In the United States, the Form 1099 has been used for years by investment firms to report investment income of their customers. As a result of final regulations (the “Final Regulations”) that the United States Internal Revenue Service issued on June 28, 2024, there will now be a Form 1099-DA (not yet released) on which custodial brokers will be required to report sales and exchanges of digital assets, including cryptocurrency. The reporting requirement will go into effect in 2026 for sales and exchanges in calendar year 2025. In addition, starting in 2027 (for transactions on and after January 1, 2026), brokers will be required to also report information on the tax basis for certain digital assets.
The Final Regulations exclude brokers that do not take possession of the digital assets being sold or exchanged (decentralized or non-custodial brokers). The IRS intends to provide rules for these brokers in a different set of final regulations.
The cryptocurrency industry engaged in a comment letter campaign after the proposed rules were made public in August 2023, arguing that the proposed regulations were too broad, would be difficult to implement and violated privacy rights. Indeed, the IRS said that it reviewed more than 44,000 public comments on the proposed regulations.
The Treasury Department was quick to point out that owners of digital assets always owed tax on the sale or exchange of digital assets, and the Final Regulations did not change that or impose any new taxes on digital assets. Rather, the purpose of the Final Regulations was to “ensure that owners of digital assets receive the information they need from brokers to file their taxes more accurately, more easily, and less expensively, and that the IRS has the information needed to address the tax evasion risks posed by digital assets.”
Recognizing that new reporting requirements can pose challenges, the IRS provided transitional and penalty relief. Under Notice 2024-56, according to the IRS, there is:
[G]eneral transitional relief from reporting penalties and backup withholding for any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, provided that the broker makes a good faith effort to comply with the reporting obligations. Additionally, the notice provides more limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.
In addition, under Notice 2024-57, pending further guidance from the IRS, brokers will not have to file information concerning the following: (1) wrapping and unwrapping transactions, (2) liquidity provider transactions, (3) staking transactions, (4) transactions described by digital asset market participants as lending of digital assets, (5) transactions described by digital asset market participants as short sales of digital assets, and (6) notional principal contract transactions.
