IRS Issues Transitional Relief for Digital Asset Reporting

IRS Digital Asset Reporting: Key Updates for 2025 and Beyond

As part of the Infrastructure Investment and Jobs Act (IIJA), the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) were tasked with creating regulations to address information tax withholding and reporting obligations for digital assets. The Treasury released final regulations with regards to digital assets on December 27, 2024. This update highlights reporting requirements for trading front-end service providers interacting directly with customers on digital asset transactions, often referred to as “DeFi brokers.” These regulations represent a significant step toward standardizing digital asset reporting, aligning it with traditional financial systems, and fostering a more transparent marketplace.

These rules mandate that brokers, rather than digital asset holders, report gross proceeds from sales via Form 1099. By doing so, the regulations aim to reduce errors and noncompliance, making tax filing more straightforward and cost-effective for taxpayers. Additionally, the IRS published Notice 2025-03 providing transitional relief under Sections 3406 for back withholding and 6045 for information reporting, their implications for stakeholders, and the broader trajectory of digital asset regulation.

Transitional Relief Under Section 6045: A Brief Overview

Section 6045, which governs broker reporting requirements, has been extended to encompass digital assets. This represents a significant step toward enhancing transparency in an industry that has often been criticized for its opacity. The transitional relief aims to provide brokers, trading platforms, and other intermediaries with additional time and guidance to meet new reporting standards effectively.

Key Provisions

1. Expanded Definition of Brokers and its Impact

• The transitional relief under Section 6045 broadens the definition of “broker” to include digital asset exchanges, wallet providers, and other service platforms that facilitate trading.

• This expanded scope ensures that a wider array of entities will be subject to information reporting requirements, fostering uniformity and accountability across the digital asset ecosystem.

2. Phased Implementation Timeline for Compliance​

• Recognizing the complexities associated with integrating new reporting systems, the IRS has introduced a phased approach to compliance.

• The transitional period allows affected entities to adjust their systems, processes, and workforce to align with these regulatory changes without incurring immediate penalties.

• Reporting was previously required to start for transactions as of January 1, 2025 with withholding set to begin for 2026 transactions. However, the new transition relief pushes the timeline back 2 years with the reporting requirements for transactions beginning in 2027 and withholding to affect transactions starting in 2028.

3. Reporting Obligations

• Brokers will be required to report digital asset transactions, including cost basis and holding periods, enabling taxpayers to calculate gains and losses accurately.

• This obligation addresses a key gap in the tax reporting process, particularly for digital assets traded across multiple platforms.

4. Safe Harbor Provisions

• To mitigate undue burdens, the IRS has introduced safe harbor provisions that protect entities making good-faith efforts to comply during the transitional period.

• These provisions aim to encourage early adoption of reporting standards while acknowledging the challenges of full compliance.

Implications for the Digital Asset Industry

The transitional relief under Section 6045 marks a pivotal moment for the digital asset sector. By introducing clear reporting requirements, it strengthens the bridge between traditional financial systems and the emerging world of digital assets. Key impacts include:

• Enhanced Market Integrity: Uniform reporting rules reduce information asymmetry, fostering greater trust among investors.

• Operational Challenges: Trading platforms and brokers must invest in robust compliance infrastructure, including software upgrades and staff training.

• Regulatory Precedent: This move signals a broader trend toward regulatory standardization, which could influence global frameworks for digital assets.

Another factor to consider is the upcoming presidential administration change. There have been signals of a potential shift toward deregulation in various sectors, and questions remain about how this could impact digital asset reporting requirements. A deregulatory approach might lead to a relaxation of some of the current rules, potentially reducing the burden on brokers and trading platforms. However, it could also introduce challenges in maintaining the transparency and accountability these regulations aim to achieve. Stakeholders should remain vigilant, as any changes in regulatory priorities will require adaptability and strategic planning to ensure compliance and maintain trust in the digital asset ecosystem.

A Step Toward the Future Global Digital Asset Reporting Standards

The transitional relief under Section 6045 is more than just a temporary reprieve; it is a strategic measure to balance immediate compliance needs with long-term regulatory goals. Etities that embrace these changes proactively will not only ensure compliance but also position themselves as leaders in an increasingly regulated and competitive industry. By collecting more information from brokers, taxpayers engaging in DeFi transactions will receive clearer guidance through Form 1099, reducing inadvertent errors and saving time and money during the filing process.

While the transitional relief under Section 6045 may pose short-term challenges, its potential to drive systemic improvements in digital asset reporting cannot be overstated. By fostering transparency, accountability, and operational readiness, this development paves the way for a more mature and resilient digital asset ecosystem. As the Treasury and IRS refine these frameworks, the balance struck between regulatory clarity and operational flexibility will serve as a model for future global digital asset reporting standards, ensuring that all stakeholders can navigate this evolving landscape effectively. Simultaneously, the industry must prepare for potential shifts in the regulatory environment under new administration leadership, balancing the benefits of reduced regulatory burdens with the necessity of maintaining market integrity and trust.

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