The Treasury and the Internal Revenue Service issued final regulations Friday on reporting by brokers on dispositions of digital assets such as cryptocurrency for customers in certain sale or exchange transactions.
The reporting will need to be made on the soon-to-be released Form 1099-DA beginning with transactions on or after Jan. 1, 2025. The IRS unveiled a draft version of the form in April.
The final regulations apply to brokers that take possession of the digital assets being sold by their customers, including operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks and certain processors of digital asset payments.
Samuel Corum/Bloomberg
The regulations include gain (and loss) computation rules, basis determination rules and backup withholding rules applicable to digital asset sale and exchange transactions. The final regulations aim to ensure taxpayers will receive statements that include information reported to the IRS on Form 1099-DA, Digital Asset Proceeds from Broker Transactions, that will help them file their income tax returns and determine their tax obligations. The regulations phase in the required reporting over time.
Under the final regulations:
Brokers must report gross proceeds for transactions effected on or after Jan. 1, 2025.Brokers must report basis on certain transactions effected on or after Jan. 1, 2026.Real estate professionals that are treated as brokers must 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.For certain sales of stablecoins and non-fungible tokens, brokers can choose to report the transactions on an aggregate basis to the extent the sales exceed respective de minimis thresholds.A separate de minimis threshold also applies for PDAP sales.
The final regs don’t include reporting requirements for brokers commonly known as decentralized or non-custodial brokers that do not take possession of the digital assets being sold or exchanged. The Treasury and the IRS intend to provide rules for these brokers in a different set of final regulations.The final regulations will require brokers to report gross proceeds on the sale of digital assets starting in 2026 for all sales in 2025. Brokers will be required to also report information on the tax basis for certain digital assets beginning in 2027 for sales in 2026.
“Because of the bipartisan Infrastructure Investment and Jobs Act, investors in digital assets and the IRS will have better access to the documentation they need to easily file and review tax returns,” said Treasury acting assistant secretary for tax policy Aviva Aron-Dine in a statement. “By implementing the law’s reporting requirements, these final regulations will help taxpayers more easily pay taxes owed under current law, while reducing tax evasion by wealthy investors.”
While owners of digital assets have always owed tax on the sale or exchange of digital assets, compliant taxpayers have often needed to rely on expensive third-party services to calculate their gains or losses from the sale of digital assets. The final regulations will implement Congress’s bipartisan directive to ensure owners of digital assets receive the information they need from brokers to file their taxes more accurately, more easily, and less expensively, and that the IRS has the information needed to address the tax evasion risks posed by digital assets.
The regulations were developed after the Treasury and IRS held a public hearing and reviewed over 44,000 comments in response to the proposed regulations. The rules issued Friday mainly address reporting requirements for custodial brokers, but the Treasury and the IRS expect to issue more rules later this year to set reporting requirements for non-custodial brokers in accordance with the statutory requirements.
The IRS and the Treasury also released two notices and a revenue procedure Friday to offer transitional relief and guidance for brokers and taxpayers.
Notice for penalty relief
Notice 2024-56 provides information regarding the transition relief for brokers.
For transactions occurring in calendar year 2025 (and reported in 2026), the IRS will not impose penalties for failure to file and to furnish Forms 1099-DA if the broker makes a good faith effort to file the Forms 1099-DA and furnish associated payee statements correctly and on time.
The notice also provides relief to brokers from backup withholding obligations and associated penalties:For all transactions that occur in 2025;For 2026, for any transaction effected on behalf of a customer from whom the broker obtains the customer’s TIN and submits the customer’s name and TIN to the IRS’s TIN-matching program and receives a response that the name-TIN combination matches IRS records.Until further guidance is published, for dispositions of digital assets in return for certain NFTs or real property, and for certain sales effected by PDAPs.
Notice on temporary exceptions
Notice 2024-57 identifies transactions for which brokers are not required to file Forms 1099-DA or furnish associated payee statements until the Treasury Department and IRS issue further guidance. This reporting exception does not apply to rewards or other compensation earned by participants in these transactions. The identified transactions are:Wrapping and unwrapping transactions; Liquidity provider transactions;Staking transactions;Transactions described by digital asset market participants as the lending of digital assets;Transactions described by digital asset market participants as short sales of digital assets, andNotional principal contracts.
Revenue Procedure 2024-28 allows taxpayers to allocate units of unused basis to remaining digital asset units in digital asset wallets or accounts as of Jan. 1, 2025.
The revenue procedure provides transitional guidance on how taxpayers may transition to the basis identification methodology to allocate unused basis of digital assets to digital assets held within each wallet or account of a taxpayer as of January 1, 2025, as required by the final regulations.
KPMG offered its reaction to the rules. “Treasury and the IRS have released final regulations on ‘broker’ tax reporting for digital assets (aka, Form 1099-DA reporting),” said Tony Tuths, KPMG’s principal for alternative investments and digital asset tax practice leader, in a statement. “As expected, given the timing, Treasury had to leave some parts out. Interestingly, they decided to defer on DeFi by not immediately requiring full reporting.”
Crypto exchange Coinbase still has some concerns about the new rules and guidance. “We commend the IRS for developing more reasonable, rational rules that focus on custodial brokers, like Coinbase,” said Coinbase vice president of tax Lawrence Zlatkin in a statement. “The rules lay out a more practical timeline for implementation, and include a provision to prevent reporting duplication. But we remain deeply concerned about the absence of a de minimis rule, and the inclusion of other non-financial transactions. While we appreciate the more limited nature of these regulations, we believe the rules should be implemented on par with reporting for traditional financial brokers. We look forward to working with the IRS on efforts to implement reasonable timelines, systems integration and appropriate forms.”
