The IRS’s new proposed regulations requiring brokers to report sales and exchanges of digital assets are likely to result in higher tax bills for investors. “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,” said IRS Commissioner Danny Werfel upon release of the rules.
Broker reporting was enacted as part of the 2021 bipartisan Infrastructure Investment and Jobs Act, P.L. 117-58. In addition to requiring broker reporting, the law requires both individuals and businesses who receive $10,000 or more in digital assets to report to the IRS the name, date of birth and Social Security number of person who made the transfer. The requirement is set to take effect in 2024, although full implementation of the broker reporting rules will be done in stages. The extended effective dates for 2024-2026 are explained below.
Proceeds Reported on New Form 1099-DA
Brokers must report gross proceeds to the IRS on new Form 1099-DA and must send payee statements to customers. The digital asset form, which is not yet available, is much like the existing Form 1099-B, and proceeds from Broker and Barter Exchange Transactions. The broker reporting requirement also covers digital asset trading platforms, digital asset payment processors and digital asset hosted wallet providers. Brokers will be required to include gain or loss and basis information for sales on these information returns and statements, so their customers have the information needed to prepare their tax returns.
Real Estate Transactions Covered
Real estate reporting persons and entities, such as title companies, closing attorneys, mortgage lenders and real estate brokers, are treated as brokers for dispositions of digital assets. Now, they must report digital assets paid as consideration by real estate purchasers to acquire real estate. They also must include the fair market value of digital assets paid to the sellers of the real estate. Reporting is done on Form 1099-S, and proceeds from Real Estate Transactions.
Basis and Gain/Loss Computations
The new rules include guidance on how to calculate gain or loss, how to determine basis and when backup withholding is required. Special basis rules provide that the initial basis of digital assets exchanged for property is the fair market value of the asset plus allocable transaction costs.
Effect and Effective Dates
The IRS has asked for public comments on the proposed regulations to be submitted by October 30, 2023. A public hearing is scheduled for November 7. The effective dates in the new rules may change after that; however, as of now, broker reporting of gross proceeds takes effect on January 1, 2025. Real estate reporting applies to transactions that close on or after January 1, 2025. The gain/loss calculation and basis rules take effect for sales and exchanges as of January 1, 2026.
Now, third parties will be responsible for reporting income from digital assets to the IRS, and the IRS will match that reporting against your tax return. This compliance strategy is effective and is the IRS’s answer to reduced funding and the perceived problem with digital asset transaction income falling through the cracks. Digital investors will need to factor the tax burden into their investment decisions going forward and be careful to report the proper amount of income from payee statements.