The IRS’s new reporting architecture goes live in January 2025 with the introduction of Form 1099-DA, a change that forces a re-think of how exchanges, protocols, and users translate on‑chain activity into tax reporting. Major centralized venues that already maintain extensive customer records — notably Coinbase and Kraken — will be first in the operational crosshairs: they must adapt back‑end data pipelines, reconcile exchange-ledger events with user wallets, and produce IRS-ready outputs on a cadence and format that differs from prior crypto reporting flows.

The immediate practical shift

• Form 1099-DA changes the mechanics of taxable-event disclosure. Firms that have treated crypto as opaque or only partially reportable now face standardized reporting requirements that reach across trading, transfers that create taxable dispositions, and broker-mediated activity.
• For centralized exchanges, the engineering lift is non-trivial: transaction classification, cost-basis attribution across deposits/withdrawals, and handling nonstandard events (airdrops, forks, staking rewards) will require new reconciliation logic and audit trails.
• Retail and institutional investors will see clearer IRS signals on reported proceeds; this will increase downstream IRS matches and audit potential.

Regulatory uncertainty from the DeFi Broker Rule repeal
The repeal of the DeFi Broker Rule removes a one‑size definition for who is a “broker” in DeFi contexts, and that regulatory retreat creates ambiguity rather than clarity. Decentralized finance platforms, wallet providers, and offshore entities now occupy a gray area where legal exposure depends on how enforcement and guidance evolve.

Implications:

• Decentralized protocols that lack custodial control can argue they are not brokers, but users and counter‑parties face elevated compliance risk because reporting obligations may be assigned upstream by regulators or interpreted differently in enforcement actions.
• Offshore platforms that previously relied on non-U.S. domicile protections may still be subject to reporting obligations if counterparties or service providers are located in the U.S. or if U.S. intermediaries touch the value flow.
• The repeal raises a paradox: fewer prescriptive rules today, but more litigation and agency-driven enforcement tomorrow as regulators attempt to retrofit compliance with existing tax regimes.

Tax mechanics investors must re-evaluate
A critical tax distinction that will shape strategy is the difference between short-term and long-term capital gains. Under current U.S. principles, gains on assets held one year or less are taxed as ordinary income; gains on assets held longer qualify for long-term capital gains treatment, which is generally at lower marginal rates. For active traders, protocol yield recipients, and participants in rapid trading strategies, the new reporting regime means:

• Short-term trading strategies will likely carry higher effective tax rates once exchange-issued 1099-DA forms flow into IRS systems.
• Long-term holding strategies gain an added tax planning dimension: holding across the one-year threshold can materially change tax outcomes.
• Tax treatment of staking, liquidity mining, and similar rewards will need clearer classification in cost‑basis and holding‑period calculations, which affects timing and realization strategies.

Who bears the operational burden
Large exchanges will internalize most of the initial implementation cost, but operational burdens cascade to smaller U.S.-based Web3 teams and service providers. For those teams the practical options are:

• Adopt reconciliation and tax‑reporting software that maps on‑chain events to taxable categories and produces IRS-ready outputs.
• Outsource the problem to tax professionals who can capably interpret transaction histories and prepare filings.
• Upgrade KYC/AML, transaction logging, and user education so users understand implications of transfers between custodial and non‑custodial accounts.

Broader legislative and compliance context
Legislative proposals like Senate Bill 954 — which aims to create more uniform crypto rules — are part of a parallel track that could either reduce uncertainty (by centralizing definitions and obligations) or further complicate compliance if federal law diverges from IRS reporting constructs. Market participants should treat proposed legislation as an input to policy planning but rely on immediate IRS guidance and reporting deadlines for operational priorities.

Concrete steps for firms and teams

• Map flows: inventory every user flow that can create a taxable disposition and document the associated data fields required for 1099‑DA outputs.
• Reconcile on‑chain and off‑chain ledgers: build or buy tools that reconcile exchange balance snapshots to on‑chain movements and compute cost basis across complex events.
• Update terms and user communications: clarify tax reporting practices, whether the platform issues 1099‑DA, and what users should expect when moving funds off‑platform.
• Engage counsel and tax experts early: designability vs. compliance tradeoffs require legal interpretation specific to each business model.
• Monitor SB 954 and IRS issuances: technical rules and enforcement posture can change quickly; maintain a regulatory docket and participate in industry comment periods.

For a practical primer on how these reporting changes interact with compliance tooling and implementation timelines, see https://www.onesafe.io/blog/cryptocurrency-reporting-2025-irs-form-1099-da

Smaller U.S.-based Web3 teams in particular will need to choose between integrating reconciliation software or retaining tax professionals to convert raw ledger data into IRS-ready 1099‑DA outputs.