On August 25, 2023, the Department of the Treasury and the Internal Revenue Service (IRS) issued long-awaited proposed regulations that would require brokers to report sales and exchanges of digital assets by customers.
The proposed regulations cover a range of digital asset issues where there have been questions and confusion, including defining brokers and requiring proceeds to be reported to the IRS on new Form 1099-DA.
According to IRS Commissioner Danny Werfel, the proposed regulations are designed to:
- End confusion involving the treatment of digital assets.
- Provide clear information and reporting certainty for taxpayers, tax professionals, and others.
- Improve tax law compliance via a clearer line of sight into activities involving digital assets.
The Commissioner went on to say that "a key part of this effort fits in with the larger IRS compliance focus on wealthy taxpayers. We need to make sure digital assets are not used to hide taxable income, and the proposed regulations are designed to provide a clearer line of sight into activities by high-income people as well as others using them. We want to make sure everyone pays what they owe under the tax laws, and our research and experience demonstrate that third-party reporting improves compliance."
The IRS welcomes comments on these proposed regulations as they work to finalize the rules in this complex and evolving area.
Key provisions of the proposed regulations
Brokers. The proposed regulations would require brokers – including digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallet providers – to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to taxpayers.
In certain circumstances, brokers must also include gain or loss and basis information for sales on or after January 1, 2026, on these information returns and statements to assist tax pros and taxpayers in preparing their tax returns.
Real Estate Reporting Persons. The proposed regulations would also require real estate reporting persons – such as title companies, closing attorneys, mortgage lenders, and real estate brokers – who are treated as brokers for dispositions of digital assets, to report the disposition of digital assets paid as consideration by real estate purchasers to acquire real estate in real estate transactions that close on or after January 1, 2025.
These real estate reporting persons would also be required to include on Form 1099-S the fair market value of digital assets paid to sellers of real estate in real estate transactions that close on or after January 1, 2025.
Gain/Loss Computation. Finally, the proposed regulations set forth gain (or loss) computation rules, basis determination rules, and backup withholding rules applicable to digital asset sale and exchange transactions.
Comment period and public hearing
Written comments regarding the proposed regulations must be submitted by October 30, 2023. A public hearing has been scheduled for November 7, 2023, with a second public hearing date for November 8, 2023, if the number of requests to speak at the hearing exceeds the number that can be accommodated in one day.
The proposed regulations require brokers to provide the IRS and digital asset holders with a new Form 1099-DA for each transaction that they facilitate. Form 1099-DA will include the following information:
- The gross proceeds of the transaction
- The date of the transaction
- The type of digital asset
- The quantity of digital assets
- The transferee's name and address
Brokers will be required to begin reporting transactions on Form 1099-DA starting in 2026 for transactions that occur in 2025.
These new reporting requirements will provide the IRS with a much clearer picture of activity in the digital asset market and significantly reduce confusion that exists for tax pros, taxpayers, brokers, and other players in the digital currency space. These information reporting requirements should assist the IRS in enforcement and help prevent tax evasion.