Through the Looking Glass: US Internal Revenue Service Finalizes Cryptocurrency Tax Reporting Regulations

In August 2023, the US Internal Revenue Service (“IRS”) proposed regulations to fulfill the Congressional mandate to require US tax reporting of digital asset transactions by brokers and other intermediaries.¹  After evaluating more than 44,000 comments, the IRS has reworked the proposed regulations and issued them in final form. The final regulations were published in the Federal Register on July 9, 2024, and will generally be effective for transactions undertaken in 2025 and thereafter. This means actual reporting must be made beginning in 2026. This Legal Update updates our 2023 Legal Update on the proposed regulations and summarizes, in Q&A format, the key takeaways from the final regulations and the changes from the proposed regulations.

I. What Transactions Will Be Subject to Information Reporting?

The final regulations retain the proposed regulations’ mandate that most dispositions of digital assets will be subject to information reporting, including dispositions for cash, digital assets that differ “materially in kind or extent,”²  stored value cards, broker services or certain other property.³  Under an IRS Notice published with the final regulations, reporting is reserved with respect to certain exchanges of digital assets for other digital assets.

Dispositions must be reported on new IRS Form 1099-DA.⁴  While the direct purchase of goods and services with cryptocurrencies generally will not be subject to reporting, if the property acquired is subject to other reporting requirements (including for stock and real estate), the cryptocurrency used to acquire that property becomes reportable. And, although direct purchases paid for with cryptocurrency are not subject to reporting, if the transaction is processed by an intermediary, the intermediary will have tax reporting requirements as a digital asset middleman. Cryptocurrencies received in hard forks and airdrops are not subject to reporting. Loans of digital assets are exempt from information reporting. But the IRS has stated that is likely to change this regulation in the future.

Derivatives

Speaking of financial transactions involving cryptocurrencies, tax reporting for option and forward contract transactions will be determined based on whether the option or forward contract is blockchain-traded, not based on the property subject to the option or contract.⁵  If the option or forward contract is not blockchain-traded, even if the derivative references a digital asset, it remains subject to the existing regulations for option and forward contract reporting.⁶  In the case of both options and forward contracts that are not blockchain-traded, however, if the option or forward is physically settled in cryptocurrency, digital asset reporting will be required for the settlement. Other physically settled derivatives involving cryptocurrencies also will be subject to information reporting.⁷  This regime extends to swaps as well; although swaps generally are exempt from information reporting, if the swap if blockchain-traded, it is subject to digital asset reporting. Under a Notice issued contemporaneously with the final regulations,⁸  however, this reporting is currently suspended while the IRS considers this issue further.

If a broker executes a transaction that is internal to its platform, such as matching buy-sell orders with inventory instead of by purchasing cryptocurrency in an open market transaction to fill an order, the transaction remains subject to information reporting. Reporting will be required even if the exchange ledger is not widely distributed (e.g., it is private or permissioned).

The final regulations refine the rules for dual classification assets for US federal tax purposes; that is, an asset that is both a digital asset and a security or commodity. (The final regulations set the reporting obligations for real estate held through a distributed ledger under the real estate reporting regulations.) Stablecoins are treated as digital assets and are not treated as dual classification assets. If a transaction constitutes both a securities transaction and a digital asset transaction, it will be reportable only as a digital asset transaction.⁹  Similarly, the digital asset reporting regulations, and not the commodity reporting regulations, will apply to digital asset transactions that also meet the definition of a commodity transaction. (The definition of commodity has been expanded to include assets that are self-certified to the Commodity Futures Trading Commission.)

The IRS issued several exceptions to the regulations described above:

1. Digital asset reporting is not required on transfers of digital assets between regulated financial entities to facilitate processing, clearing, or settlement of orders on certain limited-access networks;
2. Blockchain-traded Section 1256 contracts (“60/40 contracts”) remain subject to securities reporting requirements and not digital asset reporting, even if blockchain-traded;
3. Blockchain-traded money market funds remain subject to securities reporting and not digital asset reporting;
4. Digital asset reporting is not required on closed-loop transactions in which the cryptocurrency cannot be sold outside the system for fiat currency (which does not include permissioned ledger platforms); and
5. Digital asset reporting is not required on transfers of loyalty nonfungible tokens (“NFTs”) that cannot be exchanged outside of a program’s closed network.

De Minimis Exceptions

The final regulations introduce de minimis thresholds for reporting sales of qualifying purchases of digital assets from processors of digital assets payments (“PDAP”) (i.e., disposition of digital assets for cash, different digital assets, broker services, etc.), qualifying stablecoins, and non-financial NFTs, as well as alternative aggregate reporting for qualifying stablecoins, annual PDAP transactions of $600 or less, and certain NFTs.¹⁰  There is a $25,000 annual de minimis exception for qualifying stablecoin transactions.

Payments of gas fees, staking fees, and like amounts are treated as dispositions of cryptocurrency under the proposed regulations. Accordingly, the payment of these fees will trigger tax reporting. There is no de minimis exception for these types of dispositions.

II. Who Will Be Required To Provide Information Reporting on Digital Asset Transactions?

The new reporting requirements apply to “brokers,” including digital asset middlemen.¹¹  For US federal tax purposes, a broker includes digital asset platforms, payment processors, hosted wallet providers, and issuers of cryptocurrencies that regularly offer to redeem their digital currencies, such as stablecoin issuers. Digital asset middlemen include “any person that provides facilitative services that effectuate sales of digital assets by customers,” provided that such person is in a position to know the identity of the party that makes the sale and the nature of the transaction.¹²  Generally, a person that controls the payment services for cryptocurrency payments will be considered to have the ability to control the transaction. Regularity of activity will bear on whether a person is acting as a broker.

The final regulations do not include reporting requirements for non-custodial digital asset trading platforms and unhosted digital asset wallet providers. The IRS continues to study whether non-custodial platforms should have reporting responsibilities.

The final regulations narrow the reporting rules for PDAPs. PDAPs have reporting responsibilities only if the processor has the right to obtain customer information under its anti-money laundering requirements. PDAPs are further limited to companies that have agreements with buyers to provide services. Accordingly, a PDAP attached to a seller won’t have reporting obligations. In addition, a PDAP doesn’t have a reporting obligation unless it takes possession of the cryptocurrency.

A significant change from the proposed regulations is that the IRS scaled back the definition of “broker” to exclude non-custodial industry participants (e.g., decentralized finance exchanges and unhosted digital asset wallet providers). An unhosted wallet provider that solely provides the software for a consumer to hold and transfer digital assets—and that does not, and cannot, process gross proceeds—will not be treated as a broker for US federal tax purposes.¹³  Hosted wallet providers that electronically store the private keys to digital assets on behalf of users, as well as payment processors, including credit card companies, that facilitate the payment for cash, goods, other cryptocurrencies, and services for cryptocurrencies, however, will be treated as brokers for US federal tax purposes. The final IRS regulations do not impact other regulatory analyses.

One major concern of the proposed regulations was cascading reporting—that is, each broker in a chain or reportable transaction was required to file an IRS Form 1099-DA. The final regulations seek to mitigate this over-reporting by foreshadowing changes to the IRS Form W-9. The to-be-revised IRS Form W-9 will contain a box allowing a digital asset broker to certify that it will undertake reporting, thereby relieving the Form recipient from duplicative reporting. Cascading reporting is ameliorated for broker fees, which, under the final regulations, can be reported together with the transaction generating such fees.

Stablecoin issuers that redeem their stablecoins for cash are treated as brokers for US federal tax purposes. As stated above, merchants that accept digital assets for goods and services, however, will not be treated as brokers for US federal tax purposes.

The final regulations exempt non-US brokers (other than foreign partnerships controlled by US persons) from the cryptocurrency tax reporting regulations on US persons. The IRS expects that final regulations will be provided once the United States adheres to the OECD crypto-asset reporting framework (“CARF”). The preamble to the final regulations states that, for US federal tax purposes, foreign brokers reporting certain sales of cryptocurrencies under the CARF regime will be exempt from the new reporting regulations, as they will providing information via that regime.

Complex regulations are proposed to distinguish sales effected by US brokers, non-US brokers and controlled foreign corporations.

III. Which Assets Will Be Subject to Reporting?

The final regulations retain the rule that stablecoins and NFTs—in addition to cryptocurrencies—are subject to new reporting requirements. The final regulations permit sellers to specifically identify which digital assets have been sold, allowing taxpayers to dispose of high-basis assets prior to disposing of low-basis assets. In the absence of a taxpayer identification, a broker must report dispositions on a FIFO (first-in, first-out) basis.

IV. Who Is Exempt from Information Reporting?

The existing list of tax reporting “exempt recipients” will carry over to the cryptocurrency reporting regime. Accordingly, most foreign persons, corporations, financial institutions, and tax-exempt organizations will not be subject to cryptocurrency tax reporting. In a reversal of the position taken in the proposed regulations, transactions between digital asset brokers will be exempt from reporting for US federal tax purposes.

V. What Must Be Reported Under the Proposed Reporting Regulations?

The final regulations reduce the information to be reported by the broker to the IRS and the taxpayer to the following five items:

1. Name, address, and taxpayer identification number of the payer;
2. Gross proceeds (dollars or the dollar fair market value of goods and services, reduced by transaction costs);
3. Transaction ID (if any);
4. Consideration received for the cryptocurrency (which may be determined by a digital asset aggregator); and
5. If the transaction involves a hosted wallet, the information necessary to identify the wallet and the amount originally transferred into the wallet.

Special reporting regulations are provided for tokenized securities to ensure compliance with wash sale reporting. Tokenized securities include any asset required to be registered with the Securities and Exchange Commission. Stablecoins, however, are not treated as tokenized securities.

VI. When Will These Regulations Be Applicable?

As noted above, the final reporting regulations generally are effective for transactions undertaken in 2025. Basis reporting, however, is delayed. Although Section 80603(b)(1) of the Infrastructure Investment and Jobs Act mandates basis reporting requirements for cryptocurrency acquisitions that occur on or after January 1, 2023, the final regulations mandate basis reporting for digital assets acquired in 2026 and after (as opposed to the 2023 date in the proposed regulations). In addition, when a customer transfers digital assets to a new broker, the transferring broker will not be required to provide the basis information to the transferee broker (for now). Brokers may not rely on customer-provided information for basis information.

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Mark Leeds (mleeds@mayerbrown.com; (212) 506-2499) is a tax partner, and Don F. Irwin (dirwin@mayerbrown.com; (212) 506-2792) is a corporate associate, with Mayer Brown LLP’s New York office. Mark’s professional practice focuses on the federal income tax considerations and planning for a variety of capital and digital asset market transactions. Don’s practice focuses on the regulatory and structural considerations posed by individuals and companies working in the digital asset space.

 

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¹ At that time, Mayer Brown issued a Legal Update that described the proposed digital asset reporting rules. 

² The final regulations do not offer any guidance on when the IRS believes that one cryptocurrency materially differs from another cryptocurrency.

³ Treas. Reg. § 1.6045-1(a)(9).

⁴ The final IRS Form 1099-DA is yet to be released as of the date of publication; however, a draft form was provided in April 2024.

⁵ Treas. Reg. § 1.6045-1(e)(9)(ii).

⁶ Treas. Reg. § 1.6045-1(e)(9)(i).

⁷ Treas. Reg. § 1.6045-1(a)(9)(ii)(A)(3).

⁸ Notice 2024-57.

⁹ Treas. Reg. § 1.6045-1(c)(8)(i).

¹⁰ Treas. Reg. § 1.6045-1(a)(9)(ii)(D).

¹¹ Treas. Reg. § 1.6045-1(a)(1).

¹² Treas. Reg. § 1.6045-1(a)(10). The “position to know” standard is taken from the Financial Action Task Force (“FATF”) recommendations.

¹³ Treas. Reg. § 1.6045-1(a)(1).