Treasury and IRS Finalize Digital Asset Reporting Regulations

Treasury and IRS issue final regulations on digital asset reporting, providing guidance on tax compliance for brokers and taxpayers alike.

Treasury and IRS Finalize Digital Asset Reporting Regulations

The U.S. Treasury Department and the IRS have issued final regulations requiring brokers to report digital asset sales and exchanges. This regulation helps taxpayers file accurate tax returns for these transactions, which are already taxed under current law.

Over 44,000 public comments influenced the regulations, which will take effect in 2025. Brokers will need to report these transactions using the new Form 1099-DA as part of the Infrastructure Investment and Jobs Act of 2021.

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.” He emphasized that third-party reporting improves tax compliance and prevents digital assets from being used to hide taxable income.

Werfel also stressed the importance of adequate funding for the IRS to manage these new regulations. “These new assets expand the complexity of our tax system, and the technology and personnel necessary for the IRS to keep pace with these changes is resource intensive. Ultimately, this IRS funding helps address emerging issues and creates significantly more savings than costs to the government’s bottom line,” Werfel added.

The regulations focus on brokers who manage digital assets for customers, such as custodial trading platforms, hosted wallet providers, digital asset kiosks, and specific payment processors. This initial focus covers the most taxpayers while allowing time to consider more complex transactions involving non-custodial brokers later.

Currently, brokers who do not handle digital assets directly, known as decentralized or non-custodial brokers, are not required to report. Future regulations will address these brokers. The rules also guide taxpayers on determining their basis, gain, and loss from digital asset transactions, along with backup withholding rules.

To ease the transition, the IRS offers relief for certain transactions. Real estate professionals must report the market value of digital assets in property transactions starting January 1, 2026.

An optional aggregate reporting method is available for sales of stablecoins and non-fungible tokens (NFTs) that exceed specific thresholds. For payment processors, reporting is required only if sales surpass these thresholds. Basis reporting by brokers will be mandatory for transactions from January 1, 2026.

Notice 2024-56 provides relief from penalties for brokers making a good faith effort to comply in 2025. Limited relief from backup withholding is available for certain transactions in 2026.

Notice 2024-57 postpones the need for brokers to report specific transactions until further guidance is issued. These transactions include wrapping and unwrapping, liquidity provision, staking, lending, short sales, and notional principal contracts.

Revenue Procedure 2024-28 allows taxpayers to allocate their basis in digital assets across wallets or accounts, easing the transition to new reporting requirements.

These steps by the IRS and Treasury integrate digital assets into the tax system, aiming to improve compliance and reduce tax evasion risks in digital assets.

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This article, "Treasury and IRS Finalize Digital Asset Reporting Regulations" was first published on Small Business Trends