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.