Proposed Regulations Clarify Tax Reporting Requirements for Digital Assets

The 2021 Infrastructure Investment and Jobs Act introduced new tax reporting requirements for sales and exchanges of digital assets. In response, the IRS has released proposed regulations to provide guidance on these changes. The regulations aim to clarify the obligations of brokers in reporting certain dispositions of digital assets.

Under the proposed rules, brokers, which include traditional custodial brokers, digital asset trading platforms, digital asset payment processors, and issuers of digital assets, will be required to provide customers and the IRS with Form 1099s for qualifying transactions. However, miners and stakers are generally exempt from reporting.

The scope of transactions covered the reporting regime is broad and includes sales of digital assets for cash or other digital assets, payments to digital asset payment processors, and payments with digital assets in specific real estate transactions. The definition of “digital assets” encompasses virtual currencies, stablecoins, and other digital asset tokens, including non-fungible tokens (NFTs).

These new tax reporting rules are expected to take effect in 2026 for transactions occurring in 2025 or earlier for certain derivatives transactions. However, the proposed regulations are subject to public input and are likely to be modified before being finalized, which is anticipated to occur in 2024.

Comments on the proposed regulations, including specific questions identified the IRS and Treasury, are due October 30, 2023, and a public hearing is scheduled for November 7-8, 2023.

It is important to seek specialist advice on your specific circumstances in relation to these tax reporting requirements for digital assets.

Sources:

– Mondaq.com – “Proposed Regulations Clarify Tax Reporting Requirements for Digital Assets”

– Travers Thorp – “FinTech Comparative Guide”