From the IRS release in June 2024, there will be more reporting requirements to digital and crypto brokers (the ones taking possession or custody of those assets, similar to financial institutions that take custody of securities (stock, bonds, etc.) and release a 1099 Brokerage at year end). As included in the guidance, there is no additional requirement for market makers or brokers that do not take possession, which are decentralized or non-custodial brokers (similar to Nasdaq or other markets where transactions are exchanged but they do not hold the security). However, the IRS is preparing regulations for this other decentralized or non-custodial brokers.
As stated in the IRS article, “… The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The majority of digital asset transactions today occur using these brokers. By focusing first on this group, the IRS intends these regulations to cover the greatest number of taxpayers while allowing the IRS and U.S. Treasury Department more time to consider the nuances of transactions involving non-custodial and decentralized brokers.
The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers. The U.S. Treasury Department and the IRS intend to provide rules for these brokers in a different set of final regulations.”
Additionally, the release made reference to the requirement of Real Estate professional to disclose the fair market value of digitals assets as some real estate transactions have been made using crypto currencies and digital assets. As stated in the IRS article, “... Real estate professionals are also required to report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026.”
More recently (August 2024), the IRS released a update in the draft version of Form 1099-DA – Digital Assets proceeds (it might sound familiar to the 1099-B Brokerage transactions) that allowed comments up to early September 2024 and the IRS is working on finalizing the form that will include all relevant tax information. The IRS Commissioner Danny Werfel mentioned that “… We know third-party reporting greatly improves compliance with the nation’s tax law. This step will also help us make sure digital assets are not used to hide taxable income, including in high-income categories, while providing taxpayers who play by the rules more information to accurately report their income.” Our expectation is that the crypto transactions will require more and more transparency and there will be more forms filed with the IRS from exchanges and “custodian or holder” entities in the crypto markets.
The purpose of this additional reporting requirements is that the IRS will have access to data for enforcement purposes and there is no taxpayer underreporting or not reporting digital or crypto transactions in his/her tax return. For professional tax advice on digital assets or crypto currencies, please, reach out to our team.
Link Journal of Accountancy – IRS releases updated draft of Form 1099-DA for digital assets
