The Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) recently published final regulations requiring brokers to file information returns and issue payee statements containing information regarding dispositions of digital assets for customers in certain sales or exchanges.
The regulations were issued in response to amendments made by the Infrastructure Investment and Jobs Act of 2021 to sections 6045 and 6045A of the Internal Revenue Code.[1] These amendments set forth how certain digital asset transactions should be reported by brokers, required basis reporting for all digital assets, and provides a definition for the term digital assets.[2]
What has to be Reported?
Brokers of digital assets generally are required to reporting on a Form 1099–DA, Digital Asset Proceeds From Broker Transactions, reporting various types of information regarding digital asset sales and exchanges, including the following:
- The name, address, and taxpayer identification number of the customer;
- The name and number of units of the digital asset sold;
- The sale date;
- The gross proceeds amount;
- Whether the sale was for cash, stored-value cards, or in exchange for services or other property;
- If a digital asset was held by the broker in a hosted wallet on behalf of a customer and was previously transferred into an account with the broker, the date of such transfer in and the number of units transferred in by the customer; and
- Other information required by the form or instructions.[3]
What’s a Digital Asset?
Section 6045(g)(3)(D) of the Internal Revenue Code defines a “digital asset” as “[e]xcept as otherwise provided by the Secretary, . . . any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”
The final regulations expand this definition of a “digital asset” slightly to mean “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, and that is not cash . . . .”[4] “Cash” is defined as “United States dollars or any convertible foreign currency that is issued by a government or a central bank, whether in physical or digital form.”[5]
Treasury and the IRS rejected calls for the definition of “digital asset” to not include stablecoins or nonfungible tokens (“NFT’s”), although the final regulations do provide an alternative reporting method for these certain “qualifying stablecoins” and “specified NFTs.”[6] Treasury and IRS also agreed to add closed loop assets (in other words, assets that exist only in a closed system and that cannot be exchanged outside of that system) to excepted sales not subject to reporting.[7]
Who’s a Broker?
A “broker” is defined as “any person . . . , U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others.”[8] The term specifically includes “a person that regularly offers to redeem digital assets that were created or issued by that person.”[9] However, the final regulations do not apply to persons that otherwise would be brokers that do not take possession of digital assets being sold by their customers.[10]
What is the Amount Realized and Basis of Digital Assets?
The final regulations provide that if a digital assets are sold or exchanged for cash, other property differing materially in kind or extent, or services, the amount realized from the sale or exchange is the sum of any cash received, the fair market value of the property received, and the fair market value of any services received, reduced by the amount of digital asset transaction costs allocable to the sale.[11] Generally, the fair market value of a digital asset is determined as of the date or time of the disposition of the digital asset.[12] If the fair market value of property or services received in an exchange for digital assets cannot be determined, the fair market value is to be determined by reference to the fair market value of the digital assets transferred as of the date and time of the exchange.[13]
The basis of a digital asset is the cash paid for the digital asset is the same the same as the fair market value used in determining the amount realized on the sale or disposition of the transferred property.[14]
Notice 2024-57
In Notice 2024-67, the IRS states that brokers are not required to file information returns and furnish payee statements with respect to certain transactions involving digital assets until Treasury and the IRS issue further guidance. These transactions include:
- Wrapping and unwrapping transactions;
- Liquidity provider transactions;
- Staking transactions;
- Transactions described by digital asset market participants as lending of digital assets;
- Transactions described by digital asset market participants as short sales of digital assets; and
- Notional principal contract transactions.
[1] Infrastructure Investment and Jobs Act, Public Law 117–58, § 80603, 135 Stat. 429, 1339 (2021).
[2] See id.; I.R.C. §§ 6045(g)(3)(B)(iv), (D), 6045A(d).
[3] 89 Fed. Reg. 56561; 26 C.F.R. § 1.6045-1(d)(2).
[4] 89 Fed. Reg. at 56553; 26 C.F.R. § 1.6045-1(a)(19)(A).
[5] 89 Fed. Reg. at 56552; 26 C.F.R. § 1.6045-1(a)(12).
[6] 89 Fed. Reg. at 56481-485, 56505-56508, 56570-56572; 26 C.F.R. § 1.6045-1(d)(10).
[7] 89 Fed. Reg. at 56483, 56485, 56557; 26 C.F.R. § 1.6045-1(c)(3)(ii)(D)-(E).
[8] 89 Fed. Reg. 56550; 26 C.F.R. § 1.6045-1(a)(1).
[9] 89 Fed. Reg. 56550; 26 C.F.R. § 1.6045-1(a)(1).
[10] 89 Fed. Reg. 56493;
[11] 89 Fed. Reg. 56543; 26 C.F.R. § 1.1001-7(b)(1).
[12] 89 Fed. Reg. 56544; 26 C.F.R. § 1.1001-7(b)(3).
[13] 89 Fed. Reg. 56544; 26 C.F.R. § 1.1001-7(b)(4).
[14] 89 Fed. Reg. 56544; 26 C.F.R. § 1.1012-1(h)(3).
[View source.]
