Treasury and IRS Propose New Rules on Digital Assets Reporting
On August 25, 2023, the Department of Treasury and the IRS released the long-awaited proposed regulations addressing information reporting for digital assets, including cryptocurrencies.
The proposed regulations broadly define the definition of a “broker” to include, among others, decentralized exchanges, unintended third parties, and real estate brokers concluding real estate transactions involving “digital assets” (also broadly defined to include NFTs and stablecoins). The proposed regulations aim to impose these newly defined information reporting rules upon any entity that is “regularly providing any service effectuating transfers of digital assets on behalf of another” in exchange for consideration. The proposed regulations cover broker information reporting, calculations of the amount realized and basis, as well as backup withholding for certain digital assets and exchanges. Certain exemptions apply. The government also provides new game-changing reporting rules for foreign exempt entities of U.S. brokers (leaning on similar information reporting developments at the OECD with CARF).
Digital asset trading platforms, digital asset payment processors, and digital asset hosted wallet providers, in addition to newly defined brokers, fall within the new reporting paradigm. The proposed regulations will be tackled in multiple phases.
The effective date of the proposed regulations is on or after January 1, 2026, allowing “brokers” the opportunity to develop new systems and bring their regulatory platforms current to meet the new proposed regulations’ information reporting requirements. Practitioners’ comments on the proposed regulations are due by October 30 in anticipation of public hearings scheduled for November 7-8th.
Buchanan’s Blockchain and Digital Asset Practice Group stands ready to answer any questions in the ever-shifting digital asset and cryptocurrency landscape.