New IRS Rules Require BDs to Report Sales, Exchanges of Digital Assets

The Treasury Department and the Internal Revenue Service have issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency.

The reporting requirements “will help taxpayers to file accurate tax returns with respect to digital asset transactions, which are already subject to tax under current law,” according to IRS and Treasury.

The final regs require brokers to report certain sale and exchange transactions that take place beginning in calendar year 2025 and will be reported on the soon-to-be released Form 1099-DA.

“These regulations are an important part of the larger effort on high-income individual tax compliance,” IRS Commissioner Danny Werfel said in a statement. ”We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets.”

IRS research and experience “demonstrate that third-party reporting improves compliance,” Werfel said. ”In addition, these regulations will provide taxpayers with much needed information, which will reduce burden and simplify the process of reporting their digital asset activity.”

The final regulations reflect consideration of more than 44,000 public comments received last fall on the proposed regulations, according to Werfel. Reporting is required by brokers who take possession of the digital assets being sold by their customers.

“These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The majority of digital asset transactions today occur using these brokers,” the IRS said.

The regs implement reporting requirements by the Infrastructure Investment and Jobs Act, enacted in 2021.

“This is welcome news and long overdue,” Ric Edelman, founder of the RIA Edelman Financial Engines (earlier Edelman Financial Services) who now leads the Digital Assets Council of Financial Professionals, told ThinkAdvisor Monday in an email.

“More than 50 million Americans own bitcoin and other digital assets, so these rules are essential,” Edelman said. “Trillions of dollars in capital gains have [been] generated over the past decade, and it’s a good bet that the IRS has not collected taxes on most of those profits. This is partly because of willful tax evasion, but also because honest taxpayers don’t understand their obligations and aren’t provided the information they need to report gains on their tax returns.”

The new rules issued by the IRS “solves both of these problems: by requiring crypto exchanges to issue 1099s, tax evaders will find it far more difficult to cheat. And honest taxpayers will find it as easy to report their crypto gains as they have long done for their stocks, bonds, mutual funds and ETFs,” Edelman added.

“The IRS will collect much-needed (and rightly owed) tax revenue,” Edelman said. ”Honest taxpayers will be able to satisfy their obligations easily and conveniently. And tax cheats will go to prison. Great news all around!”