FinCEN withdraws $10,000 crypto wallet proposal

The U.S. Financial Crimes Enforcement Network (FinCEN) has withdrawn its proposed reporting rule for large crypto transfers involving self-hosted wallets, ending a six-year effort to extend banks’ and money-service businesses’ checks to those transactions. FinCEN’s October 5 announcement says it considered public comments and is withdrawing the proposal as part of the administration’s deregulatory agenda. The proposal never took effect, so this removes a possible future requirement rather than ending a reporting regime already in force.

What would the $10,000 proposal have required?

The December 2020 proposal would have required banks and money-service businesses, including crypto exchanges, to report certain transfers involving unhosted wallets when a transaction exceeded $10,000, or several transactions added up to more than $10,000 within 24 hours. The Federal Register withdrawal notice says reports would have included information about the customer’s transaction and counterparty, and firms would have had to verify their customer’s identity. For transactions above $3,000, the proposal also called for recordkeeping and identity verification.

An unhosted wallet is one where the owner controls the private keys rather than relying on a financial institution to make transactions. Under the proposal, the bank or money-service business handling the transfer would have gathered information about its customer and the other side of the transaction. That offered authorities a reporting trail for some transfers between customers and self-custody wallets; it also would have put additional compliance work on regulated firms handling those transfers.

Does the withdrawal change crypto tax reporting?

No: this was a FinCEN anti-money-laundering proposal, separate from the IRS’s tax-reporting rules for digital assets. The IRS says custodial brokers must report certain customer sales and exchanges on Form 1099-DA, while individuals still have to report taxable digital-asset transactions on their returns. Those tax obligations are not removed by FinCEN’s action.

The distinction matters because the proposals addressed different questions. FinCEN’s rule concerned information financial firms would send to the government about transfers involving certain wallets. IRS broker reporting concerns customer sales and exchanges handled by brokers, and helps taxpayers and the agency document tax positions. The IRS describes its broker requirements as applying to firms that take possession of the assets being sold; its rules exclude non-custodial brokers that do not take possession.

What changes for self-custody users and firms?

For users, the practical change is that this particular proposed federal reporting and verification requirement will not be introduced. FinCEN says it will take no further action on the 2020 proposal. The decision does not make self-custody transfers exempt from tax reporting, nor does it undo the separate reporting obligations that apply to custodial brokers.

For exchanges and other covered firms, withdrawal avoids preparing for a rule that could have required additional identity checks, counterparty information and reporting around transfers to or from certain wallets. The trade-off is that the federal reporting framework will not gain the specific transaction trail this proposal sought to create. FinCEN also withdrew a separate 2023 proposal concerning crypto-mixing transactions, but that proposal addressed a different activity and does not alter the scope of the wallet rule.

The next signal to watch is whether FinCEN proposes a replacement approach after reviewing comments, or leaves this area without a new rule. The withdrawal notice says the agency will take no further action on this proposal; any future requirements would need to come through a separate measure. In the meantime, the relevant dividing lines remain the ones already in place: who controls the wallet, whether a broker takes possession, and whether a transaction creates a tax-reporting obligation.

Sources and documents

• FinCEN’s October 5 announcement — fincen.gov
• Federal Register withdrawal notice — federalregister.gov