U.S. Treasury and IRS Release Proposal for Digital Asset Tax by Brokers

‍

On August 25, 2023, the IRS and the Treasury Department released the much-awaited proposed regulations on the sale and exchange of digital assets by brokers. This step clarifies the existing tax reporting information requirements for brokers as outlined by the Biden-Harris Administration’s implementation of the bipartisan Infrastructure Investment and Jobs Act (IIJA). 

As per the U.S. Treasury Department, it is “an effort to crack down on tax cheats while helping law-abiding taxpayers know how much they owe on the sale or exchange of digital assets.” 

What is The Proposal?

As per the proposed regulations, crypto “brokers” now need to report the information on the sales and exchanges of digital assets to the IRS. This step is proposed so that digital asset brokers are subject to the same transaction reporting rules as brokers for securities and other financial instruments.

The Treasury Department and the IRS expect to make the changes in multiple phases. 

• Initially, the focus is to bring changes to the existing requirement of brokers to report on digital asset sales. 

• In the later phases, transfer statement reporting will be implemented under section 6045A(a) and broker information reporting will be implemented under section 6045A(d). This will cover transfers of covered securities that are not transfers to broker accounts or transfers subject to sales reporting.

These proposed regulations will require brokers to collect and store customers’ information, including:

• Names, addresses, and tax identification numbers.
• Information about customers’ digital asset transactions.

Definition of Broker as per the Proposed Regulations

The existing definition of a broker generally excludes a person described as “a non-U.S. payor or non-U.S. middleman” concerning a sale that is executed by the broker on behalf of a customer at an office outside the United States. 

Additionally, under existing regulations, the broker may treat the customer as an exempt foreign person based primarily on the documentation requirements that depend on whether the sale is made in the United States or outside.

The proposed regulations clarify this definition of broker for purposes of section 6045 which includes:

• Digital asset trading platforms
• Digital asset payment processors
• Certain digital asset hosted wallet providers
• People who regularly offer to redeem digital assets that were created or issued by them. 

AMM trading platform operators, for example, that facilitate a digital asset sale on behalf of customers, are required to file information returns about those sales, as well as provide a payee statement reporting the gross proceeds realized by the customer.

In addition, these proposed regulations would require real estate brokers to report on real estate purchasers who use digital assets to acquire real estate. 

Definition of Digital Assets as per the Proposed Regulations

The definition of digital assets includes “digital representations of value that are capable of being recorded using technology that is similar to technology that uses cryptography to secure transactions.”

The proposed regulations include a "similar technology standard" to ensure that digital assets are defined in a way that takes into account advancements in the techniques, methods, and technology underlying them.

Currently, the U.S. Treasury Department and the IRS are considering applying these regulations to only virtual currency or a variant thereof rather than to all digital assets. The newer forms of digital assets, such as stablecoins or NFTs, are still under discussion.

Form 1099 Reporting and Proposed Form 1099-DA

For effective 1099 reporting, digital asset brokers must have a clear understanding of their client's identity. This involves:

• Distinguishing between U.S. and non-U.S. accounts
• Gathering names, addresses, and verified U.S. Tax ID Numbers (TINs) through Form W-9 or its substitute

Traditionally, Form 1099-B has been the standard for reporting returns in the finance sector. However, the IRS has hinted at introducing a new form – 1099-DA, specifically for digital assets.

The data from Form W-9 will be used for both Form 1099-B and the upcoming 1099-DA, tailored for digital asset brokers.

For each digital asset transaction, brokers must report:

• Customer's name, address, and tax ID
• Details of the digital asset (including its name, type, and quantity)
• Transaction date and time (in UTC)
• Sale proceeds and adjusted cost basis
• Transaction ID or hash
• Addresses involved in the digital asset transaction
• The type of payment received

If assets are moved to a broker and then sold, additional details are needed:

• Transfer-in transaction's date and time
• Transaction ID or hash for the transfer-in
• Address(es) from which the asset was transferred
• Quantity of units transferred by the client during the transfer-in

However, once the proposed regulations are finalized, this extra transfer data might not be necessary for Form 1099-DA.

Timeline Overview

Here’s a quick overview of the expected actions for the proposed regulations by The Treasury Department and the IRS:

• The proposed regulations are open to public feedback until October 30, 2023. A public hearing has also been scheduled for November 7, 2023, with a second public hearing date arranged for November 8, 2023. Submit any public comments using the Federal eRulemaking Portal.

• The proposed regulations will be effective from 2025 for the tax year 2026.

• If digital assets are acquired in the customer’s account on or after this date, the broker should be required to track and report basis for them only if the sale of the digital asset is on or after January 1, 2026.

• The IRS is encouraging Voluntary broker reporting for tax years before tax years 2025 & 2026 by offering penalty waivers “to digital asset brokers that voluntarily report adjusted basis information on noncovered securities as currently applies to securities brokers.”

How Entities May Be Affected

The Treasury Department and the IRS estimate that approximately 600 to 9,500 brokers and around 13 million to 16 million customers will be impacted by these proposed regulations.

These proposed regulations increase costs for brokers who do not already maintain records of customers’ digital asset transactions. In this case, they will need to build a new system for collecting and storing digital asset transaction information, as well as reporting this information to the IRS and taxpayers, or will need to find a service provider to do so.

For customers, the proposed regulations will have different effects on different types of digital asset owners. The majority of digital asset owners will see greatly reduced costs of monitoring and tracking their own digital asset portfolios. These reduced costs and the increased confidence potential digital asset owners will gain as a result of brokers being compliant with Federal tax laws. 

How Kryptos Can Help You Stay On Top of Taxes

Reporting your cryptocurrency for taxes can be complex. You need to keep track of all your transactions for different crypto assets. These include their purchase prices and fair market values at the time of disposal, any fees or transactions, tax rates, and much more. Additionally, you also need to fill out the right forms for different taxable transactions.

Any error in the calculations or not staying compliant with the latest regulations can lead to overtaxes or missed opportunities to claim deductions. To help you out, Kryptos can automatically do all of this for you in just a few minutes.

All you have to do is upload your wallet address and the platform auto-syncs all your transaction data and figures out your taxable transactions and possible deductions. Once done, you can also generate pre-filled tax forms as defined by the IRS right from the app. 

To start calculating your crypto taxes, Sign Up Now for free.

FAQs

1. What are the proposed regulations on digital asset tax by the U.S. Treasury and IRS?

On August 25, 2023, the IRS and the Treasury Department released proposed regulations on the sale and exchange of digital assets by brokers. This aims to bring clarity to tax reporting requirements for brokers.

2. How does the proposal define a 'broker' in the context of digital assets?

The proposed regulations expand the definition of a broker to include digital asset trading platforms, payment processors, certain hosted wallet providers, and those who offer to redeem digital assets they created or issued.

3. What is the new Form 1099-DA mentioned in the proposal?

The IRS plans to introduce Form 1099-DA, specifically tailored for digital assets. This form will be used alongside the traditional Form 1099-B for reporting digital asset transactions.

4. When will the proposed regulations be effective?

The proposed regulations are set to be effective from 2025 for the tax year 2026. Digital assets acquired on or after this date will be subject to the new reporting requirements if sold on or after January 1, 2026.

5. How can Kryptos assist with crypto tax reporting?

Kryptos simplifies cryptocurrency tax reporting by auto-syncing transaction data from wallets and exchanges. It calculates taxable transactions, potential deductions, and generates pre-filled tax forms as per IRS guidelines.

‍

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!