The Clarity Act won’t lead to adoption without crypto tax reform

A growing number of people see the Clarity Act, which intends to establish clear and enforceable guardrails for the U.S. 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 major step forward. There is no doubt 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 gets the market structure right, the U.S. 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 any business defined as a crypto broker must issue, is about transparency, standardized reporting and improved compliance.

The Form 1099-DA asks crypto users for the number of assets, acquisition date, sale and disposal date, as well as specific sections for aggregated transactions for stablecoins and NFTs.

However, it is becoming more counterproductive than intended. Crypto users are now receiving tax forms that often report proceeds without a reliable cost basis, fail to properly capture holding periods and excludes non-custodial activity entirely. 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 does not align with what the IRS receives.

Even within the industry, the problem has become immense. When assets are moved between platforms, the cost basis often disappears. The receiving exchange has no reliable way to reconstruct historical purchase data. Yet, the system is designed as if crypto can be reported with the same precision as traditional securities held within a single brokerage account.

It cannot. So the burden falls back to 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 record-keeping requirements in the Clarity Act represent a necessary trade-off for regulatory certainty under the CFTC, but the operational hurdles they impose can’t 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 customer assets injects 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 acknowledges that tailored, onchain tracking solutions are required rather than outdated legacy reporting stacks, the operational demands are steep. Because digital asset markets run 24/7, firms must build and maintain continuous audit trails capable of instantly matching real-time blockchain ledger data with off-chain communications.

Contradiction in U.S. policy becomes impossible to ignore

For small and mid-sized investors, especially, the compliance burden can exceed the economic benefit. And if the future of crypto depends on broad participation, that is a serious structural problem.

This is where the contradiction in U.S. policy becomes impossible to ignore.

On the one hand, the government is supporting innovation, market growth and domestic 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’ve already seen partial backtracking, particularly around how the regime applies to non-custodial or DeFi activity. That’s a start, but it only scratches the surface.

The deeper issue is yet to be solved. The IRS does not need to turn crypto exchanges into perfect, all-seeing record keepers to improve compliance. It needs a framework that acknowledges the reality of fragmented ownership and cross-platform asset movement.

Other jurisdictions are moving in that direction. The Organisation for Economic Co-operation and Development’s (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 every user.

Exchange reporting should not function as a definitive ledger. Its purpose should be to flag unreported activity, not to force millions of users into impossible reconciliation exercises based on incomplete institutional data.

Even within the U.S., 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 policymakers understand that friction matters.

While the act does provide a de minimis exemption to shield low-volume brokers and dealers from registering or maintaining these heavy systems, which will protect the smallest startups, it simultaneously creates a steep compliance cliff for the middle market.

While established industry giants can treat these real-time surveillance pipelines as an expensive upgrade, growing businesses caught just above the de minimis threshold face sheer engineering complexity and costs that could prove a massive barrier to entry.

Reform is still lagging behind rhetoric

But at the federal level, reform is still lagging behind rhetoric, and that gap is becoming harder to ignore.

Because if the U.S. continues to define “crypto-friendly” as regulatory clarity alone while ignoring the existing tax burden, adoption will not accelerate significantly.

It will stall at the edges. High-net-worth participants and sophisticated funds will continue operating. Builders will continue building. But mainstream retail participation, the layer that many argue is needed for true scale, will quietly opt out under the weight of compliance complexity.

The U.S. won’t need to ban crypto to slow its growth, but it may tax it into friction, while other jurisdictions design systems that make participation materially easier.