On June 28, 2024, the IRS released the much-anticipated final regulations for digital asset brokers, providing detailed guidance for reporting sales and exchanges of digital assets.
Although the official published version will only be available from July 9, 2024, an unpublished version is currently accessible. These regulations, spanning 365 pages, reflect significant enhancements over the draft released in August 2023, addressing many of the ambiguities raised in public feedback.
Taina Tech, which offers fully an automated FATCA and CRS validation platform, has recently offered a guide to the IRS Digital Asset regulations.
The term “broker” includes U.S. and foreign entities like operators of custodial digital asset trading platforms, hosted wallet providers, and digital asset kiosks. However, the regulations clarify that decentralized or non-custodial brokers, who do not take possession of the digital assets, are not included under this definition. Notably, non-US brokers will be subject to these reporting requirements until the Crypto Asset Reporting Framework (CARF) is implemented in the U.S.
The IRS plans to propose regulations to implement CARF by 2028, facilitating the exchange of information with international partners regarding transactions from the 2027 calendar year. This move will align U.S. digital asset brokers with CARF regulations, requiring them to file information returns both under U.S. regulations and CARF for non-US customers.
In alignment with traditional securities brokers, digital asset brokers will need to collect a certified Taxpayer Identification Number (TIN) via Form W-9 from U.S. persons. Additionally, brokers must obtain a withholding certificate (Form W-8) to treat a customer as an exempt foreign person. These forms are crucial for complying with IRS reporting obligations and ensuring the correct treatment of foreign persons.
Brokers are expected to continuously monitor their customers’ activities and update their records to maintain compliance with the reporting requirements.
The reporting for digital assets will commence with transactions during the tax year 2025, to be reported on the new Form 1099-DA starting in January 2026.
The IRS is offering transition relief, with no penalties for missed withholding on transactions in 2026 if brokers comply with the IRS’s TIN Matching Program.
Additionally, backup withholding of 24% is required under section 6045 for transactions not covered by a W-9 or valid foreign exemption documentation, with relief provided for digital asset exchanges and sales prior to December 31, 2026.
The cost basis reporting for digital asset transactions is set to commence in the tax year 2026, with tracking backdated to January 1, 2023. The finalized regulations are a crucial step in clarifying the reporting landscape for digital assets, providing brokers with the guidelines needed to prepare for compliance and future regulatory developments.
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