DeFi brokers to file information returns and payee statements

In brief

What happened?  

Treasury and the IRS on December 27 issued final regulations (Final Regulations) classifying certain decentralized finance (DeFi) participants (DeFi participants) that provide trading front-end services effectuating digital asset sales and exchanges as “brokers” (DeFi brokers). DeFi brokers are required to file and furnish Form 1099-DA, Digital Asset Proceeds From Broker Transactions, reporting the gross proceeds on dispositions of digital assets. The Final Regulations apply to sales of digital assets effected by DeFi brokers that occur on and after January 1, 2027. DeFi brokers must file and furnish the first Forms 1099-DA in January 2028. 

The IRS concurrently issued Notice 2025-3, which provides transitional relief from penalties for DeFi brokers who fail to file required information returns and furnish required payee statements in 2028 for sales of digital assets effected in calendar year 2027, provided that the DeFi broker makes a good faith effort to comply with the filing obligations. The notice also provides transitional relief from the liability for the payment of backup withholding tax as well as from penalties for DeFi brokers who fail to pay that tax with respect to certain sales of digital assets. 

The IRS on December 31 issued Notice 2025-7 providing temporary relief allowing eligible taxpayers to use certain alternative methods for making an adequate identification of units of digital assets held in the custody of a broker that are sold, disposed of, or transferred during calendar year 2025. Taxpayers must treat the earliest acquired digital asset units held in the custody of a broker as the units sold, disposed of, or transferred unless the taxpayer provides the broker with adequate identification of the units sold, disposed of, or transferred.  

Why is it relevant? 

Treasury and the IRS on June 28, 2024 released final regulations (June 2024 Regulations) requiring Form 1099-DA to be filed by certain digital asset service providers (custodial trading platforms, hosted wallets, etc.). The June 2024 Regulations reserved for further consideration the obligation that may apply to DeFi participants. The Final Regulations impose information reporting and backup withholding obligations on DeFi brokers. These brokers will have two years to prepare for the reporting obligation.   

Action to consider 

The Final Regulations require DeFi brokers to take steps to modify their operations to enable them to comply with the information reporting and backup withholding associated with effecting digital asset sales made by US non-exempt payees (individuals, partnerships (including LLCs treated as partnerships), trusts, estates, and S-corps). DeFi brokers should review and update as necessary their current terms of service or other relevant contractual agreements with customers to address the US tax information reporting and backup withholding obligations. Existing customer onboarding processes should be modified to require the collection of US withholding certificates (Forms W-8 and W-9). DeFi brokers’ data collection and retention associated with transactions they facilitate should be reviewed and modified to ensure the data required by Form 1099-DA is available to be reported for transactions that occur on or after January 1, 2027.