Regulatory clarity for crypto tax information reporting has arrived.
On June 28, 2024, the U.S.Treasury Department issued Final Digital Asset Broker Regulations detailing what digital asset enterprises are in scope, reporting and implementation timelines, and what areas are being deferred on at this time. These regulations implement reporting requirements passed by Congress in November 2021 as part of the Infrastructure Investment and Jobs Act (IIJA). Treasury released a draft of these regulations last August. This final version clarifies requirements after reviewing comments and concerns from stakeholders. In the press release by the IRS accompanying the regulations, IRS Commissioner Danny Werfel stated, “We reviewed thousands of public comments and believe this new guidance addresses those concerns while striking a balance between industry implementation challenges and closing the tax gap related to digital assets.”
Taxbit’s prior deep dive on the proposed regulations can help you navigate the changes made in these final regulations, but here are the main takeaways:
Key Takeaways
Who is a Digital Asset Broker?
- A digital asset broker is a U.S. person that effects the sales of digital assets, including certain processor of digital asset payments
- Only brokers that custody customer digital assets are covered
- Non-custodial brokers are not required to report, but likely will be in the future
What is a Digital Asset?
- Digital assets include any digital representation of value that is recorded on a cryptographically secure distributed ledger, even if not every transaction is individually recorded.
- Stablecoins, tokenized securities and NFTs are included in this definition, but may have specialized reporting requirements as detailed below.
Effective Dates
- Calendar Year 2025:
- Track gross proceeds for transactions that occur during 2025 and report them in 2026 on the soon-to-be-released Form 1099-DA.
- Penalty waivers are in place under Sections 6721 and 6722 for sales effected in 2025 if there is good faith filing of Forms 1099-DA and furnishing payee statements.
- Backup withholding will not be required on any digital asset sale during 2025.
- Calendar Year 2026:
- Track gross proceeds and cost basis for transactions that occur during 2026 and report in 2027.
- Track digital assets accepted for payment in real-estate transactions that occur during 2026 and report in 2027.
- By1/1/2026, a Digital Asset Broker must collect a Form W-9 for any new account. For pre-existing accounts a broker can utilize the IRS TIN Matching system in lieu of a Form W-9.
- Calendar Year 2027:
- By 1/1/2027, all accounts (new and pre-existing) must be documented with a Form W-9/8.
‘Digital Asset Broker’ Defined
Under the IIJA, a digital asset broker is defined as “Any person who is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This broker definition is very broad, and could subject a wide range of digital asset companies to broker-related compliance and reporting obligations.
The final regulations narrowed considerably Treasury’s proposed definition of “broker,” at least until further rulemaking, to digital asset industry participants that custody the private keys for digital assets being sold by their customers, such as operators of custodial digital asset trading platforms, digital asset hosted wallet providers, processors of digital asset payments, persons that accept digital assets as payment for real estate, and issuers of digital assets that offer to redeem those digital assets.
Centralized Exchanges
Although Treasury does not use the term “centralized exchange” in either the final regulations or explanatory preamble, centralized exchanges are a primary focus of the regulations. Centralized exchanges operate “custodial digital asset trading platforms,” meaning they are enterprises that interact with customers on their behalf and have the ability to comply with the reporting requirements.
Processors of Digital Asset Payments
The definition of digital asset broker also includes Processors of Digital Asset Payments (PDAP). These enterprises were included in the proposed regulations and remain in the final regulations, although there are some revisions as to how they are defined.
A PDAP is any entity that, in the ordinary course of a trade or business, stands ready to effect sales of digital assets by regularly facilitating payments from one party to a second party by receiving digital assets from the first party and paying those digital assets, cash, or different digital assets to the second party. This generally means accepting digital asset payments from buyers of goods or services and processing those payments for merchants.
PDAPs are reporting brokers even if they are contractually obligated by merchants, rather than the customers, to process digital asset payments. However, a PDAP will only need to report as a digital asset broker if it already may obtain customer identification information from customers in order to comply with U.S.money-transmitter requirements (such as those found in the Bank Secrecy Act). Additionally, a PDAP is only considered a reporting broker where it takes possession of the digital assets involved in the transaction, whether on behalf of a customer or merchant, rather than merely instructing buyers on how to pay digital assets directly to merchants.
PDAPs, however, are exempt from reporting on customers who make $600 or less in digital asset purchases, in any given year. If a customer makes more than $600 in digital asset purchases (other than stablecoins or NFTs), all of that customer’s purchases are reportable (not just the purchases over $600). Further, because PDAPs generally do not take possession of goods purchased with digital assets, PDAPs are not required to conduct backup withholding.
Finally, PDAPs are not required to report cost-basis information, even after that requirement goes into effect, because PDAPs generally do not custody assets for the benefit of customers.
Non-Custodial Brokers
In a significant departure from the proposed regulations, Treasury deferred the inclusion of non-custodial brokers from final regulations until a later date, explaining that more research was required to understand how these brokers function and how reporting could be implemented in a reasonable manner. Most notably, this means decentralized financial protocols are not included in this round of final rulemaking, so no guidance currently exists for when or how those entities might start tax reporting.
Multiple-Broker Rule Clarified
For digital-asset transactions involving more than one broker, the regulations and IRS Notice 2024-56 exempt from the reporting requirements those brokers that do not credit a taxpayer’s wallet or account with the transaction’s gross proceeds. The broker crediting a customer’s account with the transaction’s gross proceeds will always be a reporting broker. In order to be exempt from reporting and withholding under this multiple-broker rule, non-reporting brokers must obtain a certification from a reporting, customer-crediting broker stating that the latter is a U.S. digital asset broker. The non-reporting broker must receive this statement from the reporting broker before the transaction takes place. Eventually this certification must be completed on a Form W-9 once the IRS releases a new version. Non-reporting brokers can rely on this written statement that is not a Form W-9 for one year after the end of the month in which the IRS revises Form W-9.
Proceeds & Cost Basis Calculations
Cost Basis Tracking
The final regulations adjusted the initial proposal for brokers to report cost basis information going back to calendar year 2023. The tracking requirement is now aligned with the reporting timeline, requiring cost basis information be provided for any activity occurring on or after 1/1/2026.
Similar to securities, digital asset brokers will be required to track and report cost basis information for digital assets that have been disposed of. While most digital asset brokers have historically recorded and maintained transaction-level data, they will need to ensure they have systems in place to track and apply the correct cost basis to disposals using a permissible disposition method (e.g., First-In-First-Out, Last-In-First-Out, etc.).
When a customer sells, disposes of, or transfers less than all units of the same digital asset, the broker must provide some method for a customer to adequately identify the units to be sold, disposed, or transferred, at or before the time of the sale. It is noteworthy that the requirement is not necessarily to enable the customer to select the exact lot for each sale, but rather, to allow a customer to provide a standing order or instruction to the broker as to which unit is being sold. Notably, the final regulations differ from the proposed regulations by specifically stating that where a broker offers “only one method of making a specific identification, such method is treated as a standing order or instruction.” In situations where a customer fails to make an identification or instruction, a default rule will apply, treating units as sold in the order of acquisition on a first-in-first-out (FIFO).
Finally, the regulations allow brokers to collect customer-provided cost basis information, which can be relied upon for reporting purposes. Customer-provided information includes information relating to the date and time of acquisition of specific digital asset units, but the information must be provided prior to the date and time of any sale, disposition, or transfer of those digital asset units.
Digital Asset Transaction Costs
The final regulations also differ from the proposed regulations with respect to the treatment of digital asset transaction costs (fees and commissions) in some scenarios. The final regulations clarify that fees and commissions on the sale of digital assets should reduce the proceeds received. This includes transactions involving the sale of one digital asset for another digital asset where the proposed regulations required the transaction’s costs to be split equally between the disposed of asset and the acquired asset.
It is also important to note that in general, digital asset transaction costs paid using digital assets rather than fiat currency are treated as taxable disposals of the assets used to pay the fee. There is one exception, however, where digital asset transaction costs are paid by withholding some of the digital assets received by the customer in the transaction. This is an important clarification that alleviates brokers from reporting a digital asset fee on the purchase of the same digital asset.
Form 1099 Reporting
The core component of these final regulations is the requirement that digital asset brokers file annual information returns detailing information about the taxable dispositions of property belonging to customers. Historically, the Form 1099-B has been used in traditional finance to report the required information. Given the nuanced and unique aspects of digital asset broker reporting, a new form was inevitable.
On April 18, 2024, the IRS released a draft version of the new Form 1099-DA, Digital Asset Proceeds From Broker Transactions, based on the original proposed broker reporting regulations. The expectation is that a final version of the Form 1099-DA will be released, taking into account the changes set forth in the finalized regulations.
Similar to reporting on traditional financial assets, digital asset reporting will require a broker to include the following pieces of information for each transaction:
- Name, address, taxpayer identification number
- Digital asset details (name, type, number of units)
- Sale Date
- Gross proceeds of the sale and Adjusted Cost Basis
- Form of consideration received
One big difference between the final regulations and the proposed regulations involves the date information. The proposed regulations required both date and time (in Universal Coordinated Time) to be reported because of the inherent volatility of digital assets. The final regulations have dropped the time requirement, only requiring that the date be reported.
For assets that were transferred to a broker and subsequently disposed of, the following information will also be required:
- Date of such transfer-in transaction
- Number of units transferred in by the customer as part of that transfer-in transaction
The following data points will no longer be required to be reported because the requirement to report was removed from the final regulations:
- Transaction ID or hash
- Digital asset addresses involved
- Important Note: These data elements should be removed from the revised Form 1099-DA, but it should be noted that although reporting is no longer required, the information must still be collected by brokers and made available to the IRS for inspection for seven years.
Once rules are published under Sec. 6045A related to transfer statements, certain transfer information may no longer be required on Form 1099-DA.
Stablecoins
Industry commentary overwhelmingly requested that sales of stablecoins be exempted from broker reporting in whole or in part, often asserting that most stablecoin activity resulted in little to no gain or loss, given that stablecoins closely track the value of the fiat currency to which they are pegged.
While the IRS did not exempt stablecoins from reporting, it is offering an alternative reporting method to alleviate potentially “unnecessary and burdensome reporting.” The alternative reporting method allows brokers to limit reporting by introducing aggregation rules and setting a de minimis threshold.
Three important questions must be answered with respect to stablecoins:
1. Is the digital asset a Qualifying Stablecoin?
The regulations create a multi-part test defining what constitutes a Qualifying Stablecoin:
- Is the asset designed to track on a 1:1 basis a government issued convertible currency
- Does the asset employ either of the following stabilization mechanisms:
- The issuer of the asset is required by regulation to redeem the asset on a 1:1 basis for the currency it is pegged to; or
- The asset (through its stabilization mechanism) does not fluctuate from its peg currency more than 3% during any consecutive 10-day period during the calendar year
- Is the digital asset generally accepted as payment by persons other than the issuer
2. Are the customer’s aggregate proceeds less than $10,000?
If a customer’s aggregate gross proceeds (after reduction for allocable digital asset transaction costs) from all designated sales effected by that broker of qualifying stablecoins does not exceed $10,000 for the year, the broker is not required to report that customer’s stablecoin activity for that year.
3. Are the customer’s aggregate proceeds greater than $10,000?
Where the gross proceeds from designated sales of qualifying stablecoins exceed the de minimis threshold, brokers may either report each disposal separately, or report on each qualifying stablecoin on an aggregate basis. It should be noted that if the de minimis threshold is met, each individual stablecoin must be reported (i.e., all stablecoin activity), even if the activity for a specific qualifying stablecoin does not meet the de minimis threshold on its own. For the purpose of this analysis, it is important to note that a designated sale of stablecoin does not include the sale of stablecoin in exchange for another digital asset that is not a qualifying stablecoin (e.g., USDC for BTC). Non-designated sales are not subject to transactional or aggregate reporting.
When reporting in the aggregate, the following data points are required:
- The name of the qualifying stablecoin sold
- The aggregate gross proceeds for the year from designated sales of the qualifying stablecoin (after reduction for the allocable digital asset transaction costs)
- The total number of units of the qualifying stablecoin sold in designated sales of the qualifying stablecoin
- The total number of designated sale transactions of the qualifying stablecoin
NFTs
Reporting for specified non-fungible tokens is only required to the extent the customer’s aggregate gross proceeds (after reduction for the allocable digital asset transaction costs) from all sales of specified non-fungible tokens exceed a de minimis threshold for the year – in the case of non-fungible tokens, the final regulations denote a $600 threshold.
When reporting in the aggregate, the following data points are required:
- The aggregate gross proceeds for the year from all sales of specified non-fungible tokens (after reduction for the allocable digital asset transaction costs)
- The total number of specified non-fungible token sales;
- To the extent ordinarily known by the broker, the aggregate gross proceeds that is attributable to the first sale by a creator or minter of the specified non-fungible token
Customer Data & Tax Documentation
The final regulations and Notice 2024-56 not only provide clarity in terms of the imposed timelines for documentation and back-up withholding, they also provide recognition that industry needed additional time to properly document pre-existing account holders and have provided related relief. Ultimately, just as the rules apply to traditional finance, digital asset brokers will need to obtain certified taxpayer identification numbers (TINs) from their customers, achieved by collecting a Form W-9 or Substitute W-9, as well as Forms W-8 to identify exempted foreign persons.
The new regulations establish a timeline for the collection of Forms W-9, that includes a relief period that will leverage the IRS TIN Matching System:
- New Accounts in 2026:
- New accounts established in 2026 require a Form W-9 or W-8.
- Pre-Existing Exempt Foreign Persons in 2026:
- For sales effected prior to January 1, 2027 with an account established prior to January 1, 2026, brokers may treat a customer as an exempt foreign person if the customer has not been previously classified as a U.S. person and there is no U.S. residence address on file. It is our understanding that if U.S. indicia exists that a Form W-8 will be required.
- Pre-Existing U.S. Persons in 2026:
- For sales effected in 2026 for accounts opened prior to 1/1/26, the IRS is permitting brokers to rely on uncertified TINs so long as they match the Name and TIN with the IRS TIN Matching System and the result comes back as a match. In the event that the result is not a match, it is our understanding that the IRS then would expect a Form W-9.
The relief period ends on January 1, 2027, at which point all accounts, regardless of U.S. status or date established, must be documented with a Form W-9/8.
Backup Withholding
In line with the relief described above, and to allow adequate time for the collection of tax documentation, the IRS provides relief from backup withholding through 2025. Beginning January 1, 2026, backup withholding involving gross proceeds in the form of digital assets is required up to the amount garnered from an immediate liquidation by the broker of those digital assets. Specifically, brokers are required to withhold up to 24 percent of the original sale proceeds from the customer. An immediate liquidation refers to the broker systematically liquidating the received digital assets as part of the process to complete the underlying sale transaction. This approach ensures that brokers are not financially burdened by holding onto volatile digital assets for extended periods.
The IRS has provided more permanent backup withholding relief for transactions involving specified NFTs, PDAP transactions, and real estate reporters.
Pending Additional Guidance from Treasury
While the newly published regulations offer specific guidance in many areas of the IIJA, there are significant elements that have yet to be clarified, including:
- Non-custodial brokers – Although included in the proposed regulations, Treasury elected to wait to finalize reporting rules for brokers that do not take custody of any digital assets on behalf of customers until they can gain a better understanding of how these brokers operate.
- Specified transactions not subject to reporting – In a companion notice (Notice 2024-57), the IRS exempted certain types of digital asset transactions from being subject to reporting even if they were facilitated by a digital asset broker. This decision is likely because the substantive tax treatment is still unclear meaning the subject transactions may not result in a sale as defined in the final regulations. The subject transactions include:
- Wrapping transactions – moving an asset native to one network onto another network
- Liquidity provider transactions – depositing assets into a pool of assets to be used as liquidity for trading in those assets
- Staking transactions – depositing assets into a pool to be used for the purpose of validating transactions on a proof-of-stake network
- Transactions described as lending transactions – transferring digital assets to another user subject to the recipient’s obligation to return equivalent digital assets to the transferor
- Transactions described as short sale transactions – receiving digital assets from another user subject to the obligation to return the equivalent digital assets to the other user
- Notional Principal Transactions – transactions undertaken with respect to notional principal contract
- Digital asset transfer statements – Treasury has not yet proposed any rules on statements that brokers will eventually have to issue when their customers transfer digital assets out of the broker’s custody to another broker or to an unhosted wallet as required by Section 6045A.
- Receipt of digital assets exceeding $10,000 by a trade or business – Treasury has not yet proposed any rules with respect to the disclosure by merchants of instances where the trade or business received over $10,000 in digital assets as part of their business on Form 8300.
How Taxbit can help
Taxbit is uniquely positioned as the trusted partner to help you achieve 100% compliance with these new regulations. Taxbit has filed more digital asset Form 1099’s than anyone in the information reporting industry. Our platform enables a single system of record to unlock scalable tax compliance that meets your business needs and complies with an ever-changing regulatory landscape. Reduce the burden on your internal teams and customers with a best-in-class experience.
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