On June 28, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released final regulations and other transitional guidance implementing information reporting by digital asset brokers under section 6045. The rules are effective for transactions occurring on or after January 1, 2025 for which brokers are required to file Forms 1099-DA (Digital Asset Proceeds from Broker Transactions) in early 2026.
In response to the more than 44,000 comments received, the final regulations make a few significant and welcomed changes to the proposed regulations:
- Custodial Brokers – The final regulations implement broker reporting for custodial brokers but delay implementation for non-custodial industry participants, such as decentralized finance (DeFi) platforms and non-custodial wallets, to allow additional time to address the complexities associated with these parties. The final regulations also adopt a multiple broker rule to reduce duplicate information reporting.
- Stablecoins – The final regulations adopt a $10,000 annual de minimis reporting threshold for qualifying stablecoin sales and the option for aggregate reporting above this threshold.
- Non-fungible Tokens (NFTs) – The final regulations adopt a $600 annual de minimis reporting threshold for NFT sales and the option for aggregate reporting above this threshold.
- Payment Processors – The final regulations narrow the circumstances in which processors of digital asset payments (PDAPs) are treated as brokers to those in which the processor already may obtain customer identification information from the buyer in order to comply with anti-money laundering (AML) obligations, and add a de minimis annual reporting threshold of $600.
- Information Reported – The final regulations eliminate the requirement to report the time of the transaction, the transaction ID, and the wallet address.
- Coordination with OECD Crypto-Asset Reporting Framework (CARF) – The final regulations reserve on rules requiring non-US brokers to report information on US customers to the IRS in order to coordinate the rules with new forthcoming proposed regulations that would implement the CARF.
At the same time they released the final regulations, the Treasury and the IRS issued important transitional guidance:
- Notice 2024-56 provides transitional relief from penalties for failure to file correct Forms 1099-DA and from some of the backup withholding requirements. The notice also provides guidance on how to certify that a broker is an exempt recipient until the IRS updates Form W-9 (Request for Taxpayer Identification Number and Certification).
- Notice 2024-57 provides that, until Treasury and the IRS provide further guidance, brokers are not required to report on certain identified transactions, including wrapping of tokens, liquidity provider transactions, lending of digital assets, and staking transactions.
- Revenue Procedure 2024-28 provides a safe harbor to allocate unused basis of digital assets to digital assets held within each wallet or account as of January 1, 2025.
Definition of Broker
The preamble to the final regulations makes it clear that Treasury and the IRS believe that non-custodial industry participants fall within the definition of a broker. However, Treasury and the IRS acknowledged that they would benefit from additional consideration of issues involving non-custodial industry participants. As a result, the final regulations implement broker reporting for custodial brokers and brokers acting as principals for transactions occurring after January 1, 2025 (for which Forms 1099-DA are due in early 2026) and delay implementation for non-custodial industry participants, such as decentralized exchanges, DeFi platforms, and unhosted wallet providers. The final regulations also reserve on the specific exemptions for certain validation services and certain hardware and software wallets. However, the final regulations retain the examples illustrating that participants that solely engage in validation or provide wallets are not brokers.
Thus, the final regulations essentially apply to brokers that take possession of digital assets of the digital assets being sold by their customers. This includes operators of custodial digital asset trading platforms, hosted wallet providers, and certain digital asset payment processors. It also includes digital asset kiosks, brokers (including securities brokers, who accept digital assets in payment for their services), and real estate reporting persons if they have actual knowledge that digital assets were used to purchase the real estate.
Processors of Digital Asset Payments (PDAPs). The final regulations narrow the circumstances in which PDAPs are treated as brokers to those in which the processor already may obtain customer identification information from the buyer in order to comply with AML obligations. This was in response to comments that a PDAP does not necessarily have a relationship with the customer to be able to collect personal identification information. In addition, the final regulations have added a de minimis annual threshold of $600 for PDAP sales below which no reporting is required. This is in addition to the $10,000 threshold for stablecoin transactions, discussed below. Thus, the PDAP can exclude $10,000 of stablecoin and $600 of other digital asset transactions from reporting.
Multiple Broker Rule. The final regulations add digital asset brokers to the list of exempt recipients for sales of digital assets, but limit the exception to US digital asset brokers. In addition, the final regulations adopt a multiple broker rule for digital asset brokers, similar to the rule for securities brokers. The exception provides that the broker crediting the gross proceeds to the customer's wallet address or account is required to report the transaction when more than one digital asset broker would otherwise have a reporting obligation. The preamble explains that this broker is in the best position to backup withhold on these transactions if the customer does not provide the broker with the necessary tax documentation. The preamble also notes that a broker is not prohibited from contracting with another broker or with another third party to file the required returns on its behalf.
To be exempt from reporting under the multiple broker rule, a broker must obtain from another broker a Form W-9 certifying that the other broker is a US digital asset broker. Because the current Form W-9 does not have this certification, Notice 2024-56 will permit brokers to rely upon a written statement that is signed by another broker under penalties of perjury that the other broker is a US digital asset broker until one year after the Form W-9 is revised to accommodate this certification.
Definition of Digital Asset
The final regulations retained the broad definition of digital asset, declining various carve-outs requested by commenters. But Treasury and the IRS did adopt some key exceptions to reduce the reporting burden associated with certain types of digital assets.
Stablecoins. The final regulations adopt an alternative reporting method for certain stablecoin transactions to alleviate unnecessary and burdensome reporting. Specifically, the final regulations add a new optional alternative reporting method for sales of qualifying stablecoins, with a de minimis annual threshold below which no reporting is required. The annual threshold is $10,000 and the final regulations permit sales over this amount to be reported on an aggregate basis rather than on a transactional basis.
Qualifying stablecoins must meet the following requirements for the entire calendar year:
- The stablecoin is designed to track fiat currency (including the US dollar) on a 1:1 basis;
- The stablecoin has one of two stabilization mechanisms: (1) a results-focused mechanism that causes the unit value of the digital asset not to fluctuate from the unit value of the convertible currency it was designed to track by more than 3 percent over any consecutive 10-day period during the calendar year; or (2) a design-focused mechanism that requires the issuer to redeem the digital asset at any time on a 1:1 basis for the same convertible currency that the stablecoin was designed to track; and
- The stablecoin must generally be accepted as payment by persons other than the issuer.
If the stablecoin breaks its peg at any time during the calendar year, it will not be treated as a qualifying stablecoin for that year, which means that the alternative reporting method and threshold would not apply.
NFTs. The final regulations provide an alternative reporting method for certain types of NFTs to alleviate burdensome reporting. Specifically, the final regulations have added a new optional alternative reporting method for sales of certain NFTs to allow for aggregate reporting instead of transactional reporting, with a de minimis annual threshold below which no reporting is required. The annual threshold is $600 per customer, and if the customer's total gross proceeds from sales of NFTs exceed $600 for the year, a broker may report those sales on an aggregate basis rather than a transactional basis. To qualify for this treatment, an NFT must be indivisible, have a unique digital identifier, and not provide the holder with an interest in property that is required to be reported on Form 1099-B (i.e., security, commodity, regulated futures contract, or forward contract).
The preamble states that Treasury and the IRS anticipate that the de minimis annual threshold will eliminate reporting on many low-value NFT transactions that are less likely to be used for payment or investment purposes.
Closed Loop Assets. The final regulations add additional transactions involving closed loop digital assets to the list of excepted sales that are not subject to reporting, including digital assets representing loyalty credits or rewards, video game tokens that cannot be transferred outside the game, and digital assets using distributed ledger technology to transfer information with respect to payment instructions or management of inventory. In addition, the final regulations add a general exception for tokens that can only be redeemed for goods or services of the seller and not used outside the network.
Reportable Transactions
The preamble states that Treasury and the IRS have determined that certain digital asset transactions, such as loans, wrapping/unwrapping tokens, liquidity pool transactions, and staking require further study to determine how to facilitate appropriate reporting. Thus, Notice 2024-57 provides that until a determination is made as to how the transactions identified in the notice should be reported, brokers are not required to report on these identified transactions, and the IRS will not impose penalties for failure to file correct information returns or failure to furnish correct payee statements with respect to these identified transactions.
Information to be Reported
In response to comments, the final regulations remove a few items that were required to be reported under the proposed regulations. Specifically, the final regulations do not require reporting the time of the transaction due to burden and administrability concerns. In addition, the final regulations remove the requirement to report the transaction ID and wallet address information. However, brokers are required to collect and retain this information for seven years, (except that the retention requirement does not apply to digital assets that are subject to special reporting methods (i.e., stablecoins and NFTs)).
Reporting Basis
The proposed regulations provided that brokers must report the adjusted basis of the digital asset sold with respect to digital assets acquired in a customer's account on or after January 1, 2023 by a broker providing hosted wallet services. In response to comments, the final regulations align the acquisition applicable date for digital assets with the applicability date for adjusted basis reporting. This means that brokers will only be required to report adjusted basis for digital assets acquired on or after January 1, 2026.
The proposed regulations requested comments on whether the ordering rules of proposed Reg. § 1.1012-1(j)(1) and (2) for digital assets not held in the custody of a broker should be applied on a wallet-by-wallet basis, as proposed, on a digital asset address-by-digital asset address basis, or on some other basis. Some taxpayers had interpreted FAQs 39-41 as permitting specific identification among multiple wallets (the so-called universal or multi-wallet approach), but the final regulations clarify that specific identification may only be done with respect to units held within a single wallet or account. Revenue Procedure 2024-28 provides a safe harbor to allocate unused basis of digital assets to digital assets held within each wallet or account as of January 1, 2025.
Non-US Digital Asset Brokers and the CARF
Several commenters recommended that that the implementation of rules for non-US brokers be delayed until they could be harmonized with the OECD Crypto-Asset Reporting Framework (the CARF). The final regulations adopted these recommendations and reserve on the rules requiring non-US brokers to report information on US customers to the IRS in order to coordinate the rules for non-US brokers with new forthcoming proposed rules that would implement the CARF. The preamble notes that the proposed regulations would, if finalized, implement the CARF in sufficient time for the United States to begin exchanges of information with partner jurisdictions in 2028 with respect to transactions effected in 2027. Those proposed regulations also would require US digital asset brokers to report information on their foreign customers resident in partner jurisdictions. Currently, a sale of digital assets effected for a customer that is an exempt foreign person generally is not reportable.
Revised US Indicia for Identifying Potential US Customers
The final regulations provide that US digital asset brokers are treated as having "reason to know" that a beneficial ownership withholding certificate is unreliable or incorrect based upon the same US indicia generally applicable to US securities brokers. In an effort to account for the digital nature of the activities of digital asset brokers, the proposed regulations included new US indicia, including a customer's communication with the broker using a device that the broker has associated with a US IP address. Several comments raised concerns questioning the usefulness of the new US indicia and noting the burdens on brokers involved in tracking the required information. The final regulations do not include any of the additional US indicia in the proposed regulations.
Similar to the proposed regulations, the final regulations include a transitional rule for a broker to treat a customer as an exempt foreign person for sales of digital assets effected before January 1, 2027 that were held in a preexisting account established with a broker before January 1, 2026, provided certain requirements are met.
Transitional Guidance
Notice 2024-56. Notice 2024-56 provides much-needed relief from penalties and backup withholding for calendar year 2025 to allow brokers to get their systems up and running. The notice provides that the IRS will not impose penalties under sections 6721 and 6722 on brokers that fail to file information returns and furnish payee statements under the final regulations with respect to sales of digital assets effected during calendar year 2025, provided that such brokers make good faith efforts to file accurate and timely Forms 1099-DA and furnish accurate and timely payee statements.
The notice also provides relief from some of the backup withholding requirements. Specifically, backup withholding under section 3406 will not be required on any digital asset sale effected by brokers during calendar year 2025 to provide brokers with additional time to develop appropriate procedures for collecting certified TINs from customers and to otherwise comply with the backup withholding requirements on digital asset sales. In addition, for digital asset sales effected in calendar year 2026, the IRS will permit brokers to rely on TINs provided by payees that are not certified if those uncertified TINs were provided by payees that opened accounts with the broker prior to January 1, 2026 and if the broker, prior to effecting the digital asset sale transaction, submits the payee's name and TIN combination to the IRS's TIN Matching Program and receives a response that the name and TIN combination matches the IRS records.
The notice also provides relief in cases where it will be difficult for the broker to have the cash to make the backup withholding payments. Specifically, until further guidance is issued, backup withholding will not be required on any digital asset sale effected by a broker where the reportable proceeds is a specified NFT, nor will it be required by real estate reporting persons or PDAPs that do not have possession of the proceeds. Finally, to protect the broker against a fall in the value of the digital assets, the IRS will not impose penalties under section 6651 or 6656 with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of the received digital assets.
Notice 2024-57. Notice 2024-57 provides that until Treasury and the IRS issue further guidance, brokers are not required to make a return on these identified transactions under section 6045(a), and the IRS will not impose penalties under section 6721 or section 6722 for failure to file correct information returns or failure to furnish correct payee statements with respect to these identified transactions.
- Wrapping and unwrapping of tokens;
- Liquidity provider transactions;
- Staking transactions;
- Lending of digital assets (whether directly or short sales); and
- Notional principal contract transactions.
However, the relief does not apply to the receipt of airdrops or other digital assets as rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, interest, or other fixed or determinable income.
Revenue Procedure 2024-28. This procedure provides a safe harbor to allocate unused basis of digital assets to digital assets held within each wallet or account as of January 1, 2025. Specifically, the taxpayer may make any reasonable allocation as of January 1, 2025 of units of unused basis to a wallet or account that holds the same number of remaining digital asset units with respect to any type of digital asset for which the taxpayer is relying on the safe harbor, provided the taxpayer satisfies the following requirements:
- Each remaining digital asset unit is a capital asset;
- Each unit of unused basis must have originally attached to a digital asset that was a capital asset;
- The digital asset unit from which the unused basis is derived and the remaining digital asset are the same type of digital asset;
- The taxpayer must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each wallet or account held by the taxpayer;
- The taxpayer must be able to identify and maintain records sufficient to show the number of units of unused basis, the original cost basis of each such unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached; and
- The taxpayer must treat any allocation under this revenue procedure as irrevocable for all purposes of section 1012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.