The U.S. Department of the Treasury and the IRS published final regulations on digital asset broker reporting that make some welcome changes to the proposed regulations. The final regulations generally are effective for 2025 sales of digital assets, and basis reporting generally is effective for 2026 sales of digital assets.
The final regulations limit the definition of broker and, therefore, reporting to custodial brokers who take possession of the digital assets being sold by their customers, including operators of custodial digital asset trading platforms, digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAP). In response to comments that the proposed regulations were not administrable for noncustodial or decentralized platforms, reporting under the final regulations is limited to custodial platforms and until Treasury and the IRS issue further guidance, reporting is not required for noncustodial or decentralized trading platforms.
Narrowing the scope of covered transactions, the final regulations exclude from reporting closed loop transactions involving virtual assets that exist only in a closed system and cannot be sold or exchanged outside that system for fiat currency. Additionally, the final regulations and Notice 2024-57 exclude several transactions from reporting until further guidance is issued, including wrapping, unwrapping, liquidity provider, digital asset lending, and staking transactions.
The final regulations add an optional aggregate reporting method as well as de minimis reporting and backup withholding thresholds for certain stablecoin and nonfungible tokens (NFTs). PDAPs also have a de minimis threshold for reporting and backup withholding.
Several comments identified that the proposed regulations would result in duplicative reporting for the same transaction. To address this potential issue, the final regulations provide that no reporting is required for payments made to a U.S. digital asset broker who certifies that status on a Form W-9, “Request for Taxpayer Identification Number and Certification” (or in a written statement signed under penalties of perjury until the Form W-9 is revised).
The final regulations also include a multiple broker rule that requires reporting by the broker crediting the gross proceeds to the customer’s wallet or account (crediting broker) but relieves the broker paying the proceeds to the crediting broker if they obtain a Form W-9 (or statement) certifying that the crediting broker is a U.S. digital asset broker.
The final regulations revise the proposed regulations to remove the requirement that brokers report the time of the transaction, the transaction identification, and the digital asset address information. However, for most transactions brokers still must collect transaction identification and digital asset address information and retain it for seven years so that it can be made available to the IRS upon request.
The final regulations reserve rules for non-U.S. digital asset brokers. The final regulations also provide a transition rule for brokers to treat customers as foreign persons exempt from reporting and withholding if the person has not previously been classified as a U.S. person and they do not have a U.S. address. This transition rule applies to sales of digital assets effected before Jan. 1, 2027, for digital assets held with the broker in an account established before Jan. 1, 2026.
The final regulations generally adopt the proposed rules for determining gain, loss, and basis of digital assets under Treasury Regulation Section 1.1001-7 and Treasury Regulation Section 1.1012-1(h) and (j) effective for acquisitions of digital assets on or after Jan. 1, 2025. However, the final regulations include revised rules for transaction costs and specific identification. Revenue Procedure 2024-28 provides a safe harbor under Section 1012(c) to allocate unused basis of digital assets as a result of complying with the identification rules under the final regulations to digital assets held within each wallet or account as of Jan. 1, 2025.
Crowe observation
Recent Supreme Court decisions in Loper Bright Enterprises v. Raimondo and Corner Post Inc. v. Board of Governors of the Federal Reserve System could make it easier to challenge these regulations in court.
Notice 2024-56 includes the following transition relief:
While the first Forms 1099-DA, “Digital Asset Proceeds From Broker Transactions,” are not required to be filed until 2026, brokers must track covered transactions and capture necessary information for transactions occurring on or after Jan. 1, 2025, which is only a few months from now. Notice 2024-56 and Notice 2024-57 provide penalty and transition relief; however, they do not eliminate the need to begin putting procedures in place and obtaining information from participants in digital asset transactions. Additionally, participants in noncustodian and other transactions excepted from the final regulations should remain engaged as Treasury and the IRS continue their focus on expanding the scope of digital asset broker reporting to these excepted transactions.
Publication of these final regulations, international digital asset reporting, withholding and information sharing under the Organization for Economic Cooperation and Development’s Crypto-Asset Reporting Framework, and recent proposed regulations identifying certain derivative transactions that could include digital assets as listed transactions are reminders of the continued enforcement efforts by the IRS and global tax authorities focused on digital assets.
The recent Supreme Court decision overruling Chevron raises five uncertainties regarding judicial review of federal tax regulations.
Tax-exempt organizations should understand the structures of their various legal entities to help meet requirements for maintaining their tax-exempt status.
The recent Supreme Court decision overruling Chevron raises five uncertainties regarding judicial review of federal tax regulations.
Tax-exempt organizations should understand the structures of their various legal entities to help meet requirements for maintaining their tax-exempt status.
