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IRS Issues Final Regulations and Other Guidance on Digital Asset Transactions
(Parker Tax Publishing July 2024)
The IRS issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning in calendar year 2025; the regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. In addition, the IRS issued a notice providing transitional relief from reporting penalties for brokers during calendar year 2025; a notice providing that until further guidance is issued, brokers will not have to file information returns or furnish payee statements on certain specified digital asset transactions; and a procedure that generally permits taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units. T.D. 10000; Notice 2024-56; Notice 2024-57; Rev. Proc. 2024-28.
Background
Section 80603 of the Infrastructure Investment and Jobs Act (Infrastructure Act) (Pub. L. 117-58), enacted in 2021, made several changes to the broker reporting provisions under Code Sec. 6045 to clarify the rules regarding how certain digital asset transactions should be reported by brokers, and to expand the categories of assets for which basis reporting is required to include all digital assets.
Specifically, the Infrastructure Act clarified the rules regarding how certain digital asset transactions should be reported by brokers, expanded the categories of assets for which basis reporting is required to include all digital assets, and provided a definition for the term digital assets. Additionally, the Infrastructure Act clarified that transfer statement reporting under Code Sec. 6045A(a) applies to covered securities that are digital assets and added a new information reporting provision under Code Sec. 6045A(d) to require brokers to report on transfers of digital assets that are covered securities, provided the transfer is not a sale and is not to an account maintained by a person that the broker knows or has reason to know is also a broker. Finally, the Infrastructure Act provided that these amendments apply to returns required to be filed, and statements required to be furnished, after December 31, 2023.
In August 2023, the IRS published proposed regulations in REG-122793-19 that generally required broker reporting of sales and exchanges of digital assets beginning in 2025 and provided other proposed rules, including rules for taxpayers to determine the basis and gain or loss on dispositions of digital assets. The IRS received over 44,000 comments in response to the proposed regulations.
T.D. 10000
On June 28, the IRS issued final regulations in T.D. 10000 that adopt the proposed regulations as amended in response to comments.
The final regulations require custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning on or after January 1, 2025. Brokers will report sales and exchanges of digital assets on Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The final regulations require reporting by 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). The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers. The IRS stated that it intends to provide rules for these brokers in a different set of final regulations.
The final regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. Backup withholding rules are also provided. In addition, 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 January 1, 2026.
For certain sales of stablecoins and non-fungible tokens (NFTs) exceeding de minimis thresholds, the final regulations provide for an optional, aggregate reporting method. For PDAP transactions, the regulations require reporting on a transactional basis only if the customer's sales are above a de minimis threshold.
Under the final regulations, reporting of basis will be required by certain brokers for digital asset transactions occurring on or after January 1, 2026.
Notice 2024-56
In Notice 2024-56, the IRS provides transition relief from penalties for brokers who fail to report sales of digital assets, other than digital assets not required to be reported as digital assets pursuant under the final regulations. This penalty relief is available for information returns required to be filed and payee statements required to be furnished in 2026 for sales of digital assets effected in calendar year 2025, provided that the broker makes a good faith effort to file the appropriate information return and furnish the associated payee statement accurately.
The notice also provides transitional relief from the liability for the payment of backup withholding tax, as well as from penalties for brokers who fail to pay withholding tax with respect to certain sales of digital assets required to be reported under Code Sec. 6045. In addition, Notice 2024-56 provides transitional relief from penalties for brokers who fail to backup withhold and pay the full backup withholding tax due if such failure is due to a decrease in the value of withheld digital assets in a sale of digital assets in return for different digital assets effected on or before December 31, 2026, and the broker immediately liquidates the withheld digital assets for cash.
Notice 2024-57
In Notice 2024-57, the IRS announced that brokers are not required to report certain identified digital asset transactions under Code Sec. 6045 until further notice and the IRS will not assert penalties with respect to these identified transactions. The delay on information reporting provided in Notice 2024-57 applies to the following six types of transactions:
(1) Wrapping and unwrapping transactions,
(2) Liquidity provider transactions,
(3) Staking transactions,
(4) Transactions described by digital asset market participants as lending of digital assets,
(5) Transactions described by digital asset market participants as short sales of digital assets, and
(6) Notional principal contract transactions.
The IRS stated that these transactions require further study to determine how to facilitate proper reporting. Accordingly, until that determination is made, brokers are not required to make a return on these identified transactions under Code Sec. 6045(a), and the IRS will not impose penalties under Code Secs. 6721 or 6722 for failure to file correct information returns or failure to furnish correct payee statements with respect to these identified transactions.
Rev. Proc. 2024-28
In Rev. Proc. 2024-28, the IRS provides a safe harbor under Code Sec. 1012(c)(1) on which taxpayers may rely to allocate unused basis of digital assets to digital assets held within each wallet or account of the taxpayer as of January 1, 2025. Rev. Proc. 2024-28 generally allows 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 generally must be a reasonable allocation and must be made as of January 1, 2025.
For a discussion of sales, exchanges, or other dispositions of virtual currency, see Parker Tax ¶119,610. For a discussion of broker information reporting requirements, see Parker Tax 116,180.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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