Monday, August 28, 2023

IRS Issues First-Ever Broker Rules For Digital Asset Sales


According to Law360, b
rokers of digital assets would face tax reporting requirements similar to those for brokers of securities and other financial instruments under the first-ever proposed rules governing assets such as cryptocurrency and nonfungible tokens, released Friday by the Internal Revenue Service.

Digital asset brokers would need to file information returns and payee statements on the sale of the assets for customers in certain transactions under Internal Revenue Code Section 6045, according to the proposed rules. These brokers include trading platforms, payment processors, wallet providers and individuals who offer to redeem assets that were created or issued by that individual. 

The Rules Would Begin Applying In 2026
For Transactions From The Previous Year.

By completing a new form called Form 1099-DA, brokers can assist taxpayers in assessing their tax obligations and avoiding complicated calculations or pay digital asset tax preparation services to file tax returns, according to the IRS. The 282-page proposal also recommended that brokers in certain circumstances include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, so that customers have the information they need to prepare their tax returns.

The proposed rules are in line with tax reporting regulations on other types of assets to avoid preferential treatment, and they are part of broader enforcement on wealthy taxpayers seeking to circumvent tax rules and payments, Internal Revenue Commissioner Daniel Werfel said in a statement.

"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," Werfel Said.

The rules implement a provision of the Infrastructure Investment and Jobs Act, enacted in 2021, that called for increased reporting on digital asset brokers. In a July revenue ruling, the IRS clarified that a cryptocurrency holder who earned additional tokens or coins from validating transactions in a blockchain or crypto exchange, a process called staking, should report the value of those rewards as part of gross income. The guidance speaks to a pending lawsuit in the Sixth Circuit against the agency's treatment of a couple's income earned from staking activities.

Much of the digital asset reporting provision in the 2021 law is drawn from the Organization for Economic Cooperation and Development's crypto-asset reporting framework that members approved in 2022 to address the rapid adoption of such assets that can be transferred and held without banks and other traditional financial intermediaries.

Real estate brokers, mortgage lenders, title companies and closing attorneys would also need to disclose in their tax returns transactions that use digital assets to purchase real estate, as well as supply payee statements on the assets' fair market value from the sellers, according to the proposal.

Who Needs to Submit Form 1099-DA?

Anyone who is considered a digital asset broker will need to submit Form 1099-DA to both customers and the IRS.

The IRS’s proposed regulations go into extensive detail about who should be considered a broker. They emphasize entities that are “in a position to know” the identities of the parties involved in digital asset transactions. Their proposal would categorize all of the following as brokers:

  • Centralized exchanges (such as Coinbase)
  • Decentralized exchanges (such as Uniswap)
  • Wallets that allow users to buy, sell, and trade digital assets (such as Metamask)
  • Bitcoin ATMs and other physical kiosks

Although the crypto community is likely to push back against decentralized exchanges (DEXes) having to report to the IRS, we anticipate that the IRS will not be flexible on this requirement. DEXes do not currently collect tax information about their customers, but the IRS is likely to argue that they are, in fact, “in a position to know” users’ identities and will enforce Know Your Customer (KYC) requirements.

Notably, the IRS’s proposed regulations do not consider any of the following to be brokers:

  • Miners, node operators, or others who are simply maintaining the blockchain
  • Hardware wallets that do not directly allow users to buy, sell, and trade digital assets (for example, a wallet that must be connected to an exchange in order to complete any of these transactions)
  • Software developers who indirectly facilitate digital asset transactions (for example, by developing code for a company like Coinbase)
  • Smart contract developers who receive income from a smart contract they created, but do nothing to maintain or update it

Previously, due to the broad language of the Infrastructure Act, there was a great deal of concern that these parties would be considered brokers and would face reporting requirements that they couldn’t possibly fulfill.

What Will Be Reported on Form 1099-DA?

Form 1099-DA will report information about the sale or disposition of digital assets. The IRS specifies that this includes cryptocurrencies, NFTs, and stablecoins.

Form 1099-DA will report the same information that’s currently reported on Form 1099-B for stocks:

  • When you got the digital asset (Acquisition date)
  • How much you paid for it (Cost basis)
  • When you sold or swapped it (Sale or disposition date)
  • How much money you got from selling or swapping it (Sales proceeds)
  • Gross proceeds (Total proceeds from that exchange or broker, not taking cost basis into account)

This will apply to sales made after January 1, 2025, so you can expect your first 1099-DA form in January of 2026.

Although the U.S. Department of the Treasury acknowledged that nonfungible tokens are different from other digital assets such as cryptocuWill wrap this thing up and saidrrencies, the proposal ultimately deemed that transactions that use NFTs are subject to the additional reporting requirements. Back in March, the IRS announced that it plans to float guidance treating NFTs as collectibles under IRC Section 408(m).

NFTs, which may represent artwork, antiques, music, films, fashion design and other entertainment memorabilia, are bought, sold and traded on digital asset trading platforms similar to other digital assets, and such transactions will trigger a gain or loss, the proposal said.

"The Reporting Of Gross Proceeds And Basis Information
 Is Equally Useful To Taxpayers And The IRS As
Reporting On Other Digital Assets," The Proposal Said.

The inclusion of NFTs in the proposed rules may be concerning for stakeholders because there has not been a lot of IRS guidance on the matter, according to Joshua Smeltzer, partner at Gray Reed.

Have An IRS Tax Problem?

     Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at: or
Toll Free at 888 8TAXAID (888-882-9243)


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