Final Regulations Issued: Reporting Sales and Exchanges of Digital Assets

The US Department of the Treasury and the IRS have issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency. These digital asset transactions are already subject to tax.

These final regulations, that implement reporting requirements of the Infrastructure Investment and Jobs Act enacted in 2021, require brokers to report certain sale and exchange transactions that take place beginning in calendar year 2025. These will be reported on Form 1099-DA, soon to be released.

These regulations are part of a larger effort by the IRS to ensure tax compliance by high income individual taxpayers. The goal is to better ensure that digital assets are not used to hide taxable income. They will also ensure taxpayers have the information they need to simplify the process of reporting their digital asset activity.

The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. The IRS is first focusing on brokers who process the majority of digital asset transactions: specifically, operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. The IRS intends to provide rules for these brokers in a different set of final regulations.

The regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions and backup withholding rules.

The IRS will provide transitional and penalty relief from reporting and backup withholding rules on certain transactions during the phased-in implementation.

The regulations are complex. If you have questions or need guidance about your specific situation, contact your R&A advisor.