New IRS Crypto Tax Reporting Rules Coming Soon

The IRS released over 280 pages of proposed regulations intended to implement the congressional mandate that the broker reporting rules apply to those who facilitate the transfer of digital assets such as Bitcoin and other cryptocurrency.

When these rules take effect, they will impose substantial new tax reporting obligations on digital asset trading platforms, payment processors, and wallet providers.

How We Got Here

 Brokers have long been required to file IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, for each person for whom they sell stocks, bonds, commodities, debt instruments, options, securities futures contracts, commercial paper, and almost any other type of investment.

 The broker must report such details as the sales proceeds, the sale and purchase dates, the tax basis for the sale, and whether the gains or losses were long-term or short-term.(1) These reporting requirements make it very difficult for taxpayers with such investments to hide their sales and any gains from the IRS.

Back in 2021, when Congress passed the Infrastructure Investment and Jobs Act (Public Law 117-58), it decided to help narrow the tax gap by expanding the reporting rules to cover digital assets such as Bitcoin.

The 2021 law amended the definition of “broker” to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”(2) The legislation also included digital assets in the definition of “covered securities” for tax reporting purposes.(3)

But the new reporting rules didn’t go into effect right away, and many details were left to be determined by the secretary of the Treasury. The reporting requirements were initially scheduled to begin in 2024, but implementation was delayed. Nearly two years after the 2021 act was signed into law, the IRS finally released proposed regulations intended to implement the new digital asset reporting requirements.(4)

Note that the proposed regulations are reliance regulations generally effective January 1, 2025, but because they are “reliance regulations,” you can use them now and the IRS will respect them as final until finalized.

Who Qualifies as a Digital Asset Broker?

Under the proposed regulations, “digital asset brokers” would generally be subject to the same reporting rules as brokers of stocks, securities, and other financial instruments.

We normally think of a “broker” as a person, such as a stockbroker, who acts as a middleman in property or service transactions. But digital asset brokers are defined far more broadly under the proposed regulations. They include any person who(5):

• in the ordinary course of a trade or business stands ready to facilitate the sale of digital assets by others, and
• is in a position to know the identity of the seller and the nature of the transaction that potentially will give rise to gross proceeds.

Thus, a digital asset broker includes anyone who provides services that facilitate sales of digital assets and who would typically know or be in a position to know the identity of the parties involved. This comprises a wide variety of platforms and people, including the following(6):

• Centralized digital asset exchanges, such as Coinbase
• Decentralized exchanges (DEXs), such as Uniswap and dYdX, that enable buyers and sellers to execute cryptocurrency transactions in a peer-to-peer manner with no intermediaries involved
• Platforms providing custodial wallet services that handle digital asset sales
• Operators and owners of digital asset kiosks
• Those who regularly offer to redeem digital assets issued by them, such as stablecoin issuers Real estate brokers and other middlemen (such as title companies and lawyers) involved in real estate transactions where digital assets are used as payment

The proposed regulations exclude the following from the definition of “digital asset broker”(7):

• Merchants that sell goods or services in return for digital assets such as Bitcoin (for example, if you buy a cup of coffee with Bitcoin, the coffee seller won’t have to issue a 1099)
• People in the business of validating distributed ledger transactions through proof-of-work, proof-of- stake, or any other consensus mechanism (for example, Bitcoin miners)
• Sellers of hardware or licensors of software whose sole function is to control private keys used for accessing digital assets on a distributed ledger
• NFT (non-fungible token) artists (except galleries representing NFT artists, which are classified as brokers and are required to report NFT sales)
• Non-U.S. brokers for sales effected on behalf of a customer at an office outside the United States

What Digital Assets Are Covered?

The proposed regulations define a “digital asset” as “a digital representation of value that is recorded on a cryptographically secured distributed ledger (or similar technology),” also known as a blockchain.(8)

The use of cryptography, through the use of public and private keys to transfer assets, distinguishes digital assets from other virtual assets. But each individual transaction involving a digital asset need not be recorded on a cryptographically secured distributed ledger. And the ledgers need not be widely or publicly distributed.

Cryptocurrencies such as Bitcoin and Ether are digital assets. Digital assets also include the following(9):

• Stablecoins—tokens whose value is pegged to another asset, typically U.S. dollars or another fiat currency
• NFTs, which represent unique assets, such as artwork, and are not interchangeable with each other Tokens that satisfy the definition of “digital assets” and also are characterized as securities, commodities, or derivatives under federal securities laws

Cash—for example, fiat currency in digital form, such as funds in a bank or payment processor account accessed through the internet—is not a digital asset. Digital assets also don’t include assets that exist only in a closed system, such as video game tokens that can be purchased with U.S. dollars or other fiat currency but can be used only in-game and that cannot be sold or exchanged outside the game or sold for fiat currency.(10)

What Sales Must Be Reported?

Under the proposed regulations, sales that must be reported by digital asset brokers include exchanges of digital assets for(11):

• cash and cash equivalents such as checks, credit cards, and debit cards;
• another digital asset;
• a stored value card;
• broker services;
• securities; and
• real estate. 

The proposed regulations exclude hard fork transactions, airdrops, and the receipt of digital assets by broker customers in return for services, such as taking surveys.(12)

What Information Must Be Reported?

For sales of digital assets on and after January 1, 2025, the proposed regulations require reporting of the following(13):

• The customer’s name; address; and taxpayer identification number, or TIN (If a TIN is not provided, 24 percent backup withholding applies on the customer payments.)
• The name and number of units of the digital asset sold
• The sale date and time
• The gross proceeds of the sale (less allocable digital asset transaction costs)
• Any transaction ID
• Any digital asset address(es) from which the digital asset was transferred in connection with the sale
• Whether the sale was for cash or stored-value cards, or in exchange for services or other property
• Any other information required by the form or instructions in the manner and number of copies
• required by the form or instructions

These requirements are similar to the reporting information required on Form 1099-B for sales of securities. But the IRS will create a new Form 1099-DA to report sales of digital assets.

Starting in 2026, the broker must also report(14):

• the adjusted basis of the digital asset sold;
• the date and time the digital asset was purchased; and
• whether any gain or loss on the digital asset sold is long-term or short-term.

Adjusted basis is generally cost basis plus any share of transaction costs incurred at the time of acquisition of the digital asset.

When Will the New Reporting Requirements Take Effect?

The reporting requirements are scheduled to be phased in over two years. For the 2025 tax year, brokers will be required to issue 1099-DA forms with only the gross proceeds (sales) amount listed.(15) For the 2026 tax year and later, brokers will be required to issue complete 1099-DAs that report process, cost basis, and gains and losses to taxpayers.(16)

Brokers do not have to report digital asset sales for tax year 2023 or 2024.

When the reporting requirements take effect, the IRS estimates that it will receive eight billion new Form 1099-DAs each year filed on behalf of 13 million to 16 million taxpayers. Although its current systems can’t handle that many new 1099s, the IRS expects to use some of the new funding it will receive under the Inflation Reduction Act to make upgrades to deal with the deluge of 1099-DAs.

What Happens Next?

The IRS received thousands of comments on the proposed regulations and held hearings on them in November 2023. There may be more revisions to come.

When the new reporting rules finally go into effect, they should make taxpayers’ lives easier. Taxpayers will be able to rely on the gains and losses reported to the IRS on Form 1099-DA when they complete their tax returns.

The new rules will also enable the IRS to compare the amounts reported on Form 1099-DA with the numbers taxpayers report on their returns. It’s likely that, as a result, crypto tax compliance will go way up.

Takeaways

Here are five takeaways from this article:

1. The IRS issued over 280 pages of proposed regulations explaining how “digital asset brokers” will have to report sales of digital assets to the IRS on new IRS Form 1099-DA.
2. Digital asset brokers include anyone who provides services that facilitate sales of digital assets and who would typically know or be in a position to know the identity of the parties involved. This includes digital asset trading platforms, payment processors, and many digital wallet providers.
3. Digital assets include any digital representation of value recorded on a blockchain—such as Bitcoin and other cryptocurrency, Stablecoins, and NFTs.
4. Digital asset brokers will have to file a new Form 1099-DA, reporting much the same information that stockbrokers report for stock sales, such as the customer name and TIN, sales proceeds, tax basis, and gains and losses.
5. The reporting rules are scheduled to go into effect in two stages: For the 2025 tax year, brokers must report the gross proceeds of digital asset sales. For 2026 and later, brokers must report the adjusted basis and whether any gains or losses are short-term or long-term. Brokers do not have to report digital asset sales for tax year 2023 or 2024.

1. IRC Section 6045.
2. IRC Section 6045(c)(1)(D).
3. IRC Section 6045(g)(3)(B)(iv).
4. REG-122793-19; 88 R. 59576-59659; 2023-38 IRB 829.
5. Regs. 1.6045-1(a)(1), 1.6045-1(a)(10).
6. Preamble, Prop. Reg. 1.6045-1, Section B.
7. Reg. 1.6045-1(b)(2)(viii) through (x).
8. Reg. 1.6045-1(a)(19)(i).
9. Preamble to Prop. Reg. 1.6045-1, Part A.1.
10. Ibid
11. Reg. 1.6045-1(a)(9).
12. Preamble to Prop. Reg. 1.6045-1, Section C.
13. Reg. 1.6045–1(d)(2)(i); Preamble to Prop. Reg. 1.6045-1, Section 1.D.
14. Reg. 1.6045–1(d)(2)(i). Preamble to Prop. Reg. 1.6045-1, Section 1.D.
15. Reg. 1.6045-1(d)(2)(iii)(B).
16. Reg. 1.6049-5(c)(5).

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