The Department of Treasury and the Internal Revenue Service IRS have recently issued new regulations requiring custodial brokers to report gross proceeds from the sale and exchange of digital assets, including cryptocurrencies. These regulations aim to align the reporting requirements for digital assets with those of traditional financial services.
On June 28, the final 365-page regulations were released, implementing the reporting requirements for digital asset brokers. This measure is part of the 2021 Infrastructure Investment and Jobs Act (IIJA). The law does not introduce new taxes on digital assets but establishes reporting requirements similar to those already applied to traditional financial services, aiming to help taxpayers file accurate returns and pay taxes owed under current law.
Implementation of IRS Reporting Requirements
Starting in 2026, brokers will be required to report gross proceeds from the sale of digital assets on a new Form 1099-DA for all sale and exchange transactions occurring in 2025. Additionally, brokers will need to report the tax basis for certain digital assets beginning in 2027 for sales made in 2026.
Taxpayers who comply with the regulations have often had to rely on third-party services to calculate their gains or losses from digital asset sales. These new regulations aim to provide better access to the necessary documentation for both digital asset investors and the IRS, making it easier to file and review tax returns.
Aviva Aron-Dine, Acting Assistant Secretary for Tax Policy, noted that these regulations will help taxpayers pay taxes owed under current law more easily while reducing tax evasion by wealthy investors. IRS Commissioner Danny Werfel added that these regulations are a crucial part of efforts to ensure tax compliance among high-income individuals and improve the detection of noncompliance in the high-risk area of digital assets.
Custodial vs. Non-Custodial Brokers
The new regulations apply to brokers who take possession of digital assets sold by their customers, including operators of custodial digital asset trading platforms, certain hosted wallet providers, digital asset kiosks, and certain digital asset payment processors (PDAPs).
The IRS explained that by initially focusing on this group, which covers most digital asset transactions today, it intends to cover the largest number of taxpayers while allowing more time to consider the nuances of transactions involving non-custodial and decentralized brokers. The Treasury and the IRS expect to issue additional rules later this year to establish reporting requirements for non-custodial brokers in accordance with statutory requirements.
Transitional Relief
Recognizing the challenges that implementing new reporting requirements can pose, the IRS is providing transitional relief and penalty exemptions for certain transactions to aid in the implementation phase.
Notice 2024-56 provides general transitional relief from reporting penalties and backup withholding for any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during the 2025 calendar year, provided that the broker makes a good faith effort to comply with the reporting obligations.
Limited Relief for 2026
The notice also provides more limited relief from backup withholding for certain digital asset sales during 2026 for brokers using the IRS’s TIN-matching system instead of certified TINs. Backup withholding relief is also provided for exchanges of digital assets for specified NFTs and real property and for certain sales effected by PDAPs.
Additionally, Notice 2024-57 informs brokers that, until further guidance is issued by the Treasury and the IRS, they will not need to file information returns or furnish payee statements for sales and exchanges of digital assets 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
- Notional principal contract transactions
Procedure for Unused Basis Allocation
Finally, Revenue Procedure 2024-28 allows taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units, based on the taxpayers’ records of unused bases and remaining units in those wallets or accounts.
This procedure will be published in Internal Revenue Bulletin 2024-31 on July 27. The final regulations will be published in the Federal Register on July 9.
With the implementation of these new regulations, the goal is to make information about digital assets more accessible and transparent for both taxpayers and the IRS. While the transition may present challenges, the relief measures and temporary exemptions are designed to ease this process. It is crucial for digital asset brokers to stay informed and comply with these new requirements to avoid.
