Safe Harbor Gives Brokers Only Months to Reallocate Basis for Digital Assets
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The Internal Revenue Services (IRS) released final regulations requiring “custodial” digital asset brokers to report sales and exchanges of digital assets, including cryptocurrency, beginning in 2026 for transactions in calendar year 2025. The final regulations, which implement the reporting requirements enacted by the Infrastructure Investment and Jobs Act of 2021, implement major changes with little time for brokers to prepare.
In perhaps the biggest change for brokers, the regulations require a new approach to the reallocation of basis. Critically, taxpayers have only until January 1, 2025 to use a simplified method for reallocating basis, giving the industry a small window to make the change more easily. In another significant change, brokers must use the forthcoming Form 1099-DA, Digital Asset Proceeds From Broker Transactions to report a range of information. Lastly, the regulations provide a new option for reporting transactions on an aggregate basis.
Basis Reporting and January 1, 2025 Deadline
Beginning in 2027, custodial brokers must report a customer’s tax basis and capital gain for certain digital assets for sales in calendar year 2026. The regulations require a “wallet-by-wallet” approach to digital asset identification in place of the current “universal wallet” approach in which taxpayers track basis as if all digital assets are in a single wallet. Under this approach, brokers track basis to specific digital assets, but they must use the first-in, first-out (FIFO) rule for basis if they are unable to identify the specific asset prior to or at the time of the sale.
As part of the transition process, the IRS issued Revenue Procedure 2024-28, creating a safe harbor for the allocation of unused basis held within each wallet or account as of January 1, 2025. The safe harbor allows taxpayers who track basis through a single account to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units based on the taxpayers’ records of unused basis and remaining units in those wallets or accounts. The allocation must be made by January 1, 2025, after which taxpayers must allocate basis under the final regulations.
Information Report on Forthcoming Form 1099
Custodial brokers, who take possession of the digital assets sold by their customers, will report transactions on the forthcoming Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The IRS posted a draft of the updated Form 1099-DA. Reporting will involve a range of information, including:
- The name, address, and taxpayer identification number of the customer
- The name and number of units of the digital asset sold
- The sale date(s)
- The gross proceeds amount (after reduction for allocable digital asset allocation costs)
- Whether the sale was for cash, stored-value cards, or in exchange for services or other property
- Any other information the IRS requires.
Brokers must report proceeds from the sale of digital assets along with basis in certain cases. Brokers must also report when they know or have reason to know that a corporation in which a customer owns a digital asset that is also stock has had a reportable change in control or capital structure.
The IRS is providing transitional relief for these requirements through Notice 2024-56. The notice suspends reporting penalties for brokers who do not file information returns and furnish payee statements for the sales of digital assets during 2025 if they make “good faith efforts” to comply with regulations. The notice also provides transitional relief from the IRC Section 3406 backup tax withholding requirements.
Additionally, Notice 2024-57 exempts six types of transactions from information returns or payee statements: (1) wrapping and unwrapping transactions; (2) liquidity provider transactions; (3) staking transactions; (4) digital asset lending; (5) short sales of digital assets; and (6) notional principal contract transactions. This exemption applies until the IRS issues further guidance.
Aggregate Reporting
The regulations provide an option to report the aggregate of sales of certain stablecoins and non-fungible tokens (NFTs) that meet a de minimis threshold. Under this option, a broker may report transactions in the aggregate rather than on a transaction basis if the transactions exceed the de minimum threshold. This allows the broker to use one Form 1099-DA for reporting the proceeds of all the customer’s sales for each type of qualifying asset.
Real Estate
Real estate professionals must report the fair market value of digital assets in real estate transactions in which the buyer uses digital currency to acquire the property. This applies to transactions with closing dates on or after January 1, 2026.
Next Steps
Brokers and their customers have only a few months to prepare tracking basis attributable to digital assets. As part of their preparation, brokers should immediately begin the process of allocating basis under the safe harbor. They should also familiarize themselves with the Form 1099-DA and identify where they can use the aggregate reporting method.
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