the digital asset. If the digital asset is received as compensation for services as an employee, then that income would be treated as wages.

The Internal Revenue Service (IRS) has stated that digital assets should be considered property (as opposed to currency) for income tax purposes. Accordingly, the disposition of a digital asset would likely result in a capital gain or loss transaction, which for an individual taxpayer would be reported on Schedule D and Form 8949.

A Trap for the Wary and Unwary

On page one of Form 1040, every individual taxpayer is asked:

At any time during 2024, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

In the Instructions to Form 1040, the IRS has placed a caution symbol with an exclamation mark stating, “Do not leave the question unanswered. You must answer ‘Yes’ or ‘No’ by checking the appropriate box.”

This question about transactions involving digital assets likely came about because of the IRS’ success in litigating taxpayers’ failures to report interests in foreign bank accounts. Schedule B of the Form 1040 asks taxpayers a simple “Yes” or “No” question: whether or not they have an “interest in or signature or other authority over a foreign bank account.” Individuals who answer “Yes” are then directed to the Report of Foreign Bank and Financial Accounts (FBAR) form, in which they must list the countries where their foreign accounts are located.  

The Bank Secrecy Act requires United States taxpayers to report “any financial interests they have in any bank, securities, or other financial accounts in a foreign country” to the IRS on an annual basis. 31 U.S.C. § 5314(a). A “willful” failure to file an FBAR could result in a maximum penalty of the greater of either (i) $100,000 or (ii) 50% of the account balance at the time of the reporting violation. 31 U.SC. § 5321(a)(5). The penalty for a nonwillful violation is $10,000 per year.

In several cases, the IRS successfully argued that a taxpayer’s checking “No” on Schedule B was evidence of willfulness that justified the maximum penalty under the Bank Secrecy Act.[1]

Accordingly, while the Bank Secrecy Act does not provide penalties relating to digital assets, we would expect the IRS to pursue additional penalties if taxpayers falsely checked “No” with regard to whether they received or disposed of digital assets during the tax year.