IRS Digital Assets Proposed Regulations

On 8/29/23, the IRS issued a Notice of Proposed Rulemaking and Notice of Public Hearing for Digital Assets Proposed Regulations.   The IRS Digital Assets Proposed Regulations address information reporting, the determination of amount realized and basis, and backup withholding, for certain digital asset sales and exchanges by requiring brokers, digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets to:

• file information returns,
• furnish payee statements on dispositions of digital assets effected for customers in certain sale or exchange transactions,
• require real estate reporting persons, who are treated as brokers with respect to reportable real estate transactions, to include on filed information returns and furnished payee statements the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions. Real estate reporting persons would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in these transactions.

As per the Notice of Proposed Rulemaking and Notice of Public Hearing, the IRS Digital Assets Proposed Regulations is effort to “crack down on tax cheats while helping law-abiding taxpayers know how much they owe on the sale or exchange of digital assets. This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules”.

Requirement for brokers of digital assets to report certain sales and exchanges

The IRS Digital Assets Proposed Regulations have the purpose of clarifying and adjusting the rules regarding the tax reporting of information by brokers, so that brokers for digital assets are subject to the same information reporting rules as brokers for securities and other financial instruments given that currently taxpayers that owe tax on gains and may be entitled to deduct losses on digital assets when sold, but for many taxpayers it is difficult and costly to calculate their gains. These proposed rules require brokers to provide a new Form 1099-DA to help taxpayers determine if they owe taxes and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns. These regulations align tax reporting on digital assets with tax reporting on other assets, and, as a result, avoid preferential treatment between different types of assets.

These proposed regulations are designed to help end confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals and others,” said IRS Commissioner Danny Werfel. “A key part of this effort fits in with the larger IRS compliance focus on wealthy taxpayers. We need to make sure digital assets are not used to hide taxable income, and the proposed regulations are designed to provide a clearer line of sight into activities by high-income people as well as others using them. We want to make sure everyone pays what they owe under the tax laws, and our research and experience demonstrate that third-party reporting improves compliance”.

For sales or exchanges of digital assets that take place on or after Jan. 1, 2025, the IRS Digital Assets Proposed Regulations would require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to customers. Brokers, in certain circumstances, would also be required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements, so that customers have the information they need to prepare their tax returns. Under the proposed rules, the first year that brokers would be required to report any information on sales and exchanges of digital assets is in 2026, for sales and exchanges in 2025.

Real Estate Reporting Persons

The IRS Digital Assets Proposed Regulations would also require real estate reporting persons (title companies, closing attorneys, mortgage lenders and real estate brokers), who are treated as brokers for dispositions of digital assets, to report the disposition of digital assets paid as consideration by real estate purchasers to acquire real estate in real estate transactions that close on or after Jan. 1, 2025. These real estate reporting persons would also be required to include on Form 1099-S the fair market value of digital assets paid to sellers of real estate in real estate transactions that close on or after Jan. 1, 2025.

Backup Witholding Rules

The IRS Digital Assets Proposed Regulations set forth gain (or loss) computation rules, basis determination rules and backup withholding rules applicable to digital asset sale and exchange transactions and propose many useful definitions.

Comments close on 10/30/23

Written or electronic comments must be received by October 30, 2023. A public hearing on this proposed regulation has been scheduled for November 7, 2023, at 10 a.m. ET.

The IRS Digital Assets Proposed Regulations prove that the IRS is focused reducing the tax gap and cracking down on tax evasion

Although the IRS Digital Assets proposed Regulations have not been finalized, taxpayers ought to understand that there will be upcoming regulatory and reporting scheme changes that will be applicable to digital assets and related transactions.  The IRS continues to invest in Digital Asset compliance as per the Inflation Reduction Act Strategic Operating Plan –  where it states that the Agency will pursue enforcement for complex, high-risk and emerging issues; including digital assets transactions.

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