A growing number of people see the Clarity Act, which intends to establish clear and enforceable safeguards for the US crypto industry, as a sign that Washington has 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 framework for the industry.
But legislative clarity does not automatically lead to adoption. Because even if Congress gets the market structure right, the US crypto tax framework, in its current form, is still a bit messy and complicated.
Form 1099-DA is confusing for crypto investors
On paper, Form 1099-DA, which every company defined as a cryptobroker must issue, is about transparency, standardized reporting and improved compliance.
Form 1099-DA asks crypto users for the number of assets, date of acquisition, date of sale and disposal, as well as specific sections for aggregated transactions for stablecoins and NFTs.
However, it turns out to be more counterproductive than intended. Crypto users now receive tax forms that often report income without a reliable cost base, fail to properly capture retention periods, and completely exclude non-custodial activity. The result is a fragmented and incomplete picture of a user’s actual tax position.
For retail investors, that means manually reconciling thousands of transactions across exchanges, wallets, bridges and DeFi protocols, often with conflicting data that doesn’t match what the IRS receives.
Even within the industry, the problem has become enormous. When assets are moved between platforms, the cost basis often disappears. The receiving exchange has no reliable way to reconstruct historical purchase data. Still, the system is designed as if crypto can be reported with the same precision as traditional securities held in a single brokerage account.
It cannot do that. So the burden falls back on the individual taxpayer. They are now expected to override, reconcile and reconstruct their entire transaction history or risk audit exposure if they get it wrong.
The audit trail and registration requirements of the Clarity Act represent a necessary trade-off for regulatory certainty under the CFTC, but the operational hurdles they impose cannot be ignored.
To the bill’s credit, the underlying intent of these strict mandates is a massive win for the industry. Forcing audit trails to definitively prove the absolute segregation of client assets adds a level of trust and security that will protect retail users and prevent the catastrophic commingling of funds that defined early crypto collapses.
However, the technical challenges of implementing these systems remain daunting. While the bill wisely recognizes that custom onchain tracking solutions are required in lieu of outdated legacy reporting stacks, the operational requirements are steep. Because digital asset markets run 24/7, companies must build and maintain continuous audit trails capable of instantly matching real-time blockchain ledger data with off-chain communications.
Contradiction in American politics is becoming impossible to ignore
For small and medium-sized investors in particular, the compliance burden may exceed the financial benefit. And if the future of crypto depends on broad participation, that’s a serious structural problem.
This is where the contradiction in American politics becomes impossible to ignore.
On the one hand, the government supports innovation, market growth and domestic leadership in digital assets. On the other hand, it implements a tax reporting scheme that treats decentralized networks as if they were traditional brokerage accounts with perfect data continuity.
These two positions cannot both be scaled. We have already seen partial withdrawal, particularly around how the regime applies to non-custodial or DeFi activity. It’s a start, but it only scratches the surface.
The deeper problem has not yet been solved. The IRS doesn’t need to make crypto exchanges perfect, all-seeing recordkeepers to improve compliance. It needs a framework that recognizes the reality of fragmented ownership and active movement across platforms.
Other jurisdictions are moving in that direction. The Organization for Economic Co-operation and Development (OECD) Crypto-Asset Reporting Framework (commonly referred to as CARF), for example, leans toward standardized data collection across platforms without pretending that intermediaries can reconstruct a perfect cost basis history for each user.
Stock market reporting should not act as a final ledger. Its purpose should be to flag unreported activity, not to force millions of users into impossible voting exercises based on incomplete institutional data.
Even in the US, there are early signs of recognition that the current approach is too blunt. Discussions around de minimis exemptions and targeted relief for small transactions suggest that policymakers understand that friction is important.
While the law provides a de minimis exemption to protect low-volume brokers and dealers from registering or maintaining these cumbersome systems, which will protect the smallest startups, it also creates a steep compliance cliff for the middle market.
While established industry giants may treat these real-time monitoring pipelines as an expensive upgrade, growing companies caught just above the de minimis threshold face sheer engineering complexity and cost that can prove a massive barrier to entry.
The reform still lags behind the rhetoric
But at the federal level, reform still lags behind the rhetoric, and that gap is getting harder to ignore.
Because if the US continues to define “crypto-friendly” as regulatory clarity alone while ignoring the existing tax burden, adoption will not significantly accelerate.
It will stall at the edges. Participants with high net worth and sophisticated funds will continue to operate. Builders will continue to build. But mainstream retail participation, the layer that many argue is necessary for true scale, will quietly opt out under the weight of compliance complexity.
The US does not need to ban crypto to slow its growth, but it could tax it to the point of friction, while other jurisdictions design systems that make participation significantly easier.
