IRS Digital Asset Regulations: Finalized and Published!

Finalized IRS Digital Asset Regulations

On 28th June 2024, the IRS notified the world of their finalized Digital Asset regulations for brokers' guidance to report sales and exchanges of digital assets. The official published version is not expected until 9th July, 2024, but an unpublished version is available here in the meantime. The draft of the regulations released in August of 2023, were significantly shorter than the 365 pages in this final iteration, showing that the IRS took steps to address the ambiguity highlighted in public comments.

The new regulations brought clear rules and timelines for those in the digital asset world. Major points to consider:

Broker:

Any person, U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others…”

• Includes: operators of custodial digital asset trading platforms, hosted wallet providers, and digital asset kiosks.
  • However, “broker” in these regulations does not include reporting requirements for agencies who do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers.
• Non-US digital asset brokers are currently subject to reporting on digital assets under these final regulations until CARF is implemented in the US.
  • Once implemented, non-US brokers in jurisdictions that also implemented CARF will be able to report all US customer transactions to their own jurisdiction and will not have to follow this IRS regulation.

Crypto Asset Reporting Framework (CARF):

The IRS intend to propose regulations that would, if finalized, implement CARF in sufficient time for the United States to begin exchanges of information with appropriate partner jurisdictions in 2028 with respect to transactions effected in the 2027 calendar year.

• Once the U.S implements CARF, US digital asset brokers will need to file information returns under both regulations for US customers and under CARF for non-US customers.

  • The IRS will share non-US customer information with their participating jurisdiction.
• Since the proposed CARF regulations would require additional reporting by U.S. digital asset brokers, the final regulations have been drafted taking the CARF definitions into account where feasible in order to minimize differences between the types of information that U.S. digital asset brokers are required to report under the final regulations and under upcoming proposed CARF regulations.

Onboarding Forms W-9 and W-8:

The regulations align the documentation obligations of digital asset brokers with those applicable to traditional securities brokers as described in the existing requirements for 6045 (1099-B reportable transactions). The broker shall need a certified TIN or an exemption from reporting for a foreign person who has provided a valid W-8.

W-9:

• A U.S. digital asset broker is required to collect a certified TIN, collected via W-9 for US persons.

  • Information from the W-9 will be included on reportable form 1099-DA.

W-8: 

• A U.S. digital asset broker must obtain a withholding certificate (Form W-8) to treat a customer as an exempt foreign person. This requirement ensures the broker applies the proper reliance requirements and avoids treating the customer as a foreign person under a presumption rule. If a valid Form W-8 is not obtained, the broker cannot consider the customer exempt from reporting.
  • A U.S. digital asset broker has no IRS reporting obligation if the seller is a foreign person.
• Expect a new W-9 revision to be released in the next year to allow for the identification of a new classification of exempt recipient, U.S. digital asset broker.
• Transition relief is provided:
  • There will be no penalties associated with missed withholding on transactions in 2026 if the broker submits that payee’s name and TIN combination to the IRS’s TIN Matching Program and receives a response that the name and TIN combination matches IRS records.
  • Based on current relief, all brokers effecting a sale of digital asset will need to collect a W-9 for all accounts by January 1, 2027.
  • For sales effected prior to January 1, 2027, a broker may treat a customer with an account established prior to January 1, 2026, as an exempt foreign person if the customer has not been previously classified as a U.S. person.

Ongoing Monitoring:

• Brokers should update their due diligence procedures for monitoring and responding to changes in circumstances for their customers.

  • Continuously monitor customers' activities and update their records accordingly to ensure compliance with the new information reporting requirements.

  • Brokers must act when a customer’s circumstances change and would affect the information reported. This includes updating customer information if there is a significant change in the customer’s status or activities that impact on the reporting requirements.

Reporting:

Reporting of digital assets is to be completed on form 1099-DA. The first year of reporting is for any sale transactions during TY 2025 (first reported in Jan 2026).

• Finalized form 1099-DA is still being worked on but will be changed from the Draft version published.

  • Instructions for Payer are still in process.

  • The second draft form 1099-DA was published on August 8th. This draft includes changes made from the initial published draft based on some public comments including:

    • Removal of field “Explanation if no recipient TIN”

    • Removal of box for “Broker type”

    • Simplification of identifying non-cash proceeds by a new Box 7 check box

  • Further items not clearly defined in the regulations are expected to be provided on the upcoming Instructions.

• The collection of data for reporting on 1099-DA needs to be ready by January to be compliant (just 4 months away)

• Exempt recipients should not receive a 1099, this should include new exempt recipient, U.S. digital asset broker.

• Some information will need to be collected but will not need to be reported. The items to retain include digital asset wallet addresses and transaction IDs among other essential information.

  • Record retention requirement of this data is held for 7 years, and brokers should be able to make that information available for inspection and audit.

• Transition relief is provided:

  • Brokers will not be penalized for missed reporting of 2025 transactions if they show a good faith effort to file.

Withholding

Backup withholding as required under 3406 on transactions reported under section 6045 which governs digital asset transactions. Absent a W-9 or valid foreign exemption documentation, a broker is to backup withhold at 24% upon sale of digital asset.

• Transition relief is provided:

  • For all transaction in 2025,
    • Delays the required application of backup withholding with respect to sales of digital assets.
    • Will provide brokers with additional time to develop appropriate procedures for collecting certified TIN. There will also be no penalties associated with missed backup withholding.
  • For sale of digital asset in return for NFT
  • There will be no penalties for under-withholding in the event of a digital asset for digital asset exchange in which the value of digital asset decreases before it can be liquidated for cash and falls under the 24% backup withholding value effective on transactions before December 31, 2026.

Cost basis:

The basis is to first be reported on sale transactions that occur in TY2026, giving brokers more time to get compliant for this complex requirement.

• Tracking is supposed to be backdated to the start of acquisition back to January 1, 2023

• Transfer statements are needed to identify covered securities when digital assets move between brokers.
• No transition relief has yet been announced as it was already provisioned in the regs to delay implementation of cost basis reporting requirements.

*Transition for relief was published in Notice-2024-56 (irs.gov)

Next steps for Digital Asset Regulations

The finalized IRS Digital Asset regulations mark a significant milestone for brokers, bringing much-needed clarity and structure to the reporting of digital asset sales and exchanges. These comprehensive guidelines, although extensive, aim to streamline compliance and ensure a more transparent market environment.

As the industry adapts to these changes, the transition relief provided will be crucial in aiding brokers to meet the new requirements without immediate penalties. The forthcoming implementation of the Crypto Asset Reporting Framework (CARF) further underscores the evolving regulatory landscape, signaling the need for ongoing vigilance and adaptability.

There are much more specific details to further unwind in the regulation. TAINA will continue to parse through all examples and work diligently to prepare our platform for industry needs as they are uncovered.

We would value speaking with you about your compliance process and how our award-winning validation platform may help you comply with the  CARF and Digital Asset Reporting Requirements.