IRS and Treasury issue proposed regulations outlining new digital asset reporting regime
Enacted in November 2021, the Infrastructure Investment and Jobs Act expanded Section 6045 of the Internal Revenue Code to require tax reporting by brokers of transactions involving the sale or exchange of digital assets. Nearly two years later, on August 25, 2023, the IRS and Treasury Department promulgated proposed regulations that clarify and adjust the rules regarding the tax reporting of information by brokers, so that brokers for digital assets are subject to the same information reporting rules as brokers for securities and other financial instruments.
While DLA Piper is preparing a thorough client alert on the proposed regulations, below are some of the highlights. Please be on the lookout for our alert exploring the rules in greater detail.
- What is a digital asset? The proposed regulations provide that a digital asset is “any digital representation of value that is recorded on a cryptographically secured distributed ledger.” This includes cryptocurrency, such as Bitcoin and Ether, but also includes NFTs and even stablecoins.
- Who is a broker? A broker is any person who in the ordinary course of a trade or business stands ready to effect sales of digital assets to be made by others, even if the person is not a US person. The regulations make it clear that miners and validators are not brokers, provided that they do not perform other services apart from their validation activities. It also seems relatively clear that decentralized finance and unhosted wallet services are brokers where their services directly or indirectly effectuate sales of digital assets and they earn fees from these digital asset sales.
- What information must be reported? In addition to name, address, and taxpayer ID, the information required to be collected and reported includes wallet addresses and blockchain transaction IDs. The scope of information required is broad and raises legitimate privacy concerns. The proposed rules require brokers to report this information on new IRS Form 1099-DA.
- When are the rules effective? Brokers are required to report gross proceeds from sales of digital assets effected on or after January 1, 2025, with such reporting required to be made beginning in 2026. Reporting of adjusted basis and character of gain or loss is required for sales effected on or after 1 January 2026, with such reporting required to be made beginning in 2027.
- How long is the comment period? Written comments and feedback on the proposed regulations from affected taxpayers, industries, and other interested parties will be accepted until October 30, 2023. A public hearing has been scheduled for November 7, 2023, with an overflow hearing date scheduled for November 8, 2023, if necessary. It is not clear when final regulations will be issued.
Please be on the lookout for our alert exploring the rules in greater detail.