The IRS issued a substantial guidance package on digital assets this month, including final regulations (TD 10000), two notices and a revenue procedure. The guidance is the most substantive to date related to digital assets and provides rules for information reporting, the computation of gain or loss and back-up withholding.
The primary highlight of the guidance is final regulations for reporting by brokers on the sale or exchange of digital assets. The reporting will be required on a new form, Form 1099-DA, which the IRS said will be released soon and is generally required for transactions on or after Jan. 1, 2025.
The definition of digital assets subject to reporting remains broad, similar to the proposed regulations, and includes non-fungible tokens (NFTs) and stablecoins. The term “digital asset” is defined as “any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology), without regard to whether each individual transaction involving that digital asset is actually recorded on that ledger,” but does not include cash. The regulations specify that there is no inference that a digital asset is, or is not, properly classified as a security, commodity, option, securities futures contract, regulated futures contract, or forward contract for any other purpose of the Code.
The reporting rules apply to brokers that take possession of digital assets being sold by their customers and includes operators of custodial digital-asset trading platforms, certain digital-asset hosted wallet providers, digital-asset kiosks, and certain processors of digital-asset payments. The required reporting will be phased in over time, requiring brokers to report gross proceeds for transactions effected on or after Jan. 1, 2025, and basis on certain transactions effected on or after Jan. 1, 2026.
Real estate professionals treated as brokers are required to report the fair market value of digital assets paid by buyers, and received by sellers, in real estate transactions closing on or after Jan. 1, 2026.
For reporting of sales of specified NFTs and qualifying stablecoins, the final regulations provide an optional alternative reporting method that allows aggregate reporting instead of transaction by transaction.
The final regulations do not provide reporting requirements for decentralized or non-custodial brokers that do not take possession of digital assets being sold or exchanged. Those rules are intended to be provided in a separate set of regulations.
The final regulations also include Treas. Reg. Sec. 1.1001-7, which provides rules for measuring gain or loss specifically for the sale, exchange, or other disposition of digital assets. The regulations are generally consistent with the rules for determining gain or loss with respect to other property, but provide special rules for allocating digital asset transaction costs to the sale or disposition of a digital asset.
Final regulations under Treas. Reg. Sec. 1.1012-1 provide rules for determining the basis of digital assets, including digital assets purchased for cash, received in connection with the performance of services, received for property other than digital assets, received for other digital assets, and received for the issuance of debt. The regulations under Section 1012 also provide for the allocation of digital-asset transactions costs to such transactions. There are also rules for specific identification of digital assets that are sold, disposed of, or transferred by a taxpayer. Generally, a specific identification can be made only if adequate records are maintained for all units of a specific digital asset held in a single wallet or account to establish that a unit is removed from such wallet or account for purposes of subsequent transactions.
Coinciding with the final regulations, the IRS also released Notice 2024-56, Notice 2024-57, and Rev. Proc. 2024-28.
- Notice 2024-56 provides information regarding transition relief for brokers, including relief from backup withholding obligations and penalties.
- Notice 2024-57 provides a temporary exception providing that certain identified transactions are not subject to report. Specifically, Notice 2024-56 provides that reporting does not apply to wrapping and unwrapping transactions, liquidity provider transactions, staking transactions, the lending of digital assets, short sales of digital assets and notional principal contracts. Each transaction is described in more detail in the notice. The preamble to the regulations states that the IRS have determined that these transactions require further study to determine how to facilitate appropriate reporting.
- Revenue Procedure 2024-28 provides transitional guidance how taxpayers may allocate unused basis of digital assets as of Jan. 1, 2025, in transitioning to the specific identification rules. The revenue procedure was issued to assist taxpayers who may have specifically identified units or applied FIFO based on a universal or multi-wallet approach.
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