Treasury Issues Regulations on Brokers’ Sales and Exchanges of Digital Assets, T.D. 10000; IR-2024-178; FS-2024-23; Rev. Proc. 2024-28; Notice 2024-56; Notice 2024-57

The Treasury Department and IRS have issued regulations requiring brokers of digital assets to report certain sales and exchanges. The regulations address the reporting requirements enacted by the Infrastructure Investment and Jobs Act (P.L. 117-58). According to the IRS, the regulations should improve the deter noncompliance through sales and exchanges of digital assets. In addition, the reporting requirements will provide taxpayers with the information needed to accurately report their digital asset activity. The regulations are part of the larger effort to ensure tax compliance from high-income individuals.

In addition to the broker reporting rules, the regulations establish the requirements for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also create backup withholding rules.

Reporting Requirements

Under the final regulations brokers must report the gross proceeds for sales or exchanges of digital assets taking place on or after January 1, 2025, on a new Form 1099-DA. In addition, the regulations require brokers to furnish their customers with payee statements. Beginning in 2026, brokers will also be required to include gain or loss and basis information for certain sales on these information returns and statements.

Real Estate Reporting

Under the final regulations, real estate reporting persons treated as brokers with respect to reportable real estate transactions would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in transactions that close on or after January 1, 2026.

These real estate reporting persons would also be required to include the fair market value of digital assets paid to sellers of real estate in certain real estate transactions on Form 1099-S.

Brokers Impacted by the Regulations

These final regulations apply only to digital asset industry participants that take possession of the digital assets being sold by their customers, such as operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, certain PDAPs, and digital asset kiosks, as well as to certain real estate reporting persons that are already subject to the broker reporting rules. Brokers that do not take possession of the digital assets being sold or exchanged, often referred to as decentralized or non-custodial brokers, are not subject to the new reporting requirements. The IRS will provide rules for these brokers in separate regulations.

The definitions of a processor of digital asset payments (PDAP) and PDAP sales applies only to transactions in which PDAPs take possession of the digital asset payment. The requirement that a person must receive the digital assets in order to be a PDAP covers all transactions. Proposed new digital asset middleman rules that apply to non-custodial industry participants were not finalized. The IRS continue to study this area. However, the acceptance of digital assets in return for cash, stored-value cards, or different digital assets by a physical electronic terminal or kiosk is identified as a facilitative service.

The final regulations include a rule allowing taxpayers to use a standing order or instruction to make adequate identifications of digital assets. A broker may also take into account customer provided acquisition information for purposes of identifying which units are sold, disposed of, or transferred under the identification rules. A new rule accommodates the unlikely circumstance in which the broker does not have any transfer-in date information about the units in the broker’s custody.

Stablecoins and NFTs

Stablecoins pegged to a fiat currency are not excluded from the definition of “digital assets.” The IRS will take into account any subsequent legislation regarding stablecoins. The final regs provide an alternative reporting method for certain stablecoin transactions. The final regs also provide an alternative reporting method for certain types of nonfungible tokens (NFTs). For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.

The IRS concluded that optional approaches to reporting dual classification assets generally are not appropriate, but special rules may apply to tokenized securities (which do not include stablecoins). Exceptions also apply to apply to dual classification assets that are cleared or settled on a limited-access regulated network, are section 1256 contracts, or are shares in money market funds. Additional special rules apply when a dual classification asset is a digital asset solely because its sale is cleared or settled on a limited-access regulated network.

Delay on Information Reporting for Certain Transactions

Under Notice 2024-57, until the IRS issues further guidance, brokers will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:

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

Transitional Relief

The IRS has provided general transitional relief in Notice 2024-56. Any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, will not be subject to reporting penalties and backup withholding, provided that the broker makes a good faith effort to comply with the reporting obligations. In addition, more limited relief is provided from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Finally, the Notice provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.