IRS Adopts Final Digital Asset Tax Reporting Rules with Some Revisions

The IRS on June 28 issued final regulations on information reporting for digital asset transactions. The final regulations require “brokers” to report gross proceeds, cost basis, and gain or loss on sales and exchanges of digital assets, including cryptocurrency, stablecoins, and non-fungible tokens (NFTs). The IRS is creating a new form for this purpose, Form 1099-DA (see 2025 draft form).

The final rules follow proposed regulations issued in August 2023. In the final regulations, the IRS has refined the rules through extensive feedback received from industry experts and added some much-needed clarity and guidance.

Concurrently with the final regulations, the IRS also released three pieces of additional digital asset guidance, described below, addressing transition relief and safe harbors.

Broker Definition, Middleman Rule, and Decentralized Exchanges

In late 2021, the Infrastructure Investment and Jobs Act amended the definition of “broker” under Section 6045 to add “any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This amendment is referred to as the “new digital asset middleman rule.”

To implement the new digital asset middleman rule, the final rules, like the proposed rules, provide that, subject to certain exclusions, any person that provides facilitative services that effectuate sales of digital assets by customers is a broker, provided the nature of the person’s service arrangement with customers is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds.

The term broker under the rules includes digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallets, as well as any person that regularly redeems digital assets they created or issued. Real estate brokers would also be subject to these reporting rules for transactions where digital assets are used to purchase property.

The IRS disagreed with comments on the proposed regulations that the final reporting rules should not apply to non-custodial digital asset trading platforms or “decentralized exchanges,” which the IRS deems to be in the scope of the new statutory digital asset middleman rule. However, to allow additional time to consider issues affecting decentralized exchanges, the IRS has decided to hold off on finalizing the portion of the proposed regulations dealing with non-custodial industry participants. The IRS anticipates issuing those regulations separately with a separate applicability date.

Stablecoin Reporting Rules

The final rules clarify the reporting treatment of stablecoins, allowing filers of Forms 1099-DA to aggregate certain sales of stablecoins and NFTs with a de minimis threshold requirement.

The rules include an alternative reporting method for certain stablecoin transactions. Specifically, the final regulations add a s $10,000 overall annual de minimis threshold for “qualifying stablecoins” sales and permit sales over this amount to be reported on an aggregate basis rather than on a transactional basis. Under these rules, brokers may report designated sales of qualifying stablecoins under an alternative reporting method.

In addition, under the final rules, if the broker is using the alternative reporting method for qualifying stablecoins, no reporting would be required if a customer uses a qualifying stablecoin to buy another digital asset that is not a qualifying stablecoin.

The final rules define qualifying stablecoins as any digital asset that meets three conditions for the entire calendar year:

1. The digital asset must be designed to track on a one-to-one basis a single convertible currency issued by a government or a central bank (including the U.S. dollar).
2. The digital asset must use one of two stabilization mechanisms set forth in the final rules.
3. The digital asset must generally be accepted as payment by persons other than the issuer.
4. If a stablecoin breaks its peg at any time during the calendar year, it will lose its status as a qualifying stablecoin and not be able to apply the alternative reporting method and threshold.

NFT Reporting Rules

The definition of digital assets in the final rules includes NFTs. However, the final rules add an optional reporting rule for NFTs that would eliminate reporting on NFTs when certain conditions are met. The optional alternative reporting method for sales of certain NFTs allows for aggregate reporting instead of transactional reporting, with a de minimis annual threshold below which no reporting is required. Specifically, the final rules adopt an annual $600 de minimis threshold for each customer, below which brokers reporting under the optional aggregate method are not required to report gross proceeds from certain NFT transactions.

Dual Classification Assets

For transactions that involve the sale of “dual classification assets” – i.e., a digital asset that also constitutes the sale of a commodity or security (other than options that constitute contracts covered by Section 1256(b)) – the rules generally provide that the broker would report the sale only as a sale of a digital asset and not as a sale of a security or commodity.

The final regulations include three exceptions to the general rule requiring that dual classification assets be reported as digital assets for: (1) dual classification assets that are cleared or settled on a limited-access regulated network (LARN), (2) dual classification assets that are Section 1256 contracts, and (3) dual classification assets that are shares in money market funds.

Transaction IDs and Wallet Addresses

While digital asset brokers will have to collect and retain digital asset wallet addresses and transaction IDs for transactions under the final rules, they will not be required to report this information to the IRS, as the proposed rules would have required. While the reporting is not required under the final rules, brokers will need to retain the information for seven years and make it available for inspection.

Processors of Digital Asset Payments (PDAPs)

PDAPs – referred to as “digital asset payment processors” in the proposed regulations – enable persons (buyers) to make payments to second parties (typically merchants) using digital assets.

The final rules define a PDAP (processor of digital asset payments) as a person who in the ordinary course of a trade or business stands ready to effect sales of digital assets by regularly facilitating payments from one party to a second party by receiving digital assets from the first party and paying those digital assets, cash, or different digital assets to the second party.

Under the final rules, PDAPs are treated as brokers and required to report digital asset payments by a buyer only if the processor already may obtain customer identification information from the buyer to comply with anti-money laundering (AML) obligations, and a de minimis annual reporting threshold of $600 applies.

Multiple-Broker Rule

The final regulations include digital asset brokers in the list of exempt recipients for sales of digital assets, but this exemption is limited to U.S. digital asset brokers. Additionally, the regulations implement a multiple broker rule for digital asset brokers, similar to the rule for securities brokers. Under this rule, the broker that credits the gross proceeds to the customer’s wallet address or account (crediting broker) is responsible for reporting the transaction when multiple digital asset brokers would otherwise have a reporting obligation. The preamble clarifies that the crediting broker is best positioned to handle backup withholding on these transactions if the customer fails to provide the required tax documentation. Furthermore, the preamble indicates that a broker is not restricted from contracting with another broker or a third party to file the required returns on its behalf. To be exempt from reporting under this rule, a broker must obtain a Form W-9 (Request for Taxpayer Identification Number and Certification) from another broker, certifying that the other broker is a U.S. digital asset broker.

Applicability Date and Phased-In Approach

Under the final regulations, proceeds from digital asset transactions generally must be reported starting in 2026, for sales on or after January 1, 2025. Cost basis and gain or loss reporting for digital asset transactions generally must be reported starting in 2027, for sales on or after January 1, 2026.

Nonetheless, the IRS agreed with comments on the proposed regulations that a more phased-in approach was appropriate. Accordingly, under the final regulations, brokers will still be required to report basis for transactions occurring on or after January 1, 2026, but only with respect to digital assets the customer acquired from, and held with, the same broker on or after January 1, 2026 – rather than on or after January 1, 2023, as proposed.

Concurrent Digital Asset Guidance

The IRS released three pieces of guidance on digital assets in addition to the final regulations.

Notice 2024-56 provides transition relief from penalties for brokers with respect to information reporting and backup withholding on digital assets by brokers under Section 6045. The notice also provides guidance on how to certify that a broker is an exempt recipient until Form W-9 is updated by the IRS.

Notice 2024-57 provides that, until further notice, brokers are not required to report certain identified digital asset transactions under Section 6045:

Wrapping and unwrapping transactions,
Liquidity provider transactions,
Staking transactions,
Transactions described by digital asset market participants as lending of digital assets (type 1 transactions),
Transactions described by digital asset market participants as short sales of digital assets (type 2 transactions), and
Notional principal contract transactions.

Revenue Procedure 2024-28 provides a safe harbor on which taxpayers may rely to allocate unused basis of digital assets to digital assets held within each wallet or account of the taxpayer as of January 1, 2025.

Insights

The final regulations represent highly anticipated guidance under the Infrastructure Investment and Jobs Act, which expanded information reporting rules to include digital assets and authorized the IRS and Treasury Department to issue regulations.

Companies involved with facilitating transfers of digital assets may be impacted by these new rules, which will require additional information captured from market participants along with increased compliance filings. BDO can help companies navigate through the final regulations and prepare for the upcoming filing requirements.