Digital asset broker tax reporting rules finalized: Top points for brokers and taxpayers

On July 9, 2024, final regulations were published in the Federal Register implementing a new digital asset transaction reporting regime, reflecting a number of changes to the proposed form of these regulations in response to more than 44,000 comments.

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 Internal Revenue Service (IRS) and the US Treasury Department (Treasury) promulgated proposed regulations that clarified and adjusted 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.

The final regulations are effective for transactions occurring on or after January 1, 2025, with brokers required to file Forms 1099-DA (Digital Asset Proceeds from Broker Transactions) for such transactions beginning in 2026. As discussed below, the IRS also issued some additional transitional guidance relating to the final regulations.

Who is a broker?

Section 6045 expanded the definition of a broker to include "any person who (for consideration) is responsible for providing any service effectuating transfers of digital assets on behalf of another person." In the preamble to the final regulations, Treasury and the IRS explicitly rejected suggestions from commentators to meaningfully limit Congress’s definition.

Custodial market participants are brokers. The final regulations make clear that brokers who take possession of digital assets (custodial brokers) being sold by their customers are subject to this reporting regime. This includes:

1. Operators of custodial digital asset trading platforms
2. Hosted wallet providers (ie, those who electronically store the private keys to digital assets on behalf of user)
3. Processors of digital asset payments (PDAPs) (see below for some additional detail)
4. Issuers of cryptocurrencies that regularly offer to redeem their digital currencies, such as stablecoin issuers
5. Digital asset kiosks
6. Digital asset brokers (including securities brokers, who accept digital assets in payment for their services), and
7. Real estate reporting persons, if they have actual knowledge that digital assets were used to purchase the real estate.

For these custodial brokers, the final regulations require reporting for transactions occurring after January 1, 2025, with Forms 1099-DA due beginning in early 2026.

Non-custodial market participants are brokers, but the IRS and Treasury need a bit more time. With respect to non-custodial market participants, Treasury and the IRS made clear their belief that such participants are also generally covered by Congress’s definition of broker. However, Treasury and the IRS want to take some additional time to consider how this reporting regime would apply non-custodial industry participants. As a result, implementation of the final regulations is delayed for non-custodial industry participants, who include:

1. Decentralized exchanges
2. DeFi platforms, and
3. Unhosted wallet providers (solely provides the software for enabling a consumer to hold and transfer digital assets, and that does not, and cannot, process gross proceeds).

The preamble to the final regulations states that “The Treasury Department and the IRS continue to study this area and, after full consideration of all comments received, intend to expeditiously issue separate final regulations describing information reporting rules for non-custodial industry participants.” Given this, it may be prudent for non-custodial brokers to act as if the final regulations apply to them.

Validators (provided that is their sole responsibility) are not brokers. Importantly, the final regulations provide that participants that engage solely in validation of blockchain transactions (eg, mining or staking) are not brokers subject to this reporting regime.

Other questions:

• Are there special rules for PDAPs? As noted above, the final regulations generally treat PDAPs as brokers. However, many comments noted that PDAPs are often not in a position to collect personal identification information from customers. In response to these comments, the final regulations provide that a PDAP will be treated as a broker where the PDAP already collects customer identification information in order to comply with the PDAP’s obligations under anti-money laundering regimes. Further, the final regulations provide a de minimis annual threshold of $600 for PDAP sales below which no reporting is required.


• What if there are multiple brokers involved in a single transaction? To address concerns about duplicative reporting (eg, when more than one digital asset broker would otherwise have a reporting obligation vis-à-vis a reportable transaction), the final regulations provide that the broker who credits the gross proceeds to the customer’s wallet address or account is required to report the transaction. In order to establish an exemption under this multiple broker rule, a broker must obtain a Form W-9 from another broker, certifying that the latter is a US digital asset broker. As yet, the current Form W-9 has not been updated to include this certification; accordingly, Notice 2024-56 (discussed in more detail below) provides that a broker may rely upon a written statement that is signed by another broker under penalties of perjury that the other broker is a US digital asset broker until one year after the Form W-9 is appropriately revised.


• What about non-US brokers? Treasury and the IRS delayed implementation of the final regulations for non-US brokers in order to permit coordination with the Organization for Economic Co-operation and Development )’s Crypto-Asset Reporting Framework (CARF). If the CARF is finalized in its current form, Treasury and the IRS expect that the US would begin exchanging information with partner jurisdictions in 2028, with respect to transactions effected in 2027.


• Is there any transition relief for brokers? As part of the transitional guidance package issued together with the final regulations, Notice 2024-56 provides relief from penalties and backup withholding for calendar year 2025, presumably to give brokers sufficient lead time to create systems capable of complying with the new reporting rules. Importantly, Notice 2024-56 provides that a broker that fails to file information returns and furnish payee statements under the final regulations for digital asset sales made during calendar year 2025 will not be subject to penalties under sections 6721 and 6722 of the Code (or to backup withholding). This relief is only available, however, where (i) the broker made a good faith effort to file accurate and timely Forms 1099-DA and furnish accurate and timely payee statements, and (ii) the broker actually does file those returns within a reasonable period of time after the original due date. In addition, Notice 2024-56 provides that backup withholding will not apply to, among other things, sales effected by PDAPs or sales of NFTs.

What is a digital asset?

Section 6045 defines a digital asset as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” In the preamble to the final regulations, Treasury and the IRS discuss and explicitly reject numerous taxpayer comments that request limitations and/or exceptions to this definition. However, for certain digital assets discussed below, Treasury and the IRS have made some concessions to alleviate potential burdensome reporting.

Closed loop assets. Closed loop assets can only be transferred within a closed loop network. Generally, such assets cannot be traded on an exchange and are generally not bought and sold for gains. These generally include:

1. Digital assets representing loyalty credits or rewards
2. Video game tokens that cannot be transferred outside the game, and
3. Digital assets using distributed ledger technology to transfer information with respect to payment instructions or management of inventory.

The final regulations provide that transactions involving closed loop digital assets are not subject to reporting, and neither are tokens that can only be redeemed for goods or services of the seller, and not used outside the network.

Stable coins. Stable coins are digital assets that are “pegged” to a fiat currency at a 1:1 ratio. These coins give users the ability to hold fiat currency in digital form that can be easily swapped for other digital assets on an exchange, without being exposed to volatility risk. Accordingly, trading stable coins themselves generally does not give rise to material amounts of gain or loss (unlike other, non-pegged cryptocurrencies).

Recognizing that stable coins are economically equivalent to cash, the final regulations add a new optional alternative reporting method for sales of qualifying stable coins. Under the regulations, (i) no reporting is required where sales of qualifying stable coins (per customer) are in the aggregate less than $10,000, and (ii) sales over this threshold may be reported on an aggregate, rather than per-transaction basis. A qualifying stable coin must, for an entire calendar year, meet the following criteria:

1. The stable coin must track fiat currency (eg, $ or €) on a 1:1 basis
2. The stable coin must possess one of two specified stabilization mechanisms, and
3. The stable coin must generally be accepted as payment by persons other than the issuer.

If a stable coin fails any of these criteria at any time during the calendar year, it will not be treated as a qualifying stable coin. Consequently, brokers would not be able to use the alternative reporting method, and the $10,000 threshold discussed for that stable coin. It is important to note that a PDAP, with respect to qualifying stable coin transactions, would be permitted to use the higher $10,000 threshold, rather than the $600 threshold for other digital assets.

NFTs. An NFT, or “non-fungible token,” is a token held on a blockchain that represents ownership in a specific item that has value. Unlike other digital assets, an NFT is used to prove ownership in an underlying item, and therefore the value of an NFT derives from the item that is owned by holding the NFT.

The final regulations provide an optional alternative reporting method for sales of certain NFTs. They state that, (i) no reporting is required where sales of such NFTs that total less than $600 in aggregate (on a per-customer basis), and (ii) sales over this threshold may be reported on an aggregate, rather than per-transaction basis. NFTs eligible for his regime must:

1. Be indivisible
2. Possess a unique digital identifier, and
3. Not represent an interest in property that is required to be reported on Form 1099-B (such as a security or commodity).

What transactions are reportable?

In general, the final regulations provide that most dispositions of digital assets will be subject to information reporting, whether those dispositions are for cash, different digital assets, stored value cards, broker services, or other forms of property. In addition, under the final regulations, payments of gas fees (ie, transaction costs on the Ethereum blockchain, paid in Ether or its fraction, gwei), staking fees (ie, trading fees paid to staking platforms), and similar amounts are treated as dispositions of digital assets that are subject to reporting.

As part of the transitional guidance package issued together with the final regulations, Notice 2024-57 provides that until formal guidance is issued, brokers are not required to report, nor will they be penalized for failure to file correct information returns, with respect to the following:

1. Wrapping and unwrapping of tokens
2. Liquidity provider transactions
3. Staking transactions
4. Lending of digital assets (whether directly or via short sales), and
5. Notional principal contract transactions.

What information must be reported?

The final regulations eliminated some information that the proposed regulations would have required to be reported, including (i) the time of day of the transaction, and (ii) the transaction ID and wallet address information. Nevertheless, brokers are still required to collect and retain this information for seven years (except for NFTs and stable coins subject to the alternative reporting methods discussed earlier).

As a result, the final regulations require a broker to report only the following to the IRS and the taxpayer (on Form 1099-DA, which is still being finalized):

1. Name, address, and taxpayer identification number of the payer
2. Gross proceeds (in US dollars, or the US dollar value of goods and services, reduced by transaction costs, if any)
3. Consideration received for the digital asset (which may be determined by a digital asset aggregator), and
4. If the transaction involves a hosted wallet, the information necessary to identify the wallet and the amount originally transferred into the wallet.

In order to address, among other things, concerns about the "wash sale" rules, there are also special reporting rules for tokenized securities. A tokenized security generally includes (i) a digital asset that represents an interest in a separate, traditional, financial asset that is reportable as a security (eg, a digital asset that represents an ownership interest in a traditional share of stock in a 1940 Act Fund or another corporation), or (ii) a digital asset that is also a security, but does not represent an interest in a separate financial asset (eg, a security issued pursuant to a registration statement approved by the SEC that exists solely in a digital, tokenized form).

Reporting basis

The final regulations stipulate that brokers are required to report the adjusted basis of the digital asset sold on or after January 1, 2026. As previously noted, gross proceeds must be reported for digital asset transactions effected on or after January 1, 2025. However, brokers are only required to report the basis for digital assets that are acquired by, and held with, that broker on or after January 1, 2026 (ie, no retroactive tracking by brokers is required).

As part of the transitional guidance package issued together with the final regulations, Revenue Procedure 2024-28 generally permits taxpayers to rely on any reasonable allocation of units of unused basis to a wallet or an account that holds the same number of remaining digital asset units. This is based on the taxpayer’s records of such unused basis and remaining units, provided the allocation is reasonable. Taxpayers are required make this allocation as of January 1, 2025.

For more information

If you have any questions about the final regulations or any of the transitional guidance discussed above, feel free to reach out to the authors of this alert, or your DLA Piper Tax contact.