Treasury and IRS release digital asset reporting regs

Rochelle Hodes, Trudie Kanter, Lauren Owens
| 9/28/2023
Treasury and IRS release digital asset reporting regs
In summary
  • Broad proposed regulations related to the reporting rules for digital assets were released.
  • Reporting first would be required for digital asset sales effected in 2025.
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The U.S. Department of the Treasury and the IRS released proposed regulations implementing the Infrastructure Investment and Jobs Act (Infrastructure Act) expansion of IRC Section 6045 gross proceeds and basis broker reporting rules to cover digital assets. Reporting originally was set to begin in 2024 but was delayed until final regulations are issued. Under the proposed regulations, reporting would be required for digital asset sales effected on or after Jan. 1, 2025.

Proposed rules under IRC Sections 1001 and 1012 for determining digital asset gain and loss and basis will be effective on Jan. 1 of the calendar year immediately following the date that the final regulations are published. However, taxpayers can rely on the proposed rules for dispositions in taxable years ending on or after Aug. 29, 2023, provided that the rules are consistently followed in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations.

Reporting by transferors of digital assets under IRC Section 6045A and for organizational changes under IRC Section 6045B is delayed until final regulations under those provisions are published.

Crowe observation

The Infrastructure Act also expanded IRC Section 6050I to require a trade or business to report receipt of more than $10,000 in digital assets. Although that provision is effective for information returns required to be filed and statements required to be furnished after Dec. 31, 2023, no guidance has been issued yet.

Definition of digital assets

IRC Section 6045(g)(3)(D) generally defines a digital asset as any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology. The definition of digital assets under the proposed regulations is the same as in the statute. However, as explained in the preamble, the proposed regulations interpret the definition of digital asset broadly to include not only virtual currency as defined in Notice 2014-21, but also other types of digital assets, including stablecoins and non-fungible tokens.

Definition of broker subject to digital asset reporting

The proposed regulations generally define a digital asset broker as any person that in the ordinary course of a trade or business stands ready to effect sales for others of digital assets. Examples of brokers could include:

  • Digital asset platforms, including groups that share fees from the operation or that otherwise are treated as an association or partnership for federal tax purposes, even in the absence of a centralized legal entity through which trades are carried out. This means, according to the preamble to the proposed regulations, that a decentralized autonomous organization (DAO) could be treated as a broker.
  • Digital asset hosted wallet providers that, whether acting as a principal, agent, or middleman in digital asset sales, ordinarily would know the gross proceeds from the sale.
  • Operators with sufficient control or influence over noncustodial trading platforms that effect sales of digital assets made for others by providing access to automatically executing contracts, protocols, or other software programs that automatically effect sales.
  • Payment processors that stand ready to effect digital asset sales by facilitating payments in digital asset transactions.
  • Anyone who regularly redeems self-created digital assets, including issuers of stablecoins.
  • Individuals and businesses subject to reporting for real estate transactions if digital assets are used as consideration.

Merchants that sell goods and services (other than digital assets or cash) in exchange for digital assets are not brokers, though payment processors used by merchants are brokers. Solely validating distributed ledger transactions (for example, proof-of-work or proof-of-stake transactions) does not make someone a broker.

Information reported

In addition to customer name, address, taxpayer identification number, name or type of digital asset and number of units sold, sale time and date, and gross proceeds, an information broker report includes the following:

  • Transaction identification (transaction ID or transaction hash) associated with the digital asset sale, if any, which is a unique set of alphanumeric identification characters that a digital asset distributed ledger associates with the transfer of a digital asset from one digital asset address to another.
  • Digital asset address from which the digital asset was transferred in connection with the sale. For this purpose, address means the unique set of alphanumeric characters or the QR code that is associated with and generated by a digital asset wallet.
  • Whether consideration received was cash, different digital assets, or other property or services.
  • If the digital asset is also a security, information relevant to the sale of such security, similar to the information that would be reported on a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” for a non-digital asset security.

Retroactive basis reporting

Although basis reporting is proposed to begin for sales effected on or after Jan. 1, 2026, the following brokers will be required to track basis information for digital assets acquired on or after Jan. 1, 2023:

  • Hosted wallet brokers are required to report the basis for sales of digital assets effected on or after Jan. 1, 2026, if the digital asset is acquired and continuously held by that broker in the customer’s account on or after Jan. 1, 2023.
  • Any broker would be required to report basis for sales effected on or after Jan. 1, 2026, for non-digital asset option contracts on digital assets and non-digital asset forward contracts on digital assets if granted or acquired in an account on or after Jan. 1, 2023.

Looking ahead

The proposed regulations are extremely broad and require reporting for a wide range of digital asset transactions carried out through centralized and decentralized platforms. A significant number of comments requesting changes to many of the proposed rules are expected. While the comment period is short (comments are due Oct. 30), it could take a long time for Treasury and the IRS to publish final regulations.

In the meantime, participants in the crypto ecosystem should consider how the proposed rules might affect them. For instance, platforms, wallets, and software providers should consider whether they will have reporting, information collection, and basis tracking obligations if the proposed rules are finalized. Taxpayers that engage in sales or exchanges of digital assets should be aware that they could receive Form 1099-Bs from digital asset brokers that voluntarily choose to apply the proposed rules early and should consider whether to adopt the proposed rules under IRC Section 1001 and 1012 for 2023 transactions.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
Trudie Kanter
Trudie Kanter
Partner, Digital Assets Tax Leader
Lauren Owens
Lauren Owens
Washington National Tax