IRS issues final regs. on reporting requirements for digital assets

The IRS issued final regulations for reporting digital assets (T.D. 10000) that provide guidance on information reporting and the determination of amount realized and basis for certain digital asset sales and exchanges.

The regulations, issued Friday, require custodial brokers to report certain sale and exchange transactions beginning in 2026 for transactions in calendar year 2025. The transactions will be reported on Form 1099-DA, Digital Asset Proceeds From Broker Transactions, which the Service will release later. The regulations come in response to amendments to Sec. 6045 made by the Infrastructure Investment and Jobs Act, P.L. 117-58, which was signed into law in November 2021.

The final regulations require reporting by custodial brokers, which are 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). Most digital asset transactions occur using these brokers.

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 Jan. 1, 2026.

Three changes that address industry issues are:  

• The proposed regulations do not include reporting requirements for noncustodial (decentralized) brokers that do not take possession of the digital assets sold or exchanged, for now, as the IRS considers “the nuances” of transactions involving these brokers. The Service said it would provide rules for the noncustodial brokers in a different set of final regulations.
• The final regulations provide for an optional, aggregate reporting method for certain sales of stablecoins and certain nonfungible tokens (NFTs) applicable only after those sales exceed de minimis thresholds. For transactions involving certain PDAPs, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.
• The final regulations do not require, as the proposed regulations did, that taxpayers report transaction identifications on their Form 1099-DA. However, they must collect the information, retain it for seven years, and make it available to the IRS upon request.

In addition to the broker reporting rules, the regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also provide backup withholding rules.

The IRS said it reviewed over 44,000 public comments on the proposed regulations. Officials “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 news release. “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.”

The differences between the proposed regulations and the final ones show the IRS paid attention to the public comments, said Miles Fuller, senior director of government solutions at TaxBit, a cryptocurrency tax software company, and a former attorney at the IRS.

“My takeaway (is) on some of this, they said, ‘We’re going to punt. … We’re not sure we’re approaching this the right way,'” he said. “That’s them really listening … to the stakeholders involved in the industry and saying, ‘We want to make sure we get this right, so we’ll slow down a little bit and grant you this relief.'”

The IRS also issued Notice 2024-56, which provides transition relief with respect to the reporting of information and backup withholding on digital assets by brokers under Sec. 6045. 

That notice says that “if you make a good faith effort to comply with these rules but mess it up, or if you get it wrong or make a mistake, you will not be subjected to penalties,” Fuller said. “It does seem clear, though, from what the IRS says about good-faith effort, that the brokers need to try to do something. They need to try to report.”

The IRS also issued:

• Notice 2024-57, which provides that brokers are not required to file information returns and furnish payee statements for certain digital asset transactions identified in the notice — until further notice.
• Rev. Proc. 2024-28, which, subject to certain requirements, generally permits taxpayers to rely on any reasonable allocation of units of unused basis to a wallet or account that holds the same number of remaining digital asset units based on the taxpayer’s records of such unused basis and remaining units. The allocation must be a reasonable allocation as defined in Section 5.02 of the revenue procedure and must be made as of Jan. 1, 2025. 

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.