Treasury and IRS finalize tax reporting requirements for digital assets

The Department of the Treasury and the Internal Revenue Service (IRS) has released long-awaited new regulations for the reporting requirements for cryptocurrency custodial brokers. These include digital asset trading platforms or exchanges, hosted wallet providers, and certain payment processors of digital assets.

The new regulations align with longstanding reporting requirements surrounding traditional financial services such as banks and brokerage firms to help taxpayers accurately report, file returns, and pay taxes under law.

The covered firms will be required to provide customers with a new Form 1099-DA each year, as others have done for traditional assets like stocks and bonds. Aviva Aron-Dine, acting assistant secretary for tax policy, said in a June 28, 2024, press release that the regulations "will help taxpayers more easily pay taxes owed under current law while reducing tax evasion by wealthy investors."

The new regulations, summarized below, will require "custodial" crypto trading platforms such as Coinbase, Kraken, and Binance to report gross proceeds on the sale of digital assets beginning in 2026 for transactions in 2025. Firms will also be required to report cost basis information beginning in 2027 for activity in 2026.

The regulations developed by Treasury and the IRS follow a review of more than 44,000 comments submitted in response to the proposed regulations and a fierce lobbying effort by the crypto industry. The new requirements stem from the $1 trillion bipartisan 2021 Infrastructure Investment and Jobs Act.

"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," said Danny Werfel, IRS Commissioner, in a statement.

The crypto industry waged a brash comment letter campaign after Treasury proposed the rule last year, arguing that the scope of the proposal's definition of a broker was too broad.

Critics argued that the new regulations would impose unfeasible requirements on crypto miners, online forums, software developers, and other entities that should not be categorized as brokers. Such groups lack customer information and the disclosure infrastructure necessary for compliance with the regulations. The new regulations are viewed as a small victory for the crypto lobbying industry, as they do not include the decentralized ecosystem, as many feared when the "broker rule" was proposed.

It may only be a temporary reprieve, however, as the Treasury said it anticipates issuing additional rules later this year to establish tax reporting requirements for non-custodial brokers, including decentralized (DeFi) crypto platforms or exchanges. The IRS clarified that they "do not agree that non-custodial industry participants should not be treated as brokers."

The final rule was modified from the original proposal to limit some burdens on brokers and to phase in the new requirements in stages, Treasury officials said

Notice 2024-57 informs brokers that until the Treasury Department and the IRS issue further guidance, firms will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:

• Wrapping and unwrapping transactions;

• Liquidity provider transactions;

• Staking transactions;

• Transactions described by digital asset market participants as lending of digital assets;

• Transactions described by digital asset market participants as short sales of digital assets; and

• Notional principal contract transactions.

The regulations avoided the continuing legal definitional debate surrounding whether tokens are securities or commodities, broadly categorizing them as digital assets. The rules exempt some transactions involving non-fungible tokens (NFTs), stablecoins, a type of crypto token pegged to an asset such as the U.S. dollar, and digital payments from reporting below a $10,000 threshold.

The regulation provides transitional and penalty relief in Notice 2024-56 from reporting penalties and backup withholding for brokers making a good faith effort to comply in 2025.

Additional requirements

The new regulations also provide clarity on numerous other areas related to taxation involving digital assets, including: 

• Real estate transactions paid for with cryptocurrencies after Jan. 1, 2026, will also be required for reporting, as "Real estate reporting persons" will have to file the fair market value of the digital assets used in any such transaction.

• Optional aggregate reporting for sales of stablecoins and NFTs above certain thresholds.

• Cost basis reporting will be required for certain brokers from Jan. 1, 2026.

• The regulation permits taxpayers to use reasonable allocation methods for basis across wallets or accounts.

This article was originally published in Thomson Reuters' Regulatory Intelligence on July 2, 2024.

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