Digital Currency Final Regulations: Broad Overview | Cryptocurrency Tax Attorney
On June 28, 2024, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued final regulations requiring brokers to report sales and exchanges of digital assets, including cryptocurrency. These digital currency final regulations aim to improve tax compliance and provide taxpayers with necessary information for accurate tax reporting.
Digital Currency Final Regulations: Scope and Implementation
The new regulations will apply to transactions beginning in calendar year 2025, with reports to be filed on the new Form 1099-DA. These rules primarily affect custodial brokers who take possession of digital assets being sold by their customers, including:
- Operators of custodial digital asset trading platforms
- Certain digital asset hosted wallet providers
- Digital asset kiosks
- Certain processors of digital asset payments (PDAPs)
Notably, the regulations do not currently include reporting requirements for non-custodial or decentralized brokers. The Treasury and IRS plan to address these entities in a separate set of regulations in the future.
Digital Currency Final Regulations: Key Provisions
There are six key areas addressed in the final regulations:
- Basis, Gain, and Loss Determination: The regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. This is very important, because we will now have a more or less clear set of rules to follow.
- Backup Withholding: New rules for backup withholding on certain digital asset transactions are included. This is a critical issue, especially in the context of US international tax law.
- Real Estate Transactions: Real estate professionals must report the fair market value of digital assets used in real estate transactions with closing dates on or after January 1, 2026. Another key provision aimed to improve tax compliance in this area.
- Aggregate Reporting: An optional aggregate reporting method is provided for certain sales of stablecoins and non-fungible tokens (NFTs) that exceed specified thresholds.
- PDAP Transactions: Reporting is required on a transactional basis only if customer sales exceed a de minimis threshold.
- Basis Reporting: Certain brokers must report basis for transactions occurring on or after January 1, 2026. This is a very good provision for US taxpayers, because cost-basis determination is often very cumbersome when it comes to digital asset gain reporting.
Digital Currency Final Regulations: Transitional Relief and Exceptions
Obviously, the new reporting requirements is an increased compliance burden on affected custodial brokers. In order to ease this burden, the IRS is providing the following transitional and penalty relief:
- Notice 2024-56 offers general transitional relief from reporting penalties and backup withholding for brokers making good faith efforts to comply during calendar year 2025.
Limited relief from backup withholding is provided for certain digital asset sales in 2026 for brokers using the IRS TIN-matching system. - Notice 2024-57 temporarily exempts six types of transactions from reporting requirements, including wrapping and unwrapping transactions, liquidity provider transactions and staking transactions, among others.
- Revenue Procedure 2024-28 allows taxpayers to use reasonable allocation methods for unused basis across wallets or accounts holding the same digital asset.
Digital Currency Final Regulations: IRS Rationale
IRS Commissioner Danny Werfel emphasized the importance of these regulations in addressing potential noncompliance in digital currency transactions. The new reporting requirements are expected to improve detection of noncompliance and provide taxpayers with information to simplify their reporting process.
Werfel also highlighted the need for adequate IRS funding to keep pace with the evolving complexity of the tax system, particularly in relation to new digital assets.
Digital Currency Final Regulations: Impact
These Digital Currency Final Regulations represent a major development in the taxation and reporting of digital asset transactions, in particular with respect to integration of digital assets into the existing tax framework. As the digital asset landscape continues to evolve, further refinements and additional regulations are likely to follow, particularly regarding non-custodial and decentralized brokers. While the regulations provide clarity for many custodial brokers and taxpayers, the full impact of these regulations will become clearer as implementation begins in 2025 and beyond.
Contact Sherayzen Law Office for Professional Tax Help With US International Tax Aspects of Digital Currencies
Given the complex and evolving nature of digital currency regulations, it is crucial to seek expert guidance. Sherayzen Law Office specializes in US international tax law and can provide invaluable assistance in navigating the intricate landscape of digital currency taxation across borders. Contact us today to schedule your confidential consultation!