IRS Releases Proposed Regulations on Broker Reporting for Sales and Exchanges of Digital Assets | Practical Law

IRS Releases Proposed Regulations on Broker Reporting for Sales and Exchanges of Digital Assets | Practical Law

The IRS and Treasury Department recently released proposed regulations addressing requirements for brokers to report sales and exchanges of digital assets.

IRS Releases Proposed Regulations on Broker Reporting for Sales and Exchanges of Digital Assets

by Practical Law Corporate & Securities
Published on 30 Aug 2023USA (National/Federal)
The IRS and Treasury Department recently released proposed regulations addressing requirements for brokers to report sales and exchanges of digital assets.
On August 25, 2023, the IRS and Treasury Department released long-awaited proposed Treasury regulations that would require brokers to report sales and exchanges of digital assets by customers. The proposed regulations clarify the definition of broker and address gross proceeds and tax basis and capital gain reporting by brokers for transactions involving digital assets. They also provide rules for determining the amount realized on the sale or exchange of a digital asset and the tax basis of digital assets.
Under IRC Section 6045, brokers are generally required to file information returns showing the names and addresses of their customers and the gross proceeds of sales of certain property effected through the broker and to furnish their customers with information statements. If the transaction involves a "specified security" of a customer acquired through the broker account, the broker must also report the customer's tax basis and whether any gain or loss on the security is short-term or long-term capital gain or loss. The Infrastructure Investment and Jobs Act of 2021 expanded 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" and expanded the definition of covered security to include digital assets acquired on or after January 1, 2023.
Under the proposed regulations, a digital asset is any digital representation of value that is recorded on a cryptographically secured distributed ledger (or similar technology), whether or not each individual transaction involving the digital asset is actually recorded on the ledger. Digital assets include non-fungible tokens (NFTs) and stablecoins. Digital assets do not include cash, for example a fiat currency in digital form.

Definition of Broker

The proposed regulations retain the existing definition of broker as any person that in the ordinary course of a trade or business stands ready to effect sales to be made to others but revises the definition of "effect" to include a person acting as a digital asset middleman for a sale of digital assets. A digital asset middleman is any person that provides facilitative services that effectuate sales of digital assets by customers if through those services the person ordinarily would know or be in a position to know:
  • The identity of the party that makes the sale.
  • The nature of the transaction potentially giving rise to gross proceeds.
A person would be considered to be in a position to know this information if it has the ability to modify the operation of a platform to obtain customer information.
Brokers under the proposed regulations would include:
  • Digital asset trading platforms.
  • Digital asset payment processors.
  • Certain digital hosted wallet providers.
  • Operators and owners of digital asset kiosks.
  • Persons who regularly offer to redeem digital assets that they issued or created.
Cryptocurrency miners and validators are generally not considered brokers if they do not provide other functions or services in addition to validating transactions. A person acting as a principal in a sale is also not a broker subject to the reporting rules if the person is not acting as a dealer with respect to an otherwise reportable sale. For example, a retailer who accepts digital assets from a customer as payment for the sale of goods is not a broker subject to reporting if the retailer is not otherwise a dealer of digital assets.

Reporting

The proposed regulations would require brokers to report on IRS Form 1099-DA the gross proceeds from sales or exchanges of digital assets that occur on or after January 1, 2025 and to provide statements to customers, meaning that reporting would begin in 2026. The definition of sale would be expanded to include the disposition of a digital asset by a customer in exchange for:
  • Cash or stored-value cards.
  • Different digital assets.
  • Certain services.
  • Property (including securities and real property) of a type that is subject to reporting under IRC Section 6045.
A sale also includes:
  • Payment of a digital asset by the customer to a digital asset payment processor in exchange for the processor's payment of a different digital asset or cash to a second person (for example, a provider of goods or services).
  • The delivery of a digital asset pursuant to the settlement of a forward contract, option, regulated futures contract, any similar instrument or certain executory contracts entered into by the broker's customer.
Information required to be reported for digital asset sales subject to Section 6045 reporting would include:
  • The name, address, and taxpayer identification number of the customer.
  • The name and number of units of the digital asset sold.
  • The sale date and time.
  • The gross proceeds amount. This is the amount of cash and the fair market value of any property or services received on the sale of a digital asset reduced by the digital asset transaction costs.
  • The transaction ID (the unique set of identification characters that a digital asset distributed ledger associates with a digital asset transaction involving the transfer of a digital asset from one digital address to another).
  • The digital asset address from which the digital asset was transferred.
  • Whether the sale was for cash, stored-value cards, or in exchange for services or other property.
  • Any other information required by the IRS.
The proposed regulations would also require:
  • Brokers in certain cases to report gain or loss and basis information for sales or exchanges of digital assets that take place on or after January 1, 2026.
  • Real estate reporting persons to report the disposition of digital assets used to purchase real estate in transactions that close on or after January 1, 2025 and the fair market value of digital assets paid to sellers of real estate.

Determining Gain or Loss and Tax Basis

Under the proposed regulations the amount realized on the disposition of digital assets for cash, services, or materially different property equals the sum of any cash received and the fair market value of any property or services received less any allocable transaction costs. The proposed regulations also provide rules for determining the tax basis of digital assets. For example, the tax basis of digital assets purchased for cash is the amount of cash plus any allocable digital transaction costs.

Comments and Public Hearing

Written comments on the proposed regulations must be submitted by October 30, 2023. A public hearing has been scheduled for November 7, 2023.