US Treasury and IRS Propose New Regulations on Digital Asset Reporting

The US Department of the Treasury and the Internal Revenue Service (IRS) have jointly issued proposed regulations aimed at enhancing transparency and compliance in the digital asset sector. These regulations are set to mandate brokers to report sales and exchanges of digital assets conducted by their customers.

The proposed regulations encompass various digital asset concerns, notably defining brokers and mandating the reporting of proceeds to the IRS via the newly introduced Form 1099-DA. "These proposed regulations are designed to help end confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals and others," commented IRS Commissioner Danny Werfel. He emphasized the importance of ensuring digital assets aren't utilized to conceal taxable income, especially by high-income individuals.

Starting from Jan. 1, 2025, brokers, which include digital asset trading platforms, payment processors, and certain hosted wallet providers, will be required to report gross proceeds on Form 1099-DA. Additionally, they must provide payee statements to their customers. From Jan. 1, 2026, brokers will also need to report gain or loss and basis information for sales, aiding customers in tax return preparations.

The regulations further stipulate that real estate reporting entities, such as title companies and real estate brokers, must report the disposition of digital assets used as consideration in real estate transactions closing on or after Jan. 1, 2025. They will also need to report the fair market value of digital assets paid to real estate sellers for transactions closing from this date.

These proposals are part of the Biden-Harris Administration's broader strategy to close the tax gap and ensure uniformity in tax rules, especially concerning digital assets. The nonpartisan Joint Committee on Taxation (JCT) highlighted the importance of third-party income verification in reducing tax evasion, estimating that the Infrastructure Investment and Jobs Act (IIJA) provisions could generate nearly $28 billion over a decade.

Public feedback on these regulations is encouraged, with written comments accepted until Oct. 30, 2023. Public hearings are scheduled for Nov. 7 and Nov. 8, 2023, to accommodate the anticipated volume of responses.