A growing number of people see the Clarity Act, which aims to establish clear and enforceable security barriers for the US crypto industry, as a sign that Washington has firmly closed the door on the “regulation by enforcement” approach seen under the Biden administration to a more structured framework for the crypto industry.
And look, on paper, it’s a big step forward. There is no doubt that the Clarity Act offers clearer definitions and a more coherent regulatory perimeter for the industry.
But regulatory clarity does not automatically lead to adoption. Because even if Congress manages to fix the market structure, the US crypto tax framework, in its current form, is still a bit confusing and complicated.
Form 1099-DA is confusing for cryptocurrency investors
On paper, Form 1099-DA, which must be issued by any company defined as a cryptocurrency broker, is about transparency, standardized reporting, and better compliance.
Form 1099-DA asks cryptocurrency users for the amount of assets, date of acquisition, date of sale and disposition, as well as specific sections for transactions added for stablecoins and NFTs.
However, it is becoming more counterproductive than anticipated. Cryptocurrency users are now receiving tax forms that often report income without a reliable cost basis, do not adequately capture holding periods, and exclude non-custodial activities entirely. The result is a fragmented and incomplete picture of a user’s actual tax situation.
For retail investors, that means manually reconciling thousands of transactions across exchanges, wallets, bridges, and DeFi protocols, often with conflicting data that doesn’t align with what the IRS receives.
Even within the industry, the problem has become immense. When assets move between platforms, the cost base often disappears. The receiving exchange has no reliable way to reconstruct historical purchasing data. However, the system is designed as if cryptocurrencies can be reported with the same accuracy as traditional securities held in a single brokerage account.
You can’t. Therefore, the burden falls again on the individual taxpayer. They are now expected to void, reconcile and reconstruct their entire transaction history, or risk being exposed to an audit if they get it wrong.
The Clarity Act’s audit trail and recordkeeping requirements represent a necessary trade-off for regulatory certainty under the CFTC, but the operational obstacles they impose cannot be ignored.
Admittedly, the underlying intent of these strict mandates is a massive victory for the industry. Requiring audit trails to definitively demonstrate the absolute segregation of client assets injects a level of trust and security that will protect retail users and prevent the catastrophic commingling of funds that defined early cryptocurrency crashes.
However, the technical challenges of implementing these systems remain enormous. While the bill wisely recognizes that customized on-chain tracking solutions are required rather than legacy and outdated reporting stacks, the operational demands are high. Because digital asset markets operate 24/7, companies must create and maintain continuous audit trails capable of instantly matching real-time blockchain ledger data with off-chain communications.
The contradiction in American politics becomes impossible to ignore
Especially for small and medium-sized investors, the compliance burden can outweigh the economic benefit. And if the future of cryptocurrencies depends on broad participation, that is a serious structural problem.
This is where it becomes impossible to ignore the contradiction in American politics.
On the one hand, the government is supporting innovation, market growth, and national leadership in digital assets. On the other hand, it is implementing a tax reporting regime that treats decentralized networks as if they were traditional brokerage accounts with perfect data continuity.
Those two positions cannot both scale. We have already seen a partial pushback, particularly around how the regime applies to non-custodial or DeFi activities. That’s a start, but it only scratches the surface.
The deeper problem is yet to be resolved. The IRS does not need to turn crypto exchanges into perfect, all-seeing registrars to improve compliance. You need a framework that recognizes the reality of fragmented ownership and the movement of assets between platforms.
Other jurisdictions are moving in that direction. The Organization for Economic Cooperation and Development’s (OECD) Crypto Asset Reporting Framework (commonly known as CARF), for example, leans toward standardized data collection across platforms without pretending that intermediaries can reconstruct a perfect history of costs for each user.
Currency reports should not function as a definitive accounting book. Its purpose should be to flag unreported activities, not force millions of users to perform impossible reconciliation exercises based on incomplete institutional data.
Even within the United States, there are early signs of recognition that the current approach is too direct. Discussions about de minimis exemptions and targeted relief for small transactions suggest that policymakers understand that frictions are important.
While the law provides a de minimis exemption to protect low-volume brokers and dealers from registering or maintaining these burdensome systems, which will protect smaller startups, it simultaneously creates a steep compliance cliff for the mid-market.
While established industry giants may treat these real-time surveillance channels as an expensive upgrade, growing companies trapped just above the de minimis threshold face enormous engineering complexity and costs that could represent a huge barrier to entry.
Reform still lags behind rhetoric
But at the federal level, reform still lags behind the rhetoric, and that gap is increasingly difficult to ignore.
Because if the United States continues to define “crypto-friendly” only as regulatory clarity, ignoring the existing tax burden, adoption will not accelerate significantly.
It will stop at the edges. High net worth participants and sophisticated funds will continue to operate. Builders will continue to build. But widespread retail participation, the level many argue is necessary for true scale, will quietly be squeezed out under the weight of compliance complexity.
The United States will not need to ban cryptocurrencies to slow their growth, but it can tax them to the point of friction, while other jurisdictions design systems that make participation substantially easier.
