Proposed regulations around digital asset information reporting

In brief

Treasury and the IRS on August 25 issued lengthy proposed regulations (Proposed Regulations) regarding information reporting, determination of the amount realized and basis, and backup withholding for certain digital asset sales and exchanges. 

The regulations, if finalized as proposed, would impose obligations to file information returns and furnish payee statements on dispositions of digital assets based on companies engaging in a broad array of services or activities related to digital assets. 

Key provisions of the Proposed Regulations would: 

• define “digital assets” subject to reporting;
  
• address reporting in cases in which a digital asset also represents an asset reportable under another reportable category (e.g., securities, commodities, or real estate);
• expand the definition of “broker” to include both traditional brokers (like dealers, barter exchanges, and any other person who for consideration regularly acts as a middleman with respect to property or services) and any party providing “facilitative services” (which can include digital asset payment processors, certain digital asset wallets, and other service activities); 
• identify circumstances in which reporting is not required (such as for certain merchants and validators); 
• provide the information to be reported individually, and not in aggregate, on such transactions; and
• propose substantive tax rules regarding the computation of the amount realized, the determination of basis, and the allocation of costs related to certain digital asset transactions.

The preamble to the Proposed Regulations solicits feedback on over 100 specific matters. 

These reporting requirements generally are proposed to become effective for sales and exchanges of digital assets effected on or after January 1, 2025, with later effective dates for basis reporting and transfer statements. 

Written or electronic comments on the Proposed Regulations must be received by October 30, 2023. A public hearing on the regulations has been scheduled for November 7 (and November 8, if needed). Requests to attend the hearing(s) must be made by November 3. 

Action item: Any person who facilitates the disposition or transfer of digital assets should review the Proposed Regulations and consider submitting comments or participating in the public hearing. Companies also should assess (1) what data they collect about customers, users, and transactions and (2) their information reporting systems, processes, and documentation to identify what alterations may be required in seeking to comply with these regulations if adopted as proposed. Significant implementation efforts likely will be required based on the (1) expansive scope of broker and transactions in scope, (2) specific information to be obtained and reported, and (3) presumption rules if certain data is not available.