Treasury and J5 Tell Crypto Industry, No Flowers for You | Cadwalader, Wickersham & Taft LLP
Stablecoins Not Cash, Says Treasury Official
A Treasury official recently confirmed that the Treasury is unlikely to issue guidance treating stablecoins as cash. Stablecoins are digital assets that are pegged to underlying currencies or other reserve assets. In July 2025, Congress enacted the GENIUS Act, which provided a comprehensive regulatory, but not tax, framework for stablecoins. From a tax perspective, stablecoins continue to be treated similarly to other digital assets, i.e., as property rather than currency, and are subject to the custodial broker reporting rules discussed here, here, and here.
While guidance treating stablecoins as cash is not expected, the Treasury official suggested that it may revisit the application of the custodial broker reporting rules to stablecoins. Notably, when the custodial broker reporting regulations were in proposed form, various commentators suggested excluding stablecoins from the reporting requirements.
Although the Treasury ultimately did not follow these suggestions, their description of the final regulations indicates that the Treasury could revisit the application of the custodial broker reporting rules to stablecoins if Congress were to enact the Genius Act, which at the time was only proposed legislation. The Genius Act does not take effect until 2027, so the IRS has ample time to revisit the stablecoin custodial broker reporting rules.
We will continue to monitor stablecoin taxation developments in BrassTax.
J5 Sounds Alarm on Crypto Tax Evasion
The J5, which is a coalition of the tax enforcement arms of five countries, including the IRS’s criminal investigation division, recently published two reports (the “Reports”) discussing the potential that over-the-counter crypto trading desks (“OTC Desks”) and crypto payment processors may be facilitating tax evasion and money laundering.
Unlike centralized crypto exchanges, which record exchanges on publicly available blockchains, OTC Desks act as intermediaries to facilitate crypto exchanges directly, with exchanges often occurring internally at OTC Desks and not on a visible blockchain. The Reports suggest that this lack of transparency may provide opportunities for tax evasion and money laundering. Notably, the Reports indicate that the daily trading volume of crypto on OTC Desks, $1.4 billion, far surpasses that of centralized crypto exchanges, $74 million.
Crypto payment processing platforms enable the use of crypto to buy goods and services. In this regard, the Reports highlight the recent proliferation of companies, including high-end luxury brands, integrating crypto payment processing platforms. The Reports cite the ability to use these platforms as opportunities for tax evaders and money launderers to offload ill-gotten cryptocurrency.
The Reports note a rapid increase in recent years in suspicious activity reports (“SARs”) filed regarding both OTC Desks and crypto payment processors. Generally, applicable financial institutions are required to file SARs with FinCEN to report unusual or suspicious transactions. The Reports generally recommend that law enforcement agencies carefully review SARs related to OTC Desks and crypto payment processors. In light of the Reports, as well as an earlier J5 report identifying crypto red flags for financial institutions, discussed here, financial institutions may wish to exercise additional caution when interacting with OTC Desks or crypto payment processors.
