What transactions must digital asset brokers report under the proposed IRS rules?

Brokers must report gross proceeds from digital asset sales and exchanges, cost basis information for covered transactions, and gains or losses on a new Form 1099-DA. The reporting applies to cryptocurrency, NFTs, and other digital assets sold through platforms meeting the expanded broker definition under the Infrastructure Act.

When do the IRS digital asset broker reporting requirements take effect?

The proposed regulations establish a phased implementation with broker reporting of gross proceeds beginning for transactions occurring after January 1, 2025, and cost basis reporting following for transactions beginning in 2026. Brokers must prepare systems to collect and report the required information.

IRS Finalizes Digital Asset Broker Reporting Regulations | Lynch Law

On August 25, 2023, the Treasury Department and the IRS published proposed regulations that would require brokers of digital assets to report transactions on a new Form 1099-DA, bringing cryptocurrency and other digital asset transactions into the same information-reporting framework that has long applied to traditional securities. The proposed regulations represent the most significant step yet in the IRS's effort to close what it views as a substantial tax gap in the digital asset space.^[1]

While the regulations are not yet final, they signal the direction of travel and give taxpayers, exchanges, and advisors a clear picture of the reporting obligations that are coming. This post summarizes the key provisions and their practical implications.

Background: The Infrastructure Act Mandate

The Infrastructure Investment and Jobs Act of 2021 amended IRC § 6045 to expand the definition of "broker" to include any person who, for consideration, regularly provides services effectuating transfers of digital assets on behalf of another person. It also broadened the definition of "digital asset" to include any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. The legislative mandate directed the Treasury to issue implementing regulations, which the August 2023 proposed regulations address.^[2]

The statutory definition of "broker" was immediately controversial. Read broadly, it could encompass miners, validators, software developers, and decentralized finance (DeFi) protocol operators — parties that do not hold customer funds or have access to the information needed to file returns. The proposed regulations attempt to narrow the scope, at least initially.

Who Is a Broker Under the Proposed Rules

The proposed regulations define a broker, for purposes of digital asset reporting, as a person who in the ordinary course of a trade or business effectuates digital asset sales on behalf of others. This includes centralized exchanges, certain hosted wallet providers, digital asset kiosks (such as Bitcoin ATMs), and processors of digital asset payments. Importantly, the proposed regulations do not currently extend broker treatment to miners, validators, hardware or software wallet providers, or persons solely developing or publishing decentralized protocols.^[3]

However, the preamble to the proposed regulations indicates that the Treasury intends to address DeFi and other decentralized arrangements in a future rulemaking. The carve-out for decentralized protocols is therefore provisional, not permanent.

What Must Be Reported

Brokers would be required to report digital asset transactions on the new Form 1099-DA, which the IRS is developing. The proposed reporting requirements include the customer's name, address, and taxpayer identification number, the date and type of each transaction, the gross proceeds from the sale or disposition, the adjusted basis of the asset sold (to the extent known), and whether the gain or loss is short-term or long-term.

The basis-reporting requirement is particularly significant. For traditional securities, brokers have been required to track and report adjusted basis since 2011. Applying the same requirement to digital assets is technically complex because customers often acquire crypto through multiple channels — exchanges, mining, airdrops, staking rewards, hard forks — each of which may produce a different cost basis. The proposed regulations allow brokers to rely on reasonable allocation methods where complete basis information is not available, but they must still report the best information they have.^[4]

Effective Dates

The proposed regulations contemplate a phased implementation. Gross proceeds reporting for sales and exchanges of digital assets would begin for transactions occurring on or after January 1, 2025. Basis reporting would begin for digital assets acquired on or after January 1, 2026. These dates assume the regulations are finalized in a timely manner; delays in finalization could push the effective dates back.

Taxpayers should not interpret the delayed effective dates as a reprieve from current reporting obligations. Regardless of Form 1099-DA, taxpayers are already required to report all digital asset transactions on their income tax returns. The "Yes or No" digital asset question on Form 1040 has been present since 2019, and the IRS has been actively pursuing noncompliant taxpayers through John Doe summonses to exchanges and other enforcement tools.

Practical Implications

For taxpayers who hold digital assets, the message is clear: comprehensive reporting is coming, and the window for voluntary compliance is narrowing. Taxpayers with unreported or underreported digital asset income should consider correcting their returns before the new information-reporting regime makes noncompliance easily detectable.

For businesses that accept digital asset payments or compensate employees or independent contractors in cryptocurrency, the proposed regulations add another layer of reporting obligations. Businesses already required to file Forms 1099-MISC or 1099-NEC for payments in property (including cryptocurrency) should ensure their systems can accurately capture the fair market value of digital assets on the date of each transaction.

For the crypto industry itself, compliance will require significant investment in systems, processes, and personnel. Smaller exchanges and brokers may find the basis-tracking and reporting requirements particularly burdensome, and industry consolidation is a likely consequence.^[5]

The proposed regulations will go through a public comment period and a public hearing before finalization. The final rules may differ in material respects from the proposal. But the direction is unmistakable: the era of limited information reporting for digital assets is ending, and taxpayers and advisors should prepare accordingly.

References

^[1] Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions, 88 Fed. Reg. 59,576 (proposed Aug. 29, 2023).
^[2] Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, § 80603 (2021), amending IRC § 6045.
^[3] Prop. Treas. Reg. § 1.6045-1(a)(21). The proposed regulations reserve on the treatment of decentralized exchanges and DeFi protocols.
^[4] Prop. Treas. Reg. § 1.6045-1(d)(2)(ii). Brokers may use specific identification, FIFO, or other reasonable methods for basis determination.
^[5] The Treasury estimated the ten-year revenue impact of the expanded broker reporting at approximately $28 billion, reflecting the anticipated increase in voluntary compliance.