On August 25, 2023, the IRS issued proposed regulations that would require brokers to report sales and exchanges of digital assets by customers, a move that is intended to make digital asset tax reporting similar to the tax reporting required for other financial assets. (Preamble to Prop Reg REG-122793-19; IR 2023-153)
The proposed regulations cover several areas, including defining brokers and requiring proceeds to be reported to the IRS on new Form 1099-DA.
Beginning on January 1, 2025, the proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, to report gross proceeds from the sale or exchange of digital assets on a newly developed Form 1099-DA. Furthermore, the proposed regulations would require brokers to provide payee statements to customers. Additionally, under certain circumstances, brokers would also be required to include gain or loss and basis information for sales that take place on or after January 1, 2026, so that customers can use the information to complete their tax returns.
The proposed regulations’ reach would also extend to what are referred to as real estate reporting persons, such as title companies, closing attorneys, mortgage lenders and real estate brokers. A real estate reporting person would be required to report the disposition of digital assets paid as consideration by real estate purchasers to acquire real estate in real estate transactions that close on or after January 1, 2025. Real estate reporting persons would also need to include on Form 1099-S the fair market value of digital assets paid to sellers of real estate in real estate transactions that close on or after January 1, 2025.
Finally, the proposed regulations outline gain (or loss) computation rules, basis determination rules and backup withholding rules for digital asset sale and exchange transactions. (See Prop Reg §1.1001-1) Taxpayers may rely on the gain/loss computation rules for dispositions in tax years ending on or after August 29, 2023.
A public hearing has been scheduled for November 7, 2023, to discuss the proposed regulations.
Please contact your trusted advisor at Reese Henry & Company if you have any questions about how the new proposed regulations may impact your tax reporting obligations.