Treasury, IRS finalize digital asset reporting rules

The U.S. Treasury and IRS have issued final regulations requiring brokers to report digital asset sales and exchanges. These regulations help taxpayers file accurate tax returns for these transactions, which are already taxed under current law.

The rules, which will go into effect in 2025, received more than 44,000 public comments. Brokers will be required to report these transactions using a new Form 1099-DA, which is part of the Infrastructure Investment and Jobs Act of 2021.

IRS Commissioner Danny Werfel said, “We reviewed thousands of public comments and believe the new guidance addresses these issues while striking a balance between industry implementation challenges and closing the tax loophole associated with digital assets,” emphasizing that third-party reporting improves tax compliance and prevents digital assets from being used to hide taxable income.

Werfel also emphasized the importance of adequate funding for the IRS to manage these new regulations. “These new assets increase the complexity of our tax system, and the technology and staffing the IRS needs to keep up with these changes are resource-intensive. Ultimately, this funding for the IRS helps address emerging issues and generates significantly more savings than it costs the government’s bottom line,” Werfel added.

The regulations focus on brokers that manage digital assets for clients, such as custodial trading platforms, hosted wallet providers, digital asset kiosks, and certain payment processors. This initial focus covers most taxpayers, while giving time to consider more complex transactions involving non-custodial brokers later.

Currently, brokers that do not directly handle digital assets, known as decentralized or non-custodial brokers, are not required to report. Future regulations will cover these brokers. The regulations also provide guidance to taxpayers on determining their basis, gain, and loss from digital asset transactions, along with rules for withholding collateral.

To ease the transition, the IRS is offering relief for certain transactions. Real estate professionals must report the fair market value of digital assets in real estate transactions starting January 1, 2026.

An optional aggregate reporting method is available for stablecoin and non-fungible token (NFT) sales that exceed certain thresholds. For payment processors, reporting is only required when sales exceed these thresholds. Baseline reporting by brokers will be mandatory for transactions starting January 1, 2026.

Announcement 2024-56 provides relief from penalties for brokers who take good faith action to comply with the regulations in 2025. Limited withholding tax relief is available for certain transactions in 2026.

Notice 2024-57 postpones the requirement for brokers to report specific transactions until further guidance is issued. These transactions include packaging and unpacking, providing liquidity, staking, lending, short selling, and equity contracts.

Tax Procedure 2024-28 allows taxpayers to split their basis in digital assets across wallets or accounts, easing the transition to new reporting requirements.

The actions taken by the IRS and the Treasury Department aim to integrate digital assets into the tax system, with the aim of improving compliance and reducing the risk of tax evasion related to digital assets.

Photo: Shutterstock

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