IRS Issues Final Regulations Clarifying Reporting Requirements for Digital Asset Brokers

On June 28, 2024, the Department of the Treasury and the Internal Revenue Service released the highly anticipated final regulations (the “Final Regulations”)¹ relating to broker dealer information reporting, determination of basis and gain or loss, and backup withholding with respect to certain digital asset transactions and exchanges under the Infrastructure Investment and Jobs Act of 2021.² 

The Final Regulations largely align with the proposed regulations released on August 25, 2023, after the IRS reviewed more than 44,000 public comments. They are expected to take effect on September 7, 2024.

Important Takeaways

Reporting Requirements

• The Final Regulations require reporting by custodial brokers—those taking possession of the digital assets that are exchanged by their customers. This includes (i) operators of custodial digital asset trading platforms, (ii) certain digital asset hosted wallet providers, (iii) digital asset kiosks, and (iv) processors of digital asset payments (PDAPs).
• Real estate brokers must report the fair market value of digital assets involved in real estate transactions with closing dates on or after January 1, 2026. This requirement applies when the buyer uses digital assets to acquire the real estate, provided the real estate broker has actual knowledge or ordinarily would know that digital assets were used to effectuate the sale.

IRS Forms and Reporting

• The IRS will soon release IRS Form 1099-DA, Digital Asset Proceeds From Broker Transactions. Custodial brokers will be required to report sales and exchanges of digital assets (such as cryptocurrency) on this form. The reporting requirement is effective in 2026 for sales and exchanges effectuated in calendar year 2025. Brokers must collect and retain the information for seven years and make it available to the IRS upon request.
• Beginning in 2027, brokers will be required to report specific information on the tax basis for certain digital assets (for transactions beginning on and after January 1, 2026) on IRS Form W-9 Series.
• Importantly, the Final Regulations do not require that Taxpayers report transaction identifications on Form 1099-DA.

Specific information to be reported includes:

• The name, address, and taxpayer identification number of the customer
• The name and number of units of the digital asset sold
• The sale date(s)
• The gross proceeds amount (after reduction for allocable digital asset allocation costs)
• Whether the sale was for cash, stored-value cards, or in exchange for services or other property
• Any other information required by the IRS
• Additionally, brokers who provide custodial services for digital assets will be required to report a customer’s tax basis and capital gain that would meet the definition of a “covered security” if it is acquired on or after January 1, 2026.

Exemptions and Aggregates

• Non-custodial brokers and decentralized exchanges (those that take don't custody of the digital assets) are exempt from reporting under the Final Regulations at this time – future guidance will be issued.
• The Final Regulations provide for optional aggregate reporting for certain sales of stablecoins and certain non-fungible tokens at a de minimis threshold.

Compliance and Guidance

• The IRS confirmed it will adopt the OECD’s Crypto Asset Reporting Framework for reporting purposes.
• The IRS issued simultaneously Notice 2024-56 providing transitional penalty relief, provided the broker “makes a good faith effort to comply with the reporting obligations.” Furthermore, under Notice 2024-57, brokers are spared filing information with respect to wrapping and unwrapping transactions; liquidity provider transactions; staking transactions; and transactions described by digital asset market participants as lending of digital assets, as well as participants of short sales of digital assets and notional principal contract transactions.
• The IRS also issued Rev. Proc. 2024-28, issued contemporaneously with the Final Regulations, which 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, provided the allocation is a reasonable allocation (as provided in the revenue procedure) and must be made as of January 1, 2025.

Buchanan’s Blockchain and Digital Asset Practice Group is prepared to answer queries relating to Final Regulations and Form 1099-DA reporting rules. For further questions, contact Sahel A. Assar, leader of the firm's Blockchain and Digital Asset Practice Group and Tax Counsel.