The Treasury Department and the IRS issued the much-anticipated final regulations on cryptocurrency broker reporting requirements June 28, after receiving more than 44,000 public comments on the proposed rules last fall.
The regulations require brokers to report certain sale and exchange transactions that take place beginning in calendar-year 2025 on the soon-to-be released Form 1099-DA. A draft version of the form was unveiled last April. The regulations implement digital asset reporting requirements by the Infrastructure Investment and Jobs Act, which was enacted in 2021.
The final regulations are viewed by proponents as critical to policing a largely unregulated sector plagued by tax avoidance.
“We reviewed thousands of public comments and believe this new guidance addresses those concerns while striking a balance between industry implementation challenges and closing the tax gap related to digital assets,” IRS Commissioner Danny Werfel said in a statement. “These regulations are an important part of the larger effort on high-income individual tax compliance. We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets. Our research and experience demonstrate that third-party reporting improves compliance. In addition, these regulations will provide taxpayers with much-needed information, which will reduce burden and simplify the process of reporting their digital asset activity.
“Our work to address potential non-compliance in digital currency is another reason why it is so critical to fully fund IRS operations,” he added. “These new assets expand the complexity of our tax system, and the technology and personnel necessary for the IRS to keep pace with these changes is resource intensive. Ultimately, this IRS funding helps address emerging issues and creates significantly more savings than costs to the government’s bottom line.”
The final regulations are aimed at brokers that take possession of the digital assets being sold by their customers. According to the IRS, brokers include:
- Operators of custodial digital asset trading platforms;
- Certain digital asset hosted wallet providers;
- Digital asset kiosks; and
- Certain processors of digital asset payments (PDAPs).
The regulations provide gain (and loss) computation rules, basis determination rules, and backup withholding rules applicable to digital asset sale and exchange transactions, according to the IRS.
“The final regulations ensure that taxpayers will receive statements that include information reported to the IRS on Form 1099-DA, Digital Asset Proceeds from Broker Transactions, that will help them file their income tax returns and determine their tax obligations. This information will give taxpayers confidence in reporting income from digital assets while improving compliance efforts,” the agency said.
The IRS noted that it’s aware of the challenges that implementing new reporting requirements can pose; therefore, the agency is providing transitional and penalty relief from reporting and backup withholding rules on certain transactions to help phase-in implementation.
Under the final regulations:
- Brokers must report gross proceeds for transactions effected on or after Jan. 1, 2025.
- Brokers must report basis on certain transactions effected on or after Jan. 1, 2026.
- Real estate professionals that are treated as brokers must report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after Jan. 1, 2026.
- For certain sales of stablecoins and non-fungible tokens (NFTs), brokers may choose to report the transactions on an aggregate basis to the extent the sales exceed respective de minimis thresholds.
- A separate de minimis threshold also applies for PDAP sales.
The final regulations don’t include reporting requirements for decentralized or non-custodial brokers that don’t take possession of the digital assets being sold or exchanged. The Treasury Department and the IRS expect to provide rules for these brokers in a different set of final regulations.
“The final regulations announced today will require brokers to report gross proceeds on the sale of digital assets beginning in 2026 for all sales in 2025. Brokers will be required to also report information on the tax basis for certain digital assets beginning in 2027 for sales in 2026,” the Treasury Department said in a news release.
Notice on transitional relief
Notice 2024-56, issued by the IRS on Friday, provides general transitional relief from reporting penalties and backup withholding for any broker that doesn’t timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar-year 2025, provided that the broker makes a good-faith effort to comply with the reporting obligations.
In addition, the notice provides more limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Notice 2024-56 also provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.
Notice on temporary exceptions to reporting
Notice 2024-57 informs brokers that until the Treasury Department and the IRS issue further guidance, brokers won’t have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:
- Wrapping and unwrapping transactions;
- Liquidity provider transactions;
- Staking transactions;
- Transactions described by digital asset market participants as lending of digital assets;
- Transactions described by digital asset market participants as short sales of digital assets; and
- Notional principal contract transactions.
The IRS on Friday also issued Revenue Procedure 2024-28 which allows taxpayers to allocate units of unused basis to remaining digital asset units in digital asset wallets or accounts as of Jan. 1, 2025.
“Because of the bipartisan Infrastructure Investment and Jobs Act, investors in digital assets and the IRS will have better access to the documentation they need to easily file and review tax returns,” said Aviva Aron-Dine, Treasury acting assistant secretary for tax policy. “By implementing the law’s reporting requirements, these final regulations will help taxpayers more easily pay taxes owed under current law, while reducing tax evasion by wealthy investors.”
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Tags: Digital Currency, Income Tax, IRS, Taxes
