The IRS has released proposed regulations[1] to implement information reporting requirements for digital assets by brokers and certain other parties involved in arranging sales and/or exchanges of these assets. Originally introduced by the Infrastructure Investment and Jobs Act of 2021 and scheduled to take effect in 2023, the proposed regulations postpone the reporting obligations to cover transactions occurring in 2025. The IRS and customers will receive a newly announced Form 1099-DA in early 2026.

The IRS concurrently issued a news release[2] when the proposed regulations were published, providing a summary of the key points found in the regulations.

News Release Summary of the Proposed Regulations

The news release opens with a concise overview of the 282-page document containing the proposed regulations and accompanying explanations. It starts by providing a broad summary of the regulations and the rationale behind the new reporting rules.

The proposed regulations cover a range of digital asset issues where there have been questions, including defining brokers and requiring proceeds to be reported to the IRS on new Form 1099-DA.

“These proposed regulations are designed to help end confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals and others,” said IRS Commissioner Danny Werfel. “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. We welcome comments on these proposed regulations as we work to finalize the rules in this complex and evolving area.”[3]

The release then delves into more specific details about the content of the proposed regulations.

For sales or exchanges of digital assets that take place on or after Jan. 1, 2025, 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 customers. Brokers, in certain circumstances, would also be required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements, so that customers have the information they need to prepare their tax returns.[4]

Note that the regulation extends beyond what many might traditionally consider digital asset brokers. It also requires digital asset payment processors and certain hosted wallet providers to file these information returns. The news release additionally highlights special rules in the proposed regulations that address those involved in real estate transactions where digital assets are used as full or partial payment.

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 Jan. 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 Jan. 1, 2025.[5]

Finally, the news release states that the proposed regulations include guidance on various detailed computation and reporting rules.

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 and propose many useful definitions.[6]

Due Dates for Comments and Expected Release

The news release concludes by specifying the deadline for submitting comments on the proposed regulations to the agency.

Written comments regarding the proposed regulations must be submitted by Oct. 30, 2023. A public hearing has been scheduled for Nov. 7, 2023, with a second public hearing date for Nov. 8, 2023, if the number of requests to speak at the hearing exceed the number that can be accommodated in one day.[7]

Presumably, the IRS aims to release the final regulations early in 2024, allowing reporting entities sufficient time to develop systems for capturing information from transactions occurring in 2025.

[1] REG-122793-19, August 29, 2023, https://public-inspection.federalregister.gov/2023-17565.pdf (retrieved August 27, 2023)

[2] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023, https://www.irs.gov/newsroom/treasury-and-irs-issue-proposed-regulations-on-reporting-by-brokers-for-sales-or-exchanges-of-digital-assets-new-steps-designed-to-end-confusion-help-taxpayers-aid-high-income-compliance-work (retrieved August 27, 2023)

[3] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023

[4] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023

[5] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023

[6] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023

[7] “Treasury and IRS issue proposed regulations on reporting by brokers for sales or exchanges of digital assets; new steps designed to end confusion, help taxpayers, aid high-income compliance work,” IR-2023-153, August 25, 2023