Treasury Releases Proposed Regulations on Reporting and Basis Determination for Digital Asset Transactions

The release of long-awaited proposed regulations the Treasury Department marks a significant step in clarifying information reporting and basis determination rules for digital asset transactions. Enacted in November 2021, the Infrastructure Investment and Jobs Act (IIJA) introduced reporting requirements for digital asset transactions. The proposed regulations aim to address the administrative burden of filing taxes and provide clarity in the crypto ecosystem.

The regulations define “digital asset brokers” as individuals or entities that provide facilitative services for the sale of digital assets and have knowledge of the transaction details. Centralized exchanges are included in this definition, while crypto miners and stakers are explicitly excluded. The status of digital asset wallet providers and decentralized financial protocols falls into a gray area. The Treasury has established a multifactor test based on facts and circumstances to determine if a protocol is truly autonomous.

The proposed regulations do not mention a specific Form 1099-DA, which has been teased the IRS. However, it is believed that a new form will be introduced to report data points that are not currently covered Form 1099-B, such as transaction hashes or wallet addresses.

The regulations will be phased in gradually to promote voluntary compliance. Beginning January 1, 2023, digital asset brokers will need to provide cost basis information for transactions. Mandatory reporting of gross proceeds will start in tax year 2025, followed adjusted cost basis reporting in tax year 2026.

A public rulemaking hearing is scheduled for November 7, with the possibility of a second day to accommodate a high number of speakers. Feedback and comments during this period will help refine the proposed regulations.

Overall, the proposed regulations demonstrate the Treasury’s commitment to understanding the crypto ecosystem and aim to make tax reporting easier for individuals. These regulations provide much-needed clarity and guidance for brokers and taxpayers alike.

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