IRS Regulatory Framework for addressing tax information reporting for Digital Assets

Proposed regulations for addressing tax information reporting for Digital Assets

On August 25, 2023, the Department of Treasury and the IRS released long-awaited proposed regulations addressing information reporting for digital assets, including cryptocurrencies. The 280+ page document lays out a regulatory framework for addressing tax information reporting for digital assets.

The proposed regulations are expansive, and areas addressed in the regulations include digital asset broker information reporting, cost basis reporting, backup withholding and new reporting rules for foreign exempt entities of U.S. brokers. Fundamental to the proposed regulations is the definition of what is a broker of digital assets.  The regulations broadly define a “broker” to include custodial brokers, digital asset trading platforms, decentralized exchanges, digital asset payment processors, digital asset issuers and certain digital asset hosted wallets, among others.

The regulations are to apply to sales or exchanges of digital assets that take place on or after Jan. 1, 2025. Initial broker obligations include reporting gross proceeds on a newly developed Form 1099-DA to the IRS and to customers for Tax Year 2025. From January 1, 2026, the regulations add cost basis reporting obligations.

Below are highlights from the draft regulations for (1) data required to be reported and (2) onboarding obligations for brokers.

Data required for tax information reporting

The proposed regulations require specified information to be reported on digital asset sales occurring on or after January 1, 2025. The broker is to report on an information return

Customer information

• Name
• Address
• Taxpayer identification number

Transaction information

• Name
• Number of units of the digital asset sold
• Sale date and time
• Gross proceeds
• Transaction ID
• Digital asset/wallet address (or addresses if multiple) from which the digital asset was transferred.
• Sale information (cash, stored-value cards, or in exchange for services, or other property)

Transfer information

• Transfer Date and time
• Transfer Transaction ID
• Transfer digital asset/wallet address (or digital asset addresses if multiple) from which the digital asset was transferred,
• Number of units transferred.
• Transaction costs paid using digital assets

For preparation of the upcoming regulations, those acting as “brokers” for digital assets should review the needed data elements, identify gaps and plan for the collection and reporting of this information.  

Documentation/Onboarding obligations

Customer Personal Data

To comply with 1099 reporting, Digital Asset Brokers will need to know specific information for tax reporting purposes, including:

• Identification of accounts as US or non-US
• Collection of names, addresses, and US Tax Identification Numbers (TIN).

Properly documenting payees at onboarding will be crucial for establishing payees tax status and handling payees properly. The regulations call out specifically where Form W-9 can establish the collection of Certified US TINs. Documentation, as mentioned in the regulations, can also assist with establishing payee status and certain obligations including:

• Exempt recipient – a broker may treat a customer as an exempt recipient based on a Form W–9, Request for Taxpayer Identification Number and Certification.

• Exempt foreign person - to treat the customer as an exempt foreign person a broker can obtain a beneficial owner withholding certificate, such as a Form W–8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals).

• Customers not subject to Back up withholding - a broker that fails to obtain a valid Form W–9 for a customer may be subject to backup withholding.

These rules are nuanced for establishing customer tax status. Both U.S. and non-U.S. digital asset Brokers should review onboarding procedures and systems for documentation validation processes and options for establishing customer tax status and data. Digital tools, such as TAINA’s tax form validator, can assist with efficient and effective collection and validation for tax purposes of customers.

Next steps for Draft Digital Asset Regulations

Planning

• Regulations are only draft, but brokers can begin scoping the efforts needed for compliance.  January 2025 provides 18 months for planning and implementation of compliance. Systems and processes will need to be reviewed, requirements need to be written, and updates will need to be implemented and tested. With only draft regulations and final regulations release date unknown, this leads to less time than one may think there is.

 Areas that can be reviewed and assessed based on the proposed regulations include:

• Determining if and when an organization is a digital asset “broker.”
• Onboarding procedures and ability to document customers for tax purposes.
• Ability to accommodate withholding.
• Capability to timely remit withheld taxes to IRS.Capability to timely remit withheld taxes to the IRS.
• Ability to report information for tax purposes currently and in the future (e.g., determining gross proceeds and calculating fair market value).
• Cost basis current capabilities and what is needed in the future (e.g., ability for customers to select accounting method to use).
• Ability to account for transaction costs between exchanged digital assets.
• Ability to account for foreign exempt entities of US brokers.

Further evaluations will need to occur once the regulations are final. The date of which is unknown.

Draft regulations and comments

The proposed regulations provide initial guidance regarding dates and confirm use of a new form. The regulations also raise questions.  The draft regulations themselves contain about around 50 questions the IRS is seeking comments on (about 10 pages of the document). This sets the expectation that there will be further updates and revision from the proposed to final regulations. Written comments regarding the proposed regulations must be submitted by Oct. 30, 2023. A public hearing has been scheduled for November 7, 2023.

How Can TAINA Help? 

TAINA continues to monitor the crypto tax regulatory environment and track the progress of the IRS draft digital asset regulations. As the digital asset regulatory framework will only continue to grow, we believe having automated compliance solutions which adapt and are easy to update will be fundamental for achieving compliance with the released crypto and digital asset information reporting requirements.

TAINA’s advanced software can provide an automated process for solicitation, processing, and maintenance of tax forms from clients and provides for withholding and information reporting data for operational processes. 

We would value speaking with you about your compliance process and how our award-winning FATCA and CRS Validation platform may help you comply with the proposed Crypto and Digital Asset Reporting Requirements.