On 6/28/24, the U.S. Treasury and the IRS issued final regulations with an effective date of 9/9/24 requiring custodial brokers to report sales and exchanges of digital assets beginning in calendar year 2025. Meaning, information reporting and the determination of amount realized and basis for digital asset sales and exchanges. Digital Assets Broker Reporting means that brokers will be required to file information returns and furnish payee statements reporting gross proceeds and adjusted basis on dispositions of digital assets effected for customers in sale or exchange transactions. The U.S. Treasury and the IRS also added the requirement for real estate reporting persons to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate when the final regulations were issued on 6/28/24. The final regulations “Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions” stem from a notice of proposed rulemaking that appeared in the Federal Register back on 8/29/23. That said, taxpayers ought to understand that through digital assets broker reporting, the U.S. Treasury and the IRS are seeking to find potential non-compliance in digital assets and close the tax gap related to digital assets.
As per the IRS, the final regulations for digital assets broker reporting are meant to:
- Provide definition for a “broker” and require proceeds to be reported on the IRS new Form 1099-DA.
- End confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals and others.
- Ensure that digital assets are not used to hide taxable income.
- Provide a clearer line of sight into digital asset activities by high-income people as well as others using them.
- Ensure that everyone pays what they owe under the tax laws.
- Improve detection of noncompliance in the high-risk space of digital asset.
- Improve compliance given that third-party reporting improves compliance.
- Provide taxpayers with information which will reduce burden and simplify the process of reporting of a taxpayer’s digital asset activity.
- Provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions.
- Provide backup withholding rules.
The final regulations for digital assets broker reporting require:
- Reporting by brokers who take possession of the digital assets being sold by their customers.
- These 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).
- Real estate professionals are also required to 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 January 1, 2026. The broker reporting regulations require copies of Form 1099-S to be furnished to the taxpayer. The final regulations state that Form 1099-S will be updated for real estate reporting, which applies to transactions occurring on or after January 1, 2026.
The final regulations digital assets broker reporting do not:
- Include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are called decentralized or non-custodial brokers. The U.S. Treasury Department and the IRS intend to provide rules for these brokers in a separate set of final regulations.
There is transitional relief:
Under IRS Notice 2024-56, there is “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 calendar year 2025, provided that the broker makes a good faith effort to comply with the reporting obligations. Additionally, 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. Finally, the Notice 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.”
There is also a delay on information reporting for certain transactions until future guidance is issued
Under IRS Notice 2024-57, brokers will not 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.
Finally, there is transition from universal or multi-wallet approach to allocating basis in digital assets to wallet by wallet or account by account approach
Revenue Procedure 2024-28, “generally permits 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”.
Are you a taxpayer that has sold, exchanged, or otherwise disposed of a financial interest in a digital asset?
Are you a digital asset compliant taxpayer?
How is your digital asset recordkeeping?
Who is your Digital Asset CPA? ©
