July 15, 2024
Digital assets, including cryptocurrencies like Bitcoin and Ethereum, have become significant players in the global economy. As their use has grown, so has the need for regulatory oversight to ensure compliance with tax laws. According to data from the Federal Reserve, 7% of U.S. adults used cryptocurrency in 2023, either as an investment tool or for making financial transactions. To address this growing sector, the IRS recently issued final regulations (T.D. 10000) detailing the reporting requirements for digital assets.
The new regulations align digital asset reporting requirements with those of traditional financial services. While no new taxes are imposed on digital assets, the regulations require brokers to report transactions to help taxpayers file accurate returns and pay taxes owed under current law. Developed after a public hearing and review of over 44,000 comments, these regulations primarily cover custodial brokers, with additional rules for non-custodial brokers anticipated later this year. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
The rise of digital assets has brought about new challenges for tax authorities. Previously, the IRS had limited guidelines on how digital asset transactions should be reported, creating uncertainties for taxpayers and brokers. The need for clear and comprehensive regulations became evident as the volume and complexity of these transactions increased. The new regulations build on proposed rules published in August 2023 and are designed to provide clarity and consistency in reporting obligations.
Starting January 1, 2025, brokers must file information returns and provide payee statements for digital asset transactions. This will be done using the new Form 1099-DA. These reports must include detailed information about each transaction, including;
From January 1, 2026, brokers must also report the adjusted basis of the sold assets, purchase date and time, and whether the gain or loss is long-term or short-term. For assets transferred into a broker’s hosted wallet, additional details about the transfer must be reported, including transfer dates, transaction IDs, and asset addresses.
Additionally, starting January 1, 2026, real estate reporting persons must file information returns and provide payee statements for transactions where digital assets are used to acquire real estate. This includes reporting the gross proceeds and basis information, which refers to the original value or purchase price of the digital asset, adjusted for factors like transaction fees and other costs, essential for accurately calculating taxable gains or losses from the transaction.
To facilitate compliance, the IRS is providing transitional relief for brokers making a good faith effort to meet the new reporting obligations in 2025. This includes general relief from reporting penalties and backup withholding. Specifically, Notice 2024-56 outlines relief provisions for brokers who do not timely or accurately file information returns or furnish payee statements, provided they make good faith efforts to comply. Additionally, Notice 2024-57 offers more limited relief from backup withholding for certain transactions in 2026.
Reactions to the Final Regulations
The final regulations have been met with mixed reactions. Proponents claim the new regulations will boost transparency in digital asset markets and help close the “tax gap” by requiring brokers to report gross proceeds and cost basis on Form 1099-DA. Additionally, some industry experts and lawmakers have noted the Treasury’s more balanced approach in these final rules compared to earlier proposals.
Critics argue the regulations are too broad and impose significant compliance costs, particularly on smaller brokers. The broad definition of “broker” could include entities with limited transaction visibility, creating a substantial burden. Privacy advocates are concerned about the requirement to collect and retain detailed transaction data, including wallet addresses, for seven years, despite the removal of the requirement to report transaction IDs on 1099 forms.
Overall, there is uncertainty about how these regulations will affect innovation in the crypto and blockchain space. Clear reporting guidelines may legitimize the industry and attract institutional investors. However, stringent requirements could drive innovation offshore or hinder emerging decentralized finance (DeFi) applications. The Treasury’s decision to delay rules for non-custodial (decentralized) brokers shows the ongoing challenge of regulating new blockchain technologies, highlighting the need for a balanced approach as the crypto landscape evolves.
As digital assets continue to evolve, so will regulatory requirements. The IRS has indicated further guidance will be issued, particularly for non-custodial and decentralized brokers. It is crucial to stay informed about these developments to understand how you will be impacted. If you have questions about the information outlined above or need assistance with another accounting or tax issue, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.