2023-34: New proposed regulations on digital asset reporting

The IRS has issued 282 pages of proposed digital asset reporting regulations, along with official IRS explanation of the provisions, which cover a range of digital asset issues where there have been questions. Issues addressed include expansive definitions of brokers and a requirement that proceeds from the sale of digital assets be reported to the IRS starting in 2026, on new Form 1099-DA for transactions on or after January 1, 2025.

Noteworthy aspects of the proposed regulations include:

  • The IRS has proposed numerous questions on various digital asset topics and is requesting public comment for a public hearing scheduled for November 7;
  • Tiebreaker rules for brokers help to determine how to report a digital asset transaction that can also be classified as a non-digital asset transaction:
    • If a transaction could be classified as either a securities transaction or a digital asset transaction, then starting January 1, 2025, the broker must report the transaction as a digital asset transaction (on Form 1099-DA);
    • If the transaction could be classified as either a real estate transaction or a digital asset transaction, then the transaction must be reported as a real estate transaction (under existing rules);
  • The definition of “digital asset” is expansive and includes non-fungible tokens (NFTs) and stablecoins;
  • Digital assets requiring broker reporting do not include:
    • Digital assets used in “closed systems” (such as video game tokens that can be purchased with real currency but can be used only in-game and that cannot be sold or exchanged outside the game for real currency); or
    • Distributed ledger technology or similar technology for ordinary commercial purposes that do not create a new transferrable asset, such as inventory tracking or processing orders for purchase and sale transactions;
  • There is no de minimis exception for broker reporting on new IRS Form 1099-DA.

The proposed regulations can be accessed at: www.federalregister.gov/documents/2023/08/29/2023-17565/gross-proceeds-and-basis-reporting-by-brokers-and-determination-of-amount-realized-and-basis-for

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