Proposed Rule2023-17565
Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions
Primary source
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Published
August 29, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding information reporting, the determination of amount realized and basis, and backup withholding, for certain digital asset sales and exchanges. Based on existing authority as well as changes to the applicable tax law made by the Infrastructure Investment and Jobs Act, these proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets, to file information returns, and furnish payee statements, on dispositions of digital assets effected for customers in certain sale or exchange transactions. These proposed regulations would also require real estate reporting persons, who are treated as brokers with respect to reportable real estate transactions, to include on filed information returns and furnished payee statements the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions. Additionally, these real estate reporting persons would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in these transactions.
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[Federal Register Volume 88, Number 166 (Tuesday, August 29, 2023)]
[Proposed Rules]
[Pages 59576-59659]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-17565]
[[Page 59575]]
Vol. 88
Tuesday,
No. 166
August 29, 2023
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1, 31, and 301
Gross Proceeds and Basis Reporting by Brokers and Determination of
Amount Realized and Basis for Digital Asset Transactions; Proposed Rule
Federal Register / Vol. 88 , No. 166 / Tuesday, August 29, 2023 /
Proposed Rules
[[Page 59576]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 301
[REG-122793-19]
RIN 1545-BP71
Gross Proceeds and Basis Reporting by Brokers and Determination
of Amount Realized and Basis for Digital Asset Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations regarding
information reporting, the determination of amount realized and basis,
and backup withholding, for certain digital asset sales and exchanges.
Based on existing authority as well as changes to the applicable tax
law made by the Infrastructure Investment and Jobs Act, these proposed
regulations would require brokers, including digital asset trading
platforms, digital asset payment processors, and certain digital asset
hosted wallets, to file information returns, and furnish payee
statements, on dispositions of digital assets effected for customers in
certain sale or exchange transactions. These proposed regulations would
also require real estate reporting persons, who are treated as brokers
with respect to reportable real estate transactions, to include on
filed information returns and furnished payee statements the fair
market value of digital asset consideration received by real estate
sellers in reportable real estate transactions. Additionally, these
real estate reporting persons would also be required to file
information returns and furnish payee statements with respect to real
estate purchasers who use digital assets to acquire real estate in
these transactions.
DATES: Written or electronic comments must be received by October 30,
2023. A public hearing on this proposed regulation has been scheduled
for November 7, 2023, at 10 a.m. ET. If the number of requests to speak
at the hearing exceed the number that can be accommodated in one day, a
second public hearing date for this proposed regulation will be held on
November 8, 2023. Requests to speak and outlines of topics to be
discussed at the public hearing must be received by October 30, 2023.
If no outlines are received by October 30, 2023, the public hearing
will be cancelled. Requests to attend the public hearing must be
received by 5 p.m. ET on November 3, 2023. The public hearing will be
made accessible to people with disabilities. Requests for special
assistance during the public hearing must be received by 5 p.m. ET on
November 2, 2023.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-122793-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish any comments submitted electronically or on paper
to the public docket. Send paper submissions to: CC:PA:LPD:PR (REG-
122793-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044. Submissions may be hand-
delivered Monday through Friday between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-122793-19), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue NW, Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under sections 1001 and 1012, Kyle Walker, (202) 317-4718, or Harith
Razaa, (202) 317-7006, of the Office of the Associate Chief Counsel
(Income Tax and Accounting); concerning the international sections of
the proposed regulations under sections 3406 and 6045, John Sweeney or
Alan Williams of the Office of the Associate Chief Counsel
(International) at (202) 317-6933, and concerning the remainder of the
proposed regulations under sections 3406, 6045, 6045A, 6045B, 6050W,
6721, and 6722, Roseann Cutrone of the Office of the Associate Chief
Counsel (Procedure and Administration) at (202) 317-5436 (not toll-free
numbers). Concerning submissions of comments and requests to
participate in the public hearing, Vivian Hayes at
<a href="/cdn-cgi/l/email-protection#85f5f0e7e9ece6ede0e4f7ecebe2f6c5ecf7f6abe2eaf3"><span class="__cf_email__" data-cfemail="ef9f9a8d83868c878a8e9d8681889caf869d9cc1888099">[email protected]</span></a> (preferred) or at (202) 317-5306 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Background
These proposed regulations extend the information reporting rules
in Sec. 1.6045-1 to brokers who, in the ordinary course of a trade or
business, act as agents, principals, or digital asset middlemen for
others to effect sales or exchanges of digital assets for cash, broker
services, or property of a type that is subject to reporting by the
brokers (including different digital assets, securities, and real
estate) under section 6045 of the Internal Revenue Code (Code) or
effect on behalf of customers payments of digital assets associated
with payment card and third party network transactions subject to
reporting under section 6050W of the Code. These proposed regulations
also clarify that the definition of broker for purposes of section 6045
includes digital asset trading platforms, digital asset payment
processors, certain digital asset hosted wallet providers, and persons
who regularly offer to redeem digital assets that were created or
issued by that person. In addition, these proposed regulations would
require real estate reporting persons to report on real estate
purchasers who use digital assets to acquire real estate in a
reportable real estate transaction and extend the information that must
be reported under Sec. 1.6045-4 with respect to sellers of real estate
to include the fair market value of digital assets received by sellers
in exchange for real estate. Additionally, in the case of a transaction
involving the exchange of digital assets for goods (other than digital
assets) or services, these proposed regulations treat the provision of
the goods or services as reportable under section 6050W and the
disposition of the digital assets as reportable under proposed Sec.
1.6045-1 and not under section 6050W. These proposed regulations also
provide that exchanges of digital assets for property or services are
generally not reportable as barter exchange transactions under the
existing rules under Sec. 1.6045-1(e). Finally, these proposed
regulations provide specific rules under section 1001 for determining
the amount realized in a sale, exchange, or other disposition of
digital assets and under section 1012 for calculating the basis of
digital assets.
These proposed regulations concern Federal tax laws under the
Internal Revenue Code only. No inference is intended with respect to
any other legal regime, including the Federal securities laws and the
Commodity Exchange Act, which are outside the scope of these
regulations.
I. Background on Digital Assets and Virtual Currency
Digital assets are digital representations of value that use
cryptography to secure transactions that are digitally recorded using
distributed ledger technology on a distributed ledger, such as a
blockchain or similar technology. Digital assets do not exist in
physical form. Depending on the particular digital asset, individual
units of a digital asset may be referred to as
[[Page 59577]]
coins or tokens. Some digital assets are referred to as virtual
currency or as cryptocurrency.
Virtual currency is defined in Notice 2014-21, 2014-16 I.R.B. 938
(April 14, 2014) (Notice 2014-21 or Notice), for Federal income tax
purposes as a digital representation of value that functions as a
medium of exchange, a unit of account, or a store of value other than
the U.S. dollar or a foreign currency (fiat currency). The Notice
provides that convertible virtual currency (that is, virtual currency
that has an equivalent value in real currency or that acts as a
substitute for real currency) is treated as property for Federal income
tax purposes.
A digital asset account or wallet generally provides its owner or
custodian with the ability to store the public and private keys to
digital asset holdings. These keys are required to conduct transactions
with the digital assets associated with those keys and thus to control
the ability to transfer those digital assets. References in this
preamble and these proposed regulations to an owner holding digital
assets generally or holding digital assets in a wallet or account are
meant to refer to holding or controlling, whether directly or
indirectly through a custodian, the keys to the digital assets and,
thus, the ability to transfer those digital assets.
Some wallets may provide additional or different capabilities
beyond storing keys. Wallets can be digital (software) or physical
(hardware) and can be connected to the internet (hot) or disconnected
from the internet (cold). Wallets can be custodial (hosted) or non-
custodial (unhosted). Unhosted wallets are sometimes referred to as
self-hosted or self-custodial wallets. Some owners use the services of
a hosted wallet provider that stores their public and private keys. A
hosted wallet provider may also maintain balance information, provide
cybersecurity services, and facilitate the owners' ability to own, and
conduct transactions using, digital assets. These services may also
include providing owners with online platforms that directly link
owners to third party services that allow owners to buy and sell
digital assets held in their hosted wallets. Other owners do not use
the services of a hosted wallet provider and instead store private keys
in a software program or written record, often referred to as an
unhosted wallet. In general, only the user of an unhosted wallet has
access to both the public and private keys necessary to effect
transactions in the digital assets associated with those keys.
Additionally, some providers of unhosted wallets also provide their
unhosted wallet users with online platform services, which may include
links or other mechanisms for direct access to third party services
that allow users to buy and sell digital assets held in their unhosted
wallets.
A person that operates a trading platform or website that allows
users to exchange digital assets in return for different digital assets
or cash (meaning the U.S. dollar or foreign currency) is referred to in
this preamble as a digital asset trading platform. Some digital asset
trading platforms also offer hosted wallet services. In some
circumstances, the custodial digital asset trading platform will match
up buy and sell orders from separate users, whereas in other
circumstances, the digital asset trading platform will settle users'
orders using the digital asset trading platform's own account. In
either circumstance, the digital asset trading platform could elect to
require users to deposit with the trading platform the digital assets
traded on the platform. Users typically pay these digital asset trading
platforms a transaction fee (sometimes in digital assets). A custodial
digital asset trading platform might often record its users' digital
asset sale and exchange transactions on a centralized, omnibus ledger
without also recording the transactions on the relevant distributed
ledgers of the digital asset sold or exchanged. In other instances,
however, the custodial digital asset trading platform might record user
transactions directly on the distributed ledgers of the applicable
digital assets involved in the transaction. These custodial digital
asset trading platforms may provide users with valuations (in fiat
currency) of the digital asset involved in these exchanges and keep
records of each user's exchange activity.
Some digital asset trading platforms do not have access to the
private keys and, therefore, do not take custody of their users'
digital assets.\1\ Owners of digital assets using these non-custodial
trading platforms can buy, sell, and trade digital assets directly with
others using automatically executing contracts (so-called smart
contracts) to ensure that transactions are executed as agreed. For
example, some peer-to-peer trading platforms facilitate transactions
between owners of digital assets by matching buyers and sellers without
holding the funds or digital assets of buyers or sellers. Some peer-to-
peer trading platforms use software that connects buyers and sellers,
who then effect the desired transactions off the platform. Other non-
custodial trading platforms use automated market maker (AMM) systems
that rely on liquidity pools or liquidity providers to automatically
facilitate buy and sell orders on a platform. Some non-custodial
trading platforms involve persons (operators) who provide services
beyond that provided by software that merely facilitates digital asset
trading. For example, to enhance secure transactions, non-custodial
trading platform operators might process a transaction by communicating
(or providing software that will communicate) with the wallets of
buyers and sellers. Operators of non-custodial trading platforms may
charge fees for some or all of these services, which may also include
advertising or other services closely related to the facilitation of
sales of digital assets.
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\1\ Some digital asset trading platforms that do not claim to
offer custodial services may be able to exercise effective control
over a user's digital assets. See Treasury Department, Illicit
Finance Risk Assessment of Decentralized Finance (April 2023),
<a href="https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf">https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf</a>. No inference is intended as to the meaning or
significance of custody under any other legal regime, which are
outside the scope of these regulations.
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In addition to buying, selling, and exchanging digital assets,
taxpayers can participate in an increasing number and type of
transactions that involve digital assets. For example, taxpayers can
purchase or enter into derivative transactions involving digital
assets, such as options, regulated futures contracts, and forward
contracts. Some digital asset owners also use digital assets to make
payments, including to purchase goods or services from merchants or to
pay taxes or other fees to government entities. Digital assets may also
be used as payment in consideration for the purchase of real estate.
These payment transactions can be made directly to the seller through
the use of smart contracts that can execute a transaction without an
intermediary party, or through an intermediary that can process
payments in digital assets (digital asset payment processor). To effect
payment transactions using digital assets, some digital asset payment
processors will, for a fee, accept digital assets directly from payors
in exchange for the payment of cash at predetermined exchange rates to
payment recipients or will facilitate the transfer of the payor's
digital assets as part of a payment transaction. In some instances,
digital asset payment processors will instead direct payors to transfer
the digital asset payment directly to payment recipients, who may have
the right to exchange the received digital asset for cash with the
digital asset payment processors at predetermined fixed exchange rates.
[[Page 59578]]
II. Application of Existing Information Reporting Rules to Virtual
Currency or Other Digital Assets
Notice 2014-21 provides guidance on the application of the current
information reporting requirements when virtual currency is used to pay
wages (requiring the filing of Forms W-2, Wage and Tax Statement), to
make miscellaneous payments (requiring the filing of Forms 1099-MISC,
Miscellaneous Income), and to settle third party network transactions
(requiring the filing of Forms 1099-K, Payment Card and Third Party
Network Transactions). The guidance provided by the Notice, however,
focuses only on information reporting for virtual currency payments
received by payees. The guidance does not address the information
reporting requirements for income realized by persons who dispose of
virtual currency or other digital assets. Although there are several
existing information reporting provisions in the Code that do, or may,
apply to dispositions of virtual currency and other digital assets,
those provisions do not provide clear and comprehensive rules for
consistent reporting of these dispositions.
A. Sections 1001 and 1012
Section 1001 of the Code provides rules for determining the amount
of gain or loss recognized in a sale or exchange transaction. Under
section 1001(a), gain from the sale or other disposition of property
equals the excess of the amount realized from the transaction over the
adjusted basis of the property, and loss from the sale or other
disposition of property equals the excess of the adjusted basis of the
property over the amount realized. Section 1.1001-1(a) provides that
``[e]xcept as otherwise provided in subtitle A of the Code, the gain or
loss realized from the conversion of property into cash, or from the
exchange of property for other property differing materially either in
kind or in extent, is treated as income or as loss sustained.'' These
regulations do not specifically address the determination of gain or
loss with respect to digital assets.
Section 1012 of the Code provides that the basis of property is the
cost of the property. The existing regulations under section 1012
provide special rules regarding the calculation of basis for certain
types of property. These regulations do not expressly address the
calculation of basis for digital assets.
B. Section 6041
Section 6041 of the Code requires any person who, in the course of
a trade or business, makes payments of $600 or more that are deemed to
be fixed or determinable income to file information returns, and
furnish statements to the payee (payee statements), setting forth the
amount of gains, profits, and income resulting from that payment and
the name and address of the recipient of that payment. Published
guidance states that the amount of gains, profits, or income resulting
from a payment made in consideration for a capital asset is not fixed
or determinable under section 6041 if the payor has no way of
ascertaining the payee's basis in that asset. See, for example, Rev.
Rul. 80-22, 1980-1 C.B. 286 (January 21, 1980). Thus, a payor otherwise
required to report on a payment made in exchange for digital assets is
required to report the payee's gain from that transaction under section
6041 if the payor has a way to ascertain the payee's basis and if the
gain (in addition to any other payments made by that payor to the payee
during the calendar year) is equal to $600 or more. Reporting under
section 6041, however, does not apply to brokers with respect to
payments made to customers. See Sec. 1.6041-3(b). If a payment that is
reportable under section 6041 is also subject to the information
reporting rules under section 6050W, Sec. 1.6041-1(a)(1)(iv) provides
that the transaction must instead be reported under section 6050W.
C. Sections 6045, 6045A, and 6045B
Section 6045 and the regulations thereunder require a person doing
business as a broker to file information returns, and furnish payee
statements, in accordance with regulations, for each customer for whom
the broker has sold stocks, certain commodities, options, regulated
futures contracts, securities futures contracts, forward contracts or
debt instruments, in exchange for cash, showing each customer's name
and address, details regarding gross proceeds, the adjusted basis of
certain categories of assets sold, and other information as the
Secretary of the Treasury or her delegate (Secretary) may require by
forms or regulations. Section 80603 of the Infrastructure Investment
and Jobs Act, Public Law 117-58, 135 Stat. 429, 1339 (2021)
(Infrastructure Act) made several changes to the broker reporting
provisions under section 6045 to clarify the rules regarding how
certain digital asset transactions should be reported by brokers, and
to expand the categories of assets for which basis reporting is
required to include all digital assets. These changes are discussed
below in Part III of this Background. This Part II.C. of this
Background discusses the rules in place prior to the changes made by
the Infrastructure Act.
The term broker is defined by section 6045(c)(1) to include a
dealer, a barter exchange, and any other person who (for a
consideration) regularly acts as a middleman with respect to property
or services. The existing regulations under section 6045 (existing
regulations), further refine the meaning of a broker. Under existing
Sec. 1.6045-1(a)(1), a broker is defined to mean ``any person . . . ,
U.S. or foreign, that, in the ordinary course of a trade or business
during the calendar year, stands ready to effect sales to be made by
others.'' The term effect, as defined under existing Sec. 1.6045-
1(a)(10), means either to act as a principal with respect to a sale
(for example, a dealer in securities who buys a security from one
customer and then sells that security to another customer) or to act as
an agent with respect to a sale if the nature of the agency is such
that the agent ordinarily would know the gross proceeds of the sale.
Accordingly, the term broker for purposes of gross proceeds reporting
includes persons that may not otherwise be considered to act as a
broker, including certain securities custodians, escrow agents, and
stock transfer agents. The term broker for this purpose also includes
persons that are not custodians. For example, a non-custodial executing
broker that acts as an agent for customers to effect sales of
securities is included in this definition. Finally, an obligor that
regularly issues and retires its own debt obligations and a corporation
(such as a mutual fund described in existing Sec. 1.6045-1(b) Example
1 (i)) that regularly redeems its own stock also are treated as brokers
under existing Sec. 1.6045-1(a)(1).
The term commodity is defined in existing Sec. 1.6045-1(a)(5) to
mean any type of personal property (or interest therein), the trading
of regulated futures contracts in which has been approved by the
Commodities Futures Trading Commission (CFTC). At the time existing
Sec. 1.6045-1(a)(5) was promulgated, affirmative CFTC approval was
required to list new regulated futures contracts on a commodities
exchange. Since that time, however, the CFTC has revised its approval
procedures pursuant to the Commodity Futures Modernization Act
(``CFMA''), Public Law 106-554, 114 Stat. 2763 (2000). The CFTC now
also allows new contracts to be listed if the listing market self-
certifies that the new contracts comply with the Commodity Exchange
Act, 7 U.S.C. 1 et seq., and the CFTC's regulations. See CFTC, Listing
of New Contracts by Self-Certification, https://cftc.gov/
IndustryOversight/
[[Page 59579]]
ContractsProducts/index.htm and 17 CFR 40.2. Section 1.6045-1(a)(5)
does not explicitly address whether digital assets, the trading of
regulated futures contracts in which is permitted pursuant to the
CFTC's self-certification procedures, are commodities subject to
reporting.
For brokers required to file an information return with respect to
the sale of a covered security, section 6045(g) requires that the
return include the adjusted basis of the security and whether any gain
or loss with respect to the security is long-term or short-term
(adjusted basis reporting). With the exception of stock, covered
securities are defined under section 6045(g)(3) as specified securities
that are acquired on or after January 1, 2013, or such later date as
determined by the Secretary. For stock to be included in the definition
of covered securities, it must be acquired on or after either January
1, 2011, or January 1, 2012, depending on whether the average basis
method is permissible with respect to the stock under section 1012.
Under section 6045(g)(3)(B), specified securities generally include:
(i) shares of corporate stock, (ii) notes, bonds, debentures, and other
evidence of indebtedness, (iii) commodities, contracts, or derivatives
with respect to commodities, if the Secretary determines that adjusted
basis reporting is appropriate, and (iv) any other financial instrument
with respect to which the Secretary determines that adjusted basis
reporting is appropriate. The existing regulations under section 6045
do not specifically include digital assets as a specified security.
Section 6045A of the Code generally requires applicable persons who
transfer securities that are covered securities in the hands of those
applicable persons to a broker (the receiving broker) to furnish to the
receiving broker a written statement setting forth such information as
the Secretary may by regulations require. Existing Sec. 1.6045A-1(b)
requires transfer statements to include the name of the person
effecting the transfer, the receiving broker, the name and account
number of the customer for whom the security is transferred, as well as
information about the security itself, including the transfer date, the
adjusted basis, and the original acquisition date of the security.
Prior to amendments made by the Infrastructure Act, section 6045A did
not address the extent to which these requirements applied to transfers
of digital assets. These amendments are discussed below in Part III of
this Background.
Section 6045B of the Code requires certain securities issuers to
report to the IRS as well as to shareholders or their nominees the
effect on basis of certain organizational actions (such as a stock
split, merger, or acquisition) that impact the basis of issued
securities. These rules also do not explicitly address the reporting
requirements with respect to digital assets.
Any organization with members or clients that contract with each
other or with the organization to trade or barter property or services
is a barter exchange under existing Sec. 1.6045-1(a)(4). A barter
exchange must file information returns, and furnish payee statements,
with respect to the exchange of property or services by its members or
clients. Property or services are considered exchanged through a barter
exchange if payment is made by means of a credit on the books of the
barter exchange or a scrip issued by the barter exchange, or if the
barter exchange arranges a direct exchange of property or services
between members. See existing Sec. 1.6045-1(e)(2).
Section 6045(e) requires real estate reporting persons to file
information returns, and furnish payee statements, including the
seller's name and address, the gross proceeds paid to the seller, and
other information as the Secretary may require by forms or regulations
with respect to certain real estate transactions. A real estate
reporting person is defined in section 6045(e)(2) to mean the person
responsible for closing the transaction or, if no such person exists,
the mortgage lender, the transferor's broker, the transferee's broker,
or the person designated by the Secretary pursuant to regulations. Real
estate reporting persons are treated as brokers under section
6045(e)(2) for purposes of the reporting obligations under section
6045. An exception to this real estate reporting rule is made for real
estate reporting persons who rely on seller certifications setting
forth written assurances in compliance with Rev. Proc. 2007-12, 2007-1
C.B. 357 (January 22, 2007), that the real estate being sold is the
seller's principal residence and the full amount of the gain on the
sale or exchange of the principal residence is excludable from gross
income under section 121 of the Code, which generally permits
individuals to exclude from gross income gain up to $250,000 (and
married individuals filing joint returns gain up to $500,000) on the
sale or exchange of a principal residence if certain conditions are
met. Section 1.6045-4(i) also limits gross proceeds reporting required
under section 6045(e) to cash received and cash to be received (also
referred to in the existing regulations as consideration treated as
cash) by or on behalf of the real estate seller in connection with the
real estate transaction. As a result, these rules do not require the
reporting of payments using digital assets made to real estate sellers
in partial or full consideration for the sale of real estate, except to
the extent that a digital asset falls within the definition of
consideration treated as cash under existing Sec. 1.6045-4(i)(1).
The definition of broker in existing regulations generally excludes
a person described as a non-U.S. payor or non-U.S. middleman under
Sec. 1.6049-5(c)(5) with respect to a sale that is effected by the
broker on behalf of a customer at an office outside the United States.
Additionally, under existing regulations, regardless of a broker's
status as U.S. or non-U.S. broker, a broker is not required to file an
information return under section 6045 with respect to a sale for a
customer whom the broker may treat as an exempt foreign person based
primarily on documentation requirements that depend on whether the sale
is effected at an office of the broker inside or outside the United
States.\2\ Generally, the effect of these rules is that non-U.S.
securities brokers (other than controlled foreign corporations (CFCs)
and a limited class of other brokers with U.S. activities, such as U.S.
branches of foreign brokers) are not required to report information to
the IRS on their customers, and that both U.S. and non-U.S. securities
brokers are not required to report information to the IRS on non-U.S.
customers under section 6045.
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\2\ See Part I.I.4 of the Explanation of Provisions footnote 5
regarding the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the
Financial Crimes Enforcement Network's (FinCEN) implementing
regulations thereunder.
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D. Section 6050W
Section 6050W requires payment settlement entities to file
information returns, and furnish payee statements, with respect to each
participating payee to whom they have made one or more payments in
settlement of reportable payment transactions. Payment settlement
entities are merchant acquiring entities, which are banks or other
organizations that are contractually obligated to make payments to
participating payees in settlement of payment card transactions, and
third party settlement organizations (TPSOs). TPSOs are central
organizations that are contractually obligated to make payments to
participating payees with respect to third party network transactions
for the purchase of goods or services sold through a third party
payment network.
Payments by TPSOs to settle third party network transactions are
required to be reported only if they exceed a de
[[Page 59580]]
minimis threshold. Section 9674(a) of the American Rescue Plan Act of
2021, Public Law 117-2, 135 Stat. 4, 185 (ARP), lowered and modified
this threshold for calendar years beginning after December 31, 2021.
Under the prior threshold, payments by TPSOs to settle third party
network transactions were required to be reported only if the aggregate
number of transactions with a payee exceeded 200 and the aggregate
amount to be reported with respect to those transactions exceeded
$20,000 for a calendar year. Under the ARP provision, TPSOs must report
third party network transactions with any participating payee that
exceed a minimum threshold of $600 in aggregate payments, regardless of
the aggregate number of these transactions. The rules under section
6050W, however, do not expressly address whether exchanges of digital
assets for cash, services, or property effected through TPSOs are
subject to reporting under section 6050W or whether the information
reporting provisions under section 6045 would apply to such exchanges.
III. Infrastructure Investment and Jobs Act
Section 80603 of the Infrastructure Act clarifies and expands the
rules regarding how digital assets should be reported by brokers under
sections 6045 and 6045A to improve IRS and taxpayer access to gross
proceeds and adjusted basis information when taxpayers dispose of
digital assets in transactions involving brokers. First, section
80603(a) of the Infrastructure Act clarifies the definition of broker
to include any person who, for consideration, is responsible for
regularly providing any service effectuating transfers of digital
assets on behalf of another person. Second, section 80603(b)(1) of the
Infrastructure Act modifies the definition of specified securities
under section 6045(g) to explicitly include digital assets and to
provide that these specified securities are treated as covered
securities for purposes of basis reporting if they are acquired on or
after January 1, 2023. Third, section 80603(b)(1)(B) of the
Infrastructure Act defines a digital asset broadly to mean any digital
representation of value which is recorded on a cryptographically
secured distributed ledger or any similar technology as specified by
the Secretary, except as otherwise provided by the Secretary. Fourth,
section 80603(b)(2) of the Infrastructure Act clarifies that transfer
statement reporting under section 6045A(a) applies to covered
securities that are digital assets, and also adds a new information
reporting provision under section 6045A(d) to provide for broker
reporting on transfers of digital assets that are covered securities,
provided the transfer is not a sale and is not to an account maintained
by a person that the broker knows or has reason to know is also a
broker. Section 80603(c) of the Infrastructure Act provides that these
amendments apply to returns required to be filed, and statements
required to be furnished, after December 31, 2023. Finally, section
80603(d) of the Infrastructure Act provides a rule of construction
which states that these statutory amendments shall not be construed to
create any inference for any period prior to the effective date of the
amendments with respect to whether any person is a broker under section
6045(c)(1) or whether any digital asset is property which is a
specified security under section 6045(g)(3)(B).
IV. Reasons for New Information Reporting Rules for Digital Assets
Digital assets have grown in popularity as both a payment method
and an investment or trading asset. Proponents believe that digital
assets may offer potential benefits over traditional fiat currencies,
such as lower transaction costs and faster transaction speeds. Digital
assets may also be popular, however, because the distributed ledger
record of transactions does not include the identity of the parties
involved in the transactions. This pseudonymity creates a significant
risk to tax administration.
Digital assets are increasingly common in ordinary course
transactions of a type that may be subject to information reporting if
carried out using fiat currency or traditional financial assets. For
example, several payment processors and credit card issuers that handle
large volumes of payments now facilitate payments made using digital
assets. Taxpayers can buy and sell digital assets directly or invest in
digital assets through investment funds. Taxpayers can also trade
derivatives, including futures and option contracts, on digital assets.
A number of traditional financial institutions are offering, or have
announced plans to offer, custody and trading services with respect to
digital assets for institutional investors. In addition, some
institutions are converting, or tokenizing, stock and security
ownership interests into digital tokens. These tokenized stock and
security interests trade on some digital asset trading platforms, and
other trading platforms offer unique digital assets referred to as non-
fungible tokens (NFTs) for sale in exchange for cash or other digital
assets. Transactions of these kinds by U.S. taxpayers may take place
either on U.S. custodial or non-custodial trading platforms or with
U.S. financial intermediaries, or on foreign custodial or non-custodial
trading platforms or with foreign financial intermediaries.
According to the Government Accountability Office (GAO), limits on
third party information reporting to the IRS is an important factor
contributing to the tax gap, which is the difference between taxes
legally owed and taxes actually paid. GAO, Tax Gap: Multiple Strategies
Are Needed to Reduce Noncompliance, GAO-19-558T at 6 (Washington, DC:
May 9, 2019). Third party information reporting generally leads to
higher levels of taxpayer compliance because the income earned by
taxpayers is made transparent to both the IRS and taxpayers (who will
use the furnished information to avoid both inadvertent errors and
intentional misstatements). With third party information reporting that
specifically identifies digital asset transactions, the IRS could more
easily identify taxpayers with digital asset transactions that are
otherwise difficult to discover. An information reporting regime
requiring reporting to the IRS on digital asset transactions would
benefit tax compliance by helping to close the information gap with
respect to digital assets. See TIGTA, Ref. No. 2020-30-066, The
Internal Revenue Service Can Improve Taxpayer Compliance for Virtual
Currency Transactions, 10 (Sept. 2020); GAO, Virtual Currencies:
Additional Information Reporting and Clarified Guidance Could Improve
Tax Compliance, 28, GAO-20-188 (Washington, DC: Feb. 2020). In addition
to the loss of information with respect to the recipients of digital
asset payments that the IRS otherwise might receive if these
transactions were carried out using fiat currency or traditional
investment assets, these transactions give rise to a separate tax
compliance concern because the disposition of digital assets is itself
a taxable event that may give rise to gain or loss to the transferor
that is reportable on a tax return. Existing information reporting
rules do not specifically address how certain transactions involving
digital assets must be reported to the party who disposes of the
digital assets in exchange for cash, services, stored-value cards, or
other property (including different digital assets).
Expanding information reporting for digital assets also benefits
taxpayers. First, taxpayers use information provided to them by brokers
to prepare their tax returns. The lack of such
[[Page 59581]]
information reporting for digital assets may make it difficult for
taxpayers to properly track and report their gain or loss from
dispositions of digital assets. Publicly available information
indicates that this gap is being filled in part by voluntary tax
reporting to customers by some digital asset platforms, and by digital
asset tax service providers, including providers of tax software, who
charge for the preparation of tax information. The existence of these
services illustrates the benefits of information reporting to taxpayers
because the same information that is reported by brokers to the IRS on
dispositions of digital assets must also be furnished by brokers to
their customers. A second benefit to taxpayers from information
reporting is that it enables the IRS to focus its audit efforts on
taxpayers who are more likely to have underreported their income from
digital asset transactions.
Consequently, tax compliance would be increased if brokers,
including digital asset trading platforms, digital asset payment
processors, certain digital asset hosted wallet providers, and persons
who regularly offer to redeem digital assets that were created or
issued by that person, were required to file information returns, and
furnish payee statements, under section 6045 with respect to digital
asset dispositions in exchange for cash, broker services, or other
property the sale of which is separately subject to reporting under
section 6045 or with respect to transactions that are subject to
reporting (with respect to the digital asset recipient) under section
6050W. Thus, for example, a digital asset trading platform, including
an operator of a peer-to-peer or AMM trading platform, that facilitates
a digital asset sale on behalf of a customer should be required to file
an information return, and furnish a payee statement with respect to
that sale, reporting the gross proceeds realized by the customer as a
result of that sale. In addition, reporting should be required by
digital asset payment processors who facilitate the use of digital
assets to make payments of cash to others by either effecting the sale
of digital assets on behalf of the person making payment (and paying
the cash to the payment recipient) or by agreeing with the recipient of
a digital asset payment in advance of the payment to exchange the
digital assets received by that recipient for cash at a predetermined
exchange rate. Further, digital asset payment processors who facilitate
payments that are potentially subject to reporting under the existing
section 6050W regulations should be required to report on the payor's
exchange of digital assets in those transactions as well. Additionally,
a stockbroker who accepts digital assets from a customer as payment for
the customer's purchase of stock should be required to file an
information return, and furnish a payee statement, reporting the gross
proceeds realized by the customer as a result of that customer's
exchange of digital assets for stock. Reporting should also be required
in this example if the broker accepts digital assets in exchange for
the broker's services (for example, transaction fees or commissions).
Finally, to facilitate the filing by taxpayers of accurate information
returns with respect to digital asset dispositions, substantive rules
are needed for determining gain or loss in a digital asset sale or
exchange transaction and for calculating the basis of digital assets.
Explanation of Provisions
The Treasury Department and the IRS expect to make the changes to
broker reporting for digital assets in multiple phases. These proposed
regulations generally focus on changes to existing Sec. 1.6045-1 to
require brokers to report on digital asset sales. Later phases will
generally focus on implementing transfer statement reporting under
section 6045A(a) and broker information reporting under section
6045A(d) for covered security transfers that are not transfers to
accounts maintained by persons known to be brokers or subject to
reporting as sales.
I. Proposed Sec. 1.6045-1
These proposed regulations generally follow the framework and
concepts of the existing rules for broker information reporting but
differ from those rules as necessary to reflect both the unique nature
of digital assets and the clarifications and changes made to section
6045 by the Infrastructure Act. These proposed regulations do not
address every transaction involving digital assets that may give rise
to income, such as the receipt of digital assets in hard forks, because
it is more appropriate to address those transactions under other
provisions of the Code.
A. Expansion of the Types of Property Subject to Reporting
Under existing Sec. 1.6045-1(a)(9), brokers are generally required
to file an information return for each sale effected on behalf of a
customer. A disposition is treated as a sale subject to reporting only
if the property disposed of is a security, commodity, option, regulated
futures contract, securities futures contract, or forward contract and
the disposition is for cash. These proposed regulations provide that
reporting under section 6045 is also required for certain dispositions
of digital assets that are made in exchange for cash, different digital
assets, stored-value cards, broker services, or property subject to
reporting under existing section 6045 regulations.
1. Definition of Digital Assets
The definition of digital assets in these proposed regulations
follows the definition in section 80603(b)(1)(B) of the Infrastructure
Act. Specifically, proposed Sec. 1.6045-1(a)(19)(i) defines a digital
asset as a digital representation of value that is recorded on a
cryptographically secured distributed ledger (or similar technology).
These proposed regulations also provide that a digital asset does not
include cash, for example, a fiat currency in digital form such as
funds in a bank or payment processor account accessed through the
internet. In addition, under these proposed regulations, the
determination of whether an asset is a digital asset is made without
regard to whether each individual transaction involving that digital
asset is actually recorded on the cryptographically secured distributed
ledger. The use of cryptography, through the use of public and private
keys to transfer assets, distinguishes digital assets as defined by the
Infrastructure Act from other virtual assets and is therefore an
essential part of the definition.
By not limiting the definition of digital assets to only those
digital representations of value for which each transaction is actually
recorded or secured on a cryptographically secured distributed ledger,
the definition of digital assets covers transactions involving digital
representations of value that are recorded by a broker only on its own
centralized internal ledger. For example, a broker may hold a number of
units of a digital asset in its own name, similar to holding shares of
stock in street name, and carry out transactions between customers that
wish to buy or sell units of that digital asset by first matching
transactions internally and executing only net purchases or sales on
the distributed ledger. Additionally, the definition covers
transactions involving digital representations of value that are
recorded on ledgers that may or may not be widely or publicly
distributed.
The definition of digital assets includes digital representations
of value that are capable of being recorded using technology that is
similar to technology that uses cryptography to secure transactions.
These proposed
[[Page 59582]]
regulations include this similar technology standard to ensure that the
definition of digital assets captures digital representations of value
that reflect advancements to the techniques, methods, and technology,
upon which digital assets are based.
Section 80603(b)(1)(B) of the Infrastructure Act provides authority
to the Secretary to modify the definition of digital assets for
purposes of reporting under section 6045. The Treasury Department and
the IRS considered applying these regulations to only virtual currency
or a variant thereof rather than to all digital assets. The Treasury
Department and the IRS also considered whether newer forms of digital
assets, such as those referred to as stablecoins or NFTs, should be
subject to the section 6045 broker reporting rules. The proposed
regulations would require broker reporting for all types of digital
assets, for multiple reasons. First, the definition of digital assets
in the Infrastructure Act is expansive. Second, because the disposition
of digital assets may give rise to gain or loss, reporting of gross
proceeds and basis information is useful to taxpayers as well as the
IRS. For example, some NFTs are readily being bought and sold, often as
speculative investments on digital asset trading platforms, giving rise
to gain or loss that is subject to reporting by taxpayers. The Treasury
Department and the IRS are aware of concerns that applying these
proposed regulations to such NFTs would create disparate reporting of
transactions involving the subject of the NFT (such as ownership or
license interests in artwork or sports memorabilia) depending on
whether those interests are transferred using an NFT or as a
traditional sale or license contract. But given that NFTs are popular
investments, the buying and selling of NFTs raise tax administration
concerns similar to the concerns associated with other types of digital
assets that the physical analogues of NFTs do not. For example, like
other digital assets, NFTs can readily be transferred to a private
wallet or an offshore account, while the transfer of a physical artwork
or trading card may be more difficult or costly. Third, there is a
continuing evolution in the types of digital assets that can be used
for payment transactions, investment, or for other purposes and this
inclusive approach is designed to provide clarity as these types of
digital assets continue to evolve. For example, a taxpayer may acquire
an NFT to enjoy its artistic merit or for investment, or both. The
treatment of any particular type of digital asset as reportable under
these proposed regulations is not intended to imply any
characterization of that type of digital asset as a matter of
substantive law. See Part I.K of this Explanation of Provisions for
further discussion of the reasons why privately issued stablecoins are
treated as digital assets for purposes of these regulations.
Finally, it is intended that the definition of digital assets used
in these proposed regulations would not apply to other types of virtual
assets, such as assets that exist only in a closed system (such as
video game tokens that can be purchased with U.S. dollars or other fiat
currency but can be used only in-game and that cannot be sold or
exchanged outside the game or sold for fiat currency). It is also
intended that the regulations would not apply to uses of distributed
ledger technology or similar technology for ordinary commercial
purposes that do not create new transferable assets, such as tracking
inventory or processing orders for purchase and sale transactions,
which are unlikely to give rise to sales as defined for purposes of the
regulations. Comments are requested on whether the proposed definition
of digital assets accurately and appropriately defines the type of
assets to which these regulations should apply.
2. Coordination With Reporting Rules for Securities, Commodities, and
Real Estate
The Treasury Department and the IRS are aware that many provisions
of the Code incorporate references to the terms security or commodity,
and that questions exist as to whether, and if so, when, a digital
asset may be treated as a security or a commodity for purposes of those
Code sections. Apart from the rules proposed under sections 1001 and
1012 discussed in Part II of this Explanation of Provisions, these
proposed regulations are information reporting regulations, and are
therefore not the appropriate vehicle for answering those questions.
Because the existing regulations under section 6045 require reporting
with respect to sales for cash of securities and certain commodities,
and with respect to real estate transactions in which gross proceeds
are paid in cash (or consideration treated as cash), coordination rules
have been included to provide certainty to brokers with respect to
whether a particular transaction, or portion thereof, is reportable
under those existing rules or under the proposed rules for digital
assets and to avoid duplicate reporting obligations. Accordingly, the
treatment of an asset as reportable as a security, commodity, digital
asset or otherwise in these proposed rules applies only for purposes of
sections 1001, 1012, 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722
and should not be construed to apply for any other purpose of the Code
to determine whether a digital asset should or should not be properly
classified as a security, commodity, option, securities futures
contract, regulated futures contract, or forward contract. See proposed
Sec. 1.6045-1(a)(19)(ii). Similarly, the potential characterization of
digital assets as securities, commodities, or derivatives for purposes
of any other legal regime, such as the Federal securities laws and the
Commodity Exchange Act, is outside the scope of these proposed
regulations.
The Treasury Department and the IRS are aware that some digital
asset tokens may be classified as securities for U.S. Federal income
tax purposes, and that it is possible that tokens constituting
securities issued by certain U.S. issuers or companies could be traded
on certain digital asset trading platforms that are subject to these
rules. If those tokens are securities for Federal income tax purposes,
and also qualify as digital assets (as defined in proposed Sec.
1.6045-1(a)(19)), the sale of those tokens for cash could be subject to
the existing regulations requiring brokers to provide information
reporting with respect to the sale of securities for cash (that is,
gross proceeds and basis information) as well as to these proposed
regulations relating to the sale of digital assets. The Treasury
Department and the IRS considered several different alternatives for
addressing this potential overlap.
The Treasury Department and the IRS considered providing a rule
that would treat the sale for cash of any digital asset treated as a
security under current law as a sale of securities and not a sale of
digital assets for purposes of these proposed regulations. The Treasury
Department and the IRS, however, have not issued guidance addressing
when a digital asset should be treated as a security for substantive
U.S. Federal income tax purposes. Because digital asset trading
platforms may not be certain whether a particular asset should be
reported as a security or as a digital asset without that guidance, and
for the additional reasons described in the next paragraph, the
Treasury Department and the IRS determined that this alternative would
not provide the clarity and certainty necessary for information
reporting purposes.
The Treasury Department and the IRS also considered providing a
more limited exception to the definition of digital assets for digital
representations of value that represent interests in one
[[Page 59583]]
or more units of a security to provide the same information reporting
rules for a sale of stock for cash as for a sale of tokenized stock for
cash. This alternative would have several undesirable results. First,
digital asset trading platforms that trade both tokenized stock and
other digital assets would be subject to two different sets of
reporting rules when such assets were sold for cash. Second, tokenized
stock would be subject to one set of reporting rules if sold for cash--
that is, the existing regulations relating to the reporting of sales of
securities for cash--and to a different set of reporting rules if sold
for another digital asset or other consideration--that is, these
proposed regulations for sales of digital assets. Moreover, the tax
compliance concerns associated with transactions in digital assets are
different from the tax compliance concerns associated with trading in
conventional or non-digital asset securities, including as a result of
the common market practice of transferring digital assets from a
centralized platform to a private wallet and back again. Accordingly,
different reporting rules are warranted for digital assets regardless
of whether they would also qualify as a security.
As a result of these considerations, these proposed regulations
make no changes to the definition of the term security (as defined in
existing Sec. 1.6045-1(a)(3)) but instead provide a coordination rule
in proposed Sec. 1.6045-1(c)(8)(i) applicable to transactions
involving the sale of a digital asset that also constitutes a sale of a
security as so defined (other than options that constitute contracts
covered by section 1256(b)). Under this proposed coordination rule, the
broker must report the sale of an asset that qualifies both as such a
security and as a digital asset only as a sale of a digital asset and
not as a sale of a security. See Part I.B of this Explanation of
Provisions, however, for a discussion of the additional information
that the broker may be required to provide for transactions involving
the sale of a digital asset that also constitutes a sale of such a
security. See Part I.B.3 of this Explanation of Provisions for a
discussion of the applicable rules for digital assets that are also
financial contracts, including contracts that are section 1256
contracts within the meaning of section 1256(b).
The Treasury Department and the IRS are aware that the financial
services industry is exploring the use of distributed ledger technology
or similar technology, such as a blockchain or a shared ledger, to
process orders associated with conventional or non-digital asset
securities transactions. Using distributed ledger technology or similar
technology to process orders associated with securities transactions
may require the temporary creation of digital representations of
securities that may fit within the definition of digital assets in
these proposed regulations. It may be appropriate for these regulations
not to apply to these transactions because these transactions would
typically involve securities being transferred from one traditional
brokerage or custodial account to another. Nonetheless, these proposed
regulations do not provide a specific exception for these transactions
because the Treasury Department and the IRS would like to understand
whether an exception is necessary. Comments are requested on whether
the definition of digital asset or the reporting requirements with
respect to digital assets inadvertently capture transactions involving
conventional or non-digital asset securities that may use distributed
ledger technology, shared ledgers, or similar technology merely to
facilitate the processing, clearing, or settlement of orders. Comments
also are requested on whether and, if so, how the definitions or
reporting rules should be modified to address other transactions
involving tokenized or digitized financial instruments that are used to
facilitate back-office processing of the transaction. If an exception
for these types of transactions is necessary, the Treasury Department
and the IRS would also like to understand how it should be drafted so
that it does not sweep in other transactions (such as tokenized
securities, or other digital assets treated as securities) that should
not be exempted from reporting.
The Treasury Department and the IRS also considered how to apply
section 6045A and section 6045B to assets that qualify both as
specified securities under existing Sec. 1.6045-1(a)(14)(i) through
(iv) for basis reporting purposes and as digital assets under proposed
Sec. 1.6045-1(a)(19) (dual classification assets) for the period of
time until rules are promulgated dealing with the application of
sections 6045A and 6045B to digital assets. Although the existing
regulations under section 6045A operate to provide important
information to brokers required to report adjusted basis information to
the IRS (and taxpayers), it is unclear whether digital asset brokers
currently have the mechanisms in place to provide transfer statements
to receiving brokers that receive these dual classification assets in
transfers that are recorded on a blockchain. With regard to section
6045B, issuers of dual classification assets may not have procedures in
place to report information affecting basis. Accordingly, the Treasury
Department and the IRS have decided to delay transfer statement
reporting under section 6045A(a) and issuer reporting under section
6045B for these dual classification assets and will consider rules for
dual classification assets as part of the implementation of more
general transfer statement reporting and issuer reporting rules for
digital asset brokers as part of a later phase of information reporting
guidance for broker effected digital asset transfers. Proposed
Sec. Sec. 1.6045A-1(a)(1)(vi) and 1.6045B-1(a)(6) have been added to
specifically exempt from transfer and issuer reporting any specified
security that is also a digital asset. See Proposed Sec. Sec. 1.6045A-
1 and 1.6045B-1 in Part IV of this Explanation of Provisions.
The definition of commodity under existing Sec. 1.6045-1(a)(5) was
first promulgated in 1983 as part of TD 7873, 48 FR 10302, 10304 (Mar
11, 1983). Under that definition, the term includes any type of
personal property or interest therein, the trading of futures contracts
in which have been approved by the CFTC. Sometime after the
promulgation of this definition, the CFTC added a new self-
certification mechanism under which new exchange-traded contracts
become subject to the jurisdiction of the CFTC. Some digital asset
trading platforms have taken the position that assets underlying
futures contracts that are subject to the jurisdiction of the CFTC
pursuant to the CFTC's self-certification procedures are not
commodities under existing Sec. 1.6045-1(a)(5) because the CFTC did
not affirmatively approve the listing of these contracts on an
exchange. The Treasury Department and the IRS believe that the
reporting regulations should reflect the current practice of the CFTC
and therefore have modified this rule in proposed Sec. 1.6045-
1(a)(5)(i) to ensure that assets that are subject to the jurisdiction
of the CFTC pursuant to the CFTC's self-certification procedures are
included in the definition of commodity for purposes of information
reporting under section 6045.
This modification applies broadly to all types of commodities
subject to the jurisdiction of the CFTC for purposes of section 6045.
However, because there has been some uncertainty about the scope of the
term commodity for purposes of section 6045, reporting under section
6045 for sales of commodities as to which contracts have been self-
certified to the CFTC is proposed to apply to any sale that occurs on
or after January 1, 2025,
[[Page 59584]]
without regard to the date the self-certification procedures were
undertaken. Thus, if an asset became subject to the jurisdiction of the
CFTC pursuant to the CFTC's self-certification procedures prior to
January 1, 2025, sales of that asset for cash on or after January 1,
2025, will be subject to reporting as a result of the revised
definition of commodity under proposed Sec. 1.6045-1(a)(5). This
change to the definition of commodity does not affect the broker's
obligation under existing Sec. 1.6045-1(a)(9) and (c) to report on
regulated futures contracts. For a detailed discussion of the broker
reporting rules for financial contracts, see Part I.A.3 of this
Explanation of Provisions.
Consequently, a digital asset, the trading of regulated futures
contracts in which has been approved by or, pursuant to proposed Sec.
1.6045-1(a)(5)(i), self-certified to the CFTC, would be treated as a
commodity for purposes of reporting under section 6045 absent other
changes to the existing regulations. Those assets would also be digital
assets for purposes of these regulations. This dual classification
could result in confusion as to whether sales of these digital assets
should be reported as sales of commodities on Form 1099-B, sales of
digital assets on a form prescribed by the Secretary for digital asset
sales, or both--potentially resulting in duplicative reporting. To
avoid confusion and potential duplicative reporting of sales made on or
after January 1, 2025, these proposed regulations provide a
coordination rule in proposed Sec. 1.6045-1(c)(8)(i) applicable to
transactions involving the sale of a digital asset that also
constitutes a sale of a commodity. Under this proposed coordination
rule, the broker must report the sale of an asset that qualifies both
as a commodity and as a digital asset only as a sale of a digital asset
(along with the additional information that this characterization
requires) and not as a sale of a commodity.
Finally, the Treasury Department and the IRS are aware that
distributed ledger technology or similar technology may be used in
connection with transactions involving real estate. Using distributed
ledger technology or similar technology to settle real estate
transactions requires the creation of digital representations of real
estate that may fit within the definition of digital assets in these
proposed regulations. To avoid duplicative reporting for digital assets
that also constitute reportable real estate and to avoid having real
estate reporting persons report seller proceeds under an entirely new
reporting regime, proposed Sec. 1.6045-1(c)(8)(ii) provides a
coordination rule applicable to transactions involving the sale of a
digital asset that also constitutes reportable real estate (as defined
under existing Sec. 1.6045-4(b)(2)) that is subject to reporting under
existing Sec. 1.6045-4(a). Under this coordination rule, the broker
must report the sale of reportable real estate only as a sale of
reportable real estate (and not as a sale of a digital asset).
3. Rules Applicable to Financial Contracts on Digital Assets
To ensure reporting of sales of financial contracts involving or
referencing digital assets, these proposed regulations expand the
existing rules for certain financial products, such as options,
futures, and forward contracts. Proposed Sec. 1.6045-1(m)(1) expands
the type of option transactions subject to reporting to generally
include options on digital assets and options on derivatives with a
digital asset as an underlying property. Generally, under these
proposed regulations, how an option transaction is reported will depend
on: (i) whether the option is a section 1256 contract within the
meaning of section 1256(b) (section 1256 contract); (ii) whether the
transaction is a disposition of the option itself or whether the
transaction involves the delivery of the underlying property; and (iii)
whether the option is itself a digital asset (digital asset option) or
is not a digital asset (non-digital asset option).
For a disposition of an option that is not a section 1256 contract,
the nature of the option itself determines the appropriate reporting
treatment; that is, reporting would be required under proposed Sec.
1.6045-1(a)(9)(i) if the option itself is a non-digital asset option
and under proposed Sec. 1.6045-1(a)(9)(ii) if the option itself is a
digital asset option. Because the asset that is disposed of is the
option itself, this proposed reporting treatment applies without regard
to whether the digital asset option or non-digital asset option was
issued with respect to digital asset or non-digital asset underlying
property. In contrast, when an option that is not a section 1256
contract is settled by the delivery of the underlying property,
reporting under these proposed regulations is based on the nature of
the underlying property, with the delivery of non-digital asset
underlying property reportable as a sale under proposed Sec. 1.6045-
1(a)(9)(i) and the delivery of digital asset underlying property
reportable as a sale under proposed Sec. 1.6045-1(a)(9)(ii). Because
the asset that is disposed of is the asset underlying the option, this
proposed reporting treatment for the sale of underlying property that
is physically delivered applies without regard to whether the option is
itself a digital asset option or a non-digital asset option.
Because the Treasury Department and the IRS are currently unaware
of any digital asset options that are also section 1256 contracts,
these proposed regulations do not provide new rules for such options.
Rather, proposed Sec. 1.6045-1(c)(8)(iii) provides that reporting of
these dual classification options should be under the existing rules
for options that are section 1256 contracts and not under the proposed
rules for digital assets. Accordingly, for a disposition of an option
that is a section 1256 contract, reporting is required under existing
Sec. 1.6045-1(c)(5) regardless of whether the option disposed of is a
non-digital asset option or a digital asset option or whether the
option was issued with respect to digital asset or non-digital asset
underlying property. Further, as required by existing Sec. 1.6045-
1(m)(3) and proposed Sec. 1.6045-1(a)(9)(i) and (c)(8)(iii), when an
option that is a section 1256 contract is settled by the delivery of
the underlying property, the profit or loss on the contract itself is
reportable under existing Sec. 1.6045-1(c)(5), but the underlying sale
will be subject to reporting under these proposed regulations based on
the nature of the underlying property, with the delivery of non-digital
asset underlying property reportable under proposed Sec. 1.6045-
1(a)(9)(i) and the delivery of digital asset underlying property
reportable under proposed Sec. 1.6045-1(a)(9)(ii). The Treasury
Department and the IRS invite comments regarding the above-described
option transactions, including comments about how common are digital
asset options that are also section 1256 contracts. Comments are also
requested regarding whether there are other less burdensome
alternatives for reporting the above-described option transactions. For
example, whether it would be less burdensome to allow brokers to report
transactions involving section 1256 contracts that are also digital
assets or the delivery of non-digital assets that underlie a digital
asset option as a sale under proposed Sec. 1.6045-1(a)(9)(ii).
No changes have been made to the rules relating to regulated
futures contracts in the existing regulations because the definition of
a regulated futures contract in existing Sec. 1.6045-1(a)(6) can apply
to a regulated futures contract on digital assets and to regulated
futures contracts that are
[[Page 59585]]
themselves digital assets. Accordingly, pursuant to proposed Sec.
1.6045-1(c)(8)(iii), regulated futures contracts will continue to be
reported under the rules in existing Sec. 1.6045-1(c)(5) and not under
the proposed rules for digital assets.
Proposed Sec. 1.6045-1(a)(7)(iii) expands the definition of a
forward contract subject to reporting to include executory contracts
requiring delivery of digital assets in exchange for cash, different
digital assets, or any other property or services that would result in
a sale of digital assets under proposed Sec. 1.6045-1(a)(9)(ii) if the
exchange occurred at the time the contract was executed. When a forward
contract is disposed of without delivery of its underlying property,
the nature of the forward contract itself determines the appropriate
reporting treatment. Specifically, reporting is required under proposed
Sec. 1.6045-1(a)(9)(i) if the forward contract itself is a non-digital
asset forward contract and under proposed Sec. 1.6045-1(a)(9)(ii) if
the forward contract is a digital asset forward contract. Because the
asset that is disposed of is the forward contract itself, this proposed
reporting treatment applies without regard to whether the forward
contract was issued with respect to digital asset or non-digital asset
underlying property. The reporting on the delivery of the underlying
property with respect to a forward contract, in contrast, does turn on
the nature of that underlying property. That is, when the underlying
asset is non-digital asset property, the delivery is reportable under
proposed Sec. 1.6045-1(a)(9)(i); whereas when the underlying asset is
digital asset property, the delivery is reportable under proposed Sec.
1.6045-1(a)(9)(ii). Because the asset that is disposed of when there is
delivery is the asset underlying the forward contract, this proposed
reporting treatment for the sale of underlying property that is
physically delivered applies without regard to whether or not the
forward contract is itself a digital asset.
The Treasury Department and the IRS request comments with respect
to whether there is anything factually unique in the way short sales of
digital assets, options on digital assets, and other financial product
transactions involving digital assets are undertaken compared to
similar transactions involving non-digital assets, and whether these
transactions with respect to digital assets raise any additional
reporting issues that have not been addressed in these proposed
regulations.
B. Definition of Brokers Required To Report
As described in Part II.C. of the Background, prior to the
Infrastructure Act, section 6045(c)(1) defined the term broker to
include a dealer, a barter exchange, and any other person who (for a
consideration) regularly acts as a middleman with respect to property
or services. Existing regulations under section 6045 apply the
``middleman'' portion of this definition to treat as a broker effecting
a sale a person that as part of the ordinary course of a trade or
business acts as an agent with respect to a sale if the nature of the
agency is such that the agent ordinarily would know the gross proceeds
of the sale. See existing Sec. 1.6045-1(a)(1) and (a)(10)(i)(A).
Section 80603(a) of the Infrastructure Act clarifies that the
definition of broker under section 6045 includes any person who, for
consideration, is responsible for regularly providing any service
effectuating transfers of digital assets on behalf of another person.
According to a report by the Joint Committee on Taxation published in
the Congressional Record prior to the enactment of the Infrastructure
Act, the change clarified prior law to resolve uncertainty over whether
certain market participants are brokers. The change was not intended to
limit the Secretary's authority to interpret the definition of broker.
167 Cong. Rec. S5702, 5703 (daily ed. Aug. 3, 2021) (Joint Committee on
Taxation, Technical Explanation of Section 80603 of the Infrastructure
Act).
To reflect this clarification made by the Infrastructure Act,
proposed Sec. 1.6045-1(a)(1) retains the existing definition of broker
as any person that in the ordinary course of a trade or business stands
ready to effect sales to be made by others. However, the definition of
effect under existing Sec. 1.6045-1(a)(10)(i) and (ii), which sets
forth the various roles under which a broker may take actions on behalf
of customers, has been revised to provide that any person that provides
facilitative services that effectuate sales of digital assets by
customers will be considered a broker, provided the nature of the
person's service arrangement with customers is such that the person
ordinarily would know or be in a position to know the identity of the
party that makes the sale and the nature of the transaction potentially
giving rise to gross proceeds. This definition is similar to the
definition in the existing regulations with respect to agents and is
similarly intended to limit the definition of broker to persons who
have the ability to obtain information that is relevant for tax
compliance purposes. The modified definition of effect takes into
account whether a person is in a position to know information about the
identity of a customer, rather than whether a person ordinarily would
know such information, in recognition of the fact that some digital
asset trading platforms that have a policy of not requesting customer
information or requesting only limited information have the ability to
obtain information about their customers by updating their protocols as
they do with other upgrades to their platforms. The ability to modify
the operation of a platform to obtain customer information is treated
as being in a position to know that information. The Treasury
Department and the IRS expect that this clarified proposed definition
will ultimately require operators of some platforms generally referred
to as decentralized exchanges to collect customer information and
report sales information about their customers, if those operators
otherwise qualify as brokers. This decision was made because the
reasons for requiring information reporting on dispositions of digital
assets do not depend on the manner by which a business operating a
platform effects customers' transactions. Customers need information
about gross proceeds and basis to prepare their tax returns; the IRS
needs that information in order to collect the taxes that are imposed
under laws enacted by Congress and in order to focus its compliance
efforts on taxpayers who fail to comply with their obligations to
report their tax liability; and policy makers need that information in
order to understand what taxpayers are doing so that they can make
informed judgments about further laws or other guidance relating to
digital assets. Moreover, if the manner in which a digital asset
trading platform operates reduces or eliminates its obligation to
report information on customer transactions, digital asset trading
platforms might modify their operations to avoid reporting or customers
who wish to evade taxes might elect to use a non-reporting platform in
order to reduce the IRS's ability to identify them as non-compliant.
The Treasury Department and the IRS recognize that some
stakeholders may have concerns that providing personal identity
information may raise privacy concerns, and request comments on whether
there are alternative approaches that would satisfy tax compliance
objectives while reducing privacy concerns. The Treasury
[[Page 59586]]
Department and the IRS also request comments on any technological or
other technical issues that might affect the ability of a non-custodial
digital asset trading platform that is a person who qualifies as a
broker to obtain and transmit the information required under these
proposed regulations and how these issues might be overcome. The
Treasury Department and the IRS understand that digital asset trading
platforms operate with varying degrees of centralization and effective
control by founders or others, and request comments on whether the
application of reporting rules only to ``persons'' (as described in the
next paragraph) adequately limits the scope of reporting obligations to
platforms that have one or more individuals or entities that can
update, amend, or otherwise cause the platform to carry out the
diligence and reporting rules of these proposed regulations.
As used in these proposed regulations, the term person generally
has the meaning provided by section 7701(a)(1), which provides that the
term generally includes an individual, a legal entity, and an
unincorporated group or organization through which any business,
financial operation or venture is carried on, such as a partnership.
The term person includes a business entity that is treated as an
association or a partnership for Federal tax purposes under Sec.
301.7701-3(b). Accordingly, a group of persons providing facilitative
services that are in a position to know the customer's identity and the
nature of the transaction effectuated by customers may be treated as a
broker whether or not the group operates through a legal entity if the
group is treated as a partnership or other person for U.S. Federal
income tax purposes.
These clarifying changes are intended to apply the reporting rules
to digital asset trading platforms that provide facilitative services
and that are in a position to know the customer's identity and the
nature of the transaction effectuated by customers regardless of the
manner in which they are organized or operate if the platform or its
operator (or operators) is a person subject to reporting. Thus, for
example, the reporting rules apply to custodial digital asset trading
platforms that act as their customers' legal agents in trading their
customers' digital assets as well as to operators of non-custodial
trading platforms that provide digital asset middleman services that
bring buyers and sellers together and rely on smart contracts to
execute the transactions without further intervention from the
operators, despite the fact that such digital asset middlemen may not
necessarily be acting as legal agents of the customers in those
transactions. Accordingly, under this definition, in addition to acting
as either a principal with respect to sales of digital assets in the
ordinary course of a trade or business, or as an agent (including as a
custodial agent) if the nature of the agency is such that the agent
ordinarily would know the gross proceeds of the sale, a broker also
includes a person who acts as a digital asset middleman for a party in
a sale of digital assets. Proposed Sec. 1.6045-1(a)(21)(i) defines a
digital asset middleman as any person who provides a facilitative
service with respect to a sale wherein the nature of the arrangement is
such that the person ordinarily would know or be in a position to know
the identity of the party that makes the sale and the nature of the
transaction potentially giving rise to gross proceeds from the sale.
A facilitative service is defined in proposed Sec. 1.6045-
1(a)(21)(iii)(A) as any service that directly or indirectly effectuates
a sale of digital assets, such as providing: a party in the sale with
access to an automatically executing contract or protocol; access to
digital asset trading platforms; order matching services; market making
functions to offer buy and sell prices; or escrow or escrow-like
services to ensure both parties to an exchange act in accordance with
their obligations. Because some persons providing these services or
products may not be in a position to know the identity of the parties
making a sale and the nature of the transaction, proposed Sec. 1.6045-
1(a)(21)(iii)(A) specifically excludes from the definition of
facilitative service persons solely engaged in the business of
providing distributed ledger validation services--whether through
proof-of-work, proof-of-stake, or any other similar consensus
mechanism--without providing other functions or services. For the same
reason, proposed Sec. 1.6045-1(a)(21)(iii)(A) also excludes from the
definition of facilitative service persons solely engaged in the
business of selling hardware or licensing software for which the sole
function is to permit persons to control private keys which are used
for accessing digital assets on a distributed ledger. This latter
exclusion does not, therefore, exclude wallet software providers from
the definition of facilitative service if the software also provides
users with direct access to trading platforms from the wallet platform.
The Treasury Department and the IRS invite comments regarding whether
the provision of connection software by wallet providers to trading
platforms (that customers of the trading platforms can then use to
access their wallets from the trading platform) should be considered a
facilitative service resulting in the wallet provider being treated as
a broker. In addition, the Treasury Department and the IRS invite
comments regarding what additional functions wallet providers might
provide that would be considered facilitative services. Finally, the
definition of customer under proposed Sec. 1.6045-1(a)(2) has also
been revised to include persons that make sales of digital assets using
brokers who act as digital asset middlemen.
Under proposed Sec. 1.6045-1(a)(21)(ii)(A), a person is in a
position to know the identity of the party that makes the sale if that
person maintains sufficient control or influence over the facilitative
services provided so as to have the ability to set or change the terms
under which its services are provided to request that the party making
the sale provide that party's name, address, and taxpayer
identification number, in advance of the sale. This rule is similar to
the standard, recommended by the Financial Action Task Force (FATF), to
be used to determine whether a creator, owner, operator, or other
person involved in a decentralized application providing financial
services should be considered to be a virtual asset service provider
and should, thus, be subject to anti-money laundering (AML) and
counter-terrorist financing (CFT) requirements. FATF (2021), Updated
Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset
Service Providers, p. 26-28, FATF, Paris. <a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html">https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html</a>. Similarly, under proposed Sec. 1.6045-1(a)(21)(ii)(B), a
person is in a position to know the nature of the transaction
potentially giving rise to gross proceeds from a sale if that person
maintains sufficient control or influence over the facilitative
services provided so as to have the ability to determine whether and
the extent to which the transfer of digital assets involved in a
transaction gives rise to gross proceeds. Thus, a person will be
considered to be in a position to know the nature of the transaction
potentially giving rise to gross proceeds from a sale if the person can
determine that the transaction is a sale (and the gross proceeds from
that sale) based on the consideration received when a sale transaction
is completed. As a result, a person will be considered to be in a
position to know the nature of the transaction potentially
[[Page 59587]]
giving rise to gross proceeds from a sale if the person has the ability
to modify an automatically executing contract or protocol to which that
person provides access to ensure that this information is provided upon
the execution of a sale. For both of these standards, a person will be
considered as maintaining sufficient control or influence over the
provided facilitative services so as to have the ability to determine
customer identities or the nature of transactions if that person has
the ability to change the fees charged for the facilitative services,
whether by modifying the existing service arrangement or by
substituting a new service arrangement. The fact that a digital asset
trading platform operator has modified an automatically executing
contract or protocol in the past, or has replaced such a contract with
another contract in its protocol, strongly suggests that the operator
has sufficient control or influence over the facilitative services
provided to obtain the information about either the identity of the
party that makes the sale or whether and the extent to which the
transfer of digital assets involved in a transaction gives rise to
gross proceeds. The Treasury Department and the IRS invite comments
regarding what other factors should be considered relevant to
determining whether a person maintains sufficient control or influence
over provided facilitative services.
The Treasury Department and the IRS understand that in some cases
tokens that enable those who hold them to control the ability to change
the underlying protocol of a platform described as a decentralized
exchange (referred to as governance tokens) may be held in significant
part by founders, development teams, or one or more investors and that
in other cases those governance tokens may be more widely distributed.
There may also be fact patterns in which a holder of a significant
amount of governance tokens routinely takes actions that benefit the
platform, for example reimbursing users whose tokens have been stolen,
which actions are then ratified by or compensated by the broader group
of holders of governance tokens. Consequently, there can be a range of
effective control that ownership of governance tokens can provide,
based on how widely the tokens are disbursed and whether or not a group
of persons (normally the founders/development teams/investors) retain
enough tokens as a group to make decisions. Some decentralized
autonomous organizations (DAOs) are an example of this organizational
structure. Even in structures where governance tokens may be widely
distributed, individuals or groups of token holders can have the
ability to maintain practical control. In addition, in some cases, so-
called ``administration keys'' exist to allow developers or founders to
modify or replace the automatically executing contracts or protocols
underpinning digital asset trading platforms without requiring the vote
of governance token holders. The Treasury Department and the IRS invite
comments regarding the circumstances under which an operator does or
does not maintain sufficient control or influence over the facilitative
services offered by a digital asset trading platform. Additionally,
comments are requested regarding whether, and if so, how should the
ability of users of the platform, shareholders or holders of governance
tokens to vote on aspects of the platform's operations be considered.
Finally, comments are requested regarding whether this conclusion
should be impacted by the existence of full or even partial-access
administration keys or the ability of the operator to replace the
existing protocol with a new or modified protocol if that replacement
does not require holding a vote of governance tokens or complying with
these voting restrictions.
As noted, the statutory definition of broker under section
6045(c)(1)(C) refers to a person who ``for a consideration'' regularly
acts as a middleman. The revised definition of broker under the
Infrastructure Act also refers to a person who, ``for consideration,''
is responsible for regularly providing any service effectuating
transfers of digital assets on behalf of another person. The definition
of broker under existing and proposed Sec. 1.6045-1(a)(1) implements
this ``for consideration'' qualification by limiting the definition of
broker to a person who effects sales made by others ``in the ordinary
course of a trade or business.'' Persons engaged in a trade or business
necessarily are ``those so engaged for gain or profit.'' See e.g.,
Treas. Reg. Sec. 1.6041-1(b)(1); Groetzinger v. Commissioner, 480 U.S.
23 (1987). A business may receive different forms of consideration for
its goods and services. The receipt of fees may be a relevant factor in
determining whether a person is engaged in the ordinary course of a
trade or business. However, there may be persons who facilitate
transfers of digital assets for a fee or other consideration, such as
individuals who occasionally facilitate transfers but do not do so on a
regular basis, who are not engaged in a business activity. It is
intended that this ``trade or business'' requirement will result in a
more limited definition of broker than that which would apply under a
less restrictive ``for consideration'' standard. Accordingly, as long
as a broker effects the sales made by others in the ordinary course of
its trade or business, it will have a reporting obligation under
section 6045.
Proposed Sec. 1.6045-1(a)(10)(i)(B) also revises the definition of
effect to clarify that a person who acts as a principal with respect to
a sale is to be treated as effecting a sale only to the extent such
person is acting in the sale as a broker. Thus, for example, because an
obligor that regularly issues and retires its own debt obligations is a
broker, that obligor will be treated as effecting a sale when it
retires its own debt as part of those regular activities. Similarly, a
corporation that regularly issues and redeems its own stock will be
treated as effecting a sale when it redeems its own shares as part of
these regular activities. Additionally, an issuer of digital assets
that regularly offers to redeem those digital assets will be treated as
effecting a sale when it redeems those digital assets as part of these
regular activities. Finally, proposed Sec. 1.6045-1(a)(10)(i)(C) has
been revised to clarify that a person who acts as a principal in a sale
will be treated as effecting sales only if that principal is acting as
a dealer with respect to the sale that is subject to reporting under
section 6045. Thus, for example, a retailer who accepts digital assets
from a customer as payment for the sale of goods is not effecting the
sale of digital assets on behalf of that customer if that retailer is
not otherwise a dealer of digital assets. Similarly, an artist in the
business of creating and selling NFTs that represent interests in the
artist's work is not effecting the sale of digital assets on behalf of
purchasers, provided that artist is not otherwise a dealer in digital
assets. This result is appropriate regardless of whether the artist
regularly sells NFTs to the purchasers directly or through digital
asset brokers.
Proposed Sec. 1.6045-1(b)(1)(vi) through (xi) adds examples of
persons who are generally considered to be brokers under the above
definition. Specifically, digital asset trading platforms that also
provide custodial (hosted wallet) services, operators of non-custodial
trading platforms (including platforms that effect transactions through
automatically executing contracts or protocols), digital asset payment
processors, and operators and owners of digital asset kiosks are
included as examples of persons who in the ordinary course of their
trade or business stand ready to effect sales of digital assets on
behalf of customers. These examples also clarify that even if
[[Page 59588]]
a person's principal business does not meet the definition of broker,
the person will be considered a broker under the definition if that
person also regularly stands ready to effect sales of digital assets on
behalf of customers. Thus, digital asset hosted wallet providers and
persons who sell or license software to unhosted wallet users will be
considered brokers if they also facilitate or offer services to
facilitate the purchase or sale of digital assets.
Conversely, proposed Sec. 1.6045-1(b)(2)(viii) through (x)
illustrate that the term broker does not extend to merchants who sell
goods or services in return for digital assets, persons who are solely
engaged in the business of validating distributed ledger transactions
through proof-of-work, proof-of-stake, or any other consensus
mechanism, without providing other functions or services, and persons
who are solely engaged in the business of selling hardware or licensing
software, the sole function of which is to permit a person to control
private keys which are used for accessing digital assets on a
distributed ledger, without providing other functions or services.
1. Digital Asset Broker
Proposed Sec. 1.6045-1(a)(1) provides that a broker means any
person that in the ordinary course of a trade or business during the
calendar year stands ready to effect sales to be made by others. As
applied to brokers standing ready to effect sales for others of digital
assets (referred to in the preamble as a digital asset broker) the term
includes not only businesses with physical locations, such as digital
asset kiosks and other brick and mortar facilities, but also online
businesses, such as operators of trading platforms that hold custody of
their customers' digital assets and operators with sufficient control
or influence over non-custodial trading platforms that effect sales of
digital assets made for others by providing access to automatically
executing contracts, protocols, or other software programs that
automatically effect sales. As noted in the definition of effect
discussed in Part I.B of this Explanation of Provisions, operators of
non-custodial trading platforms would know or be in a position to know
the identity of their customers and the gross proceeds of their sales,
for example, because these operators have the ability to request that
new potential customers provide this information and can require that
their customers use automatically executing exchange contracts that
provide these operators with the gross proceeds information.
As noted, the term person generally includes an individual, a legal
entity, and an unincorporated group or organization through which any
business, financial operation or venture is carried on. Accordingly, an
operator of a digital asset trading platform that is an individual or
legal entity may be treated as a broker, and an operator of a digital
asset trading platform that is comprised of a group that shares fees
from the operation of the trading platform, or is otherwise treated as
an association or a partnership under Sec. 301.7701-3(b), may also be
treated as a broker even though there is no centralized legal entity
through which trades are carried out. For example, a DAO may be a
person that could be treated as a broker under these proposed
regulations. For a discussion of digital asset trading platforms that
issue governance tokens providing holders with the power to vote on
major platform decisions--such as new features to be offered or revised
governance rights, see Part I.B of this Explanation of Provisions. The
Treasury Department and the IRS request comments regarding the extent
to which holders of governance tokens should be treated as operating a
digital asset trading platform business as an unincorporated group or
organization.
A merchant that accepts digital assets directly from a customer as
payment for its provision of goods or services generally is not a
broker under these rules. A person is treated as a broker with respect
to digital assets only if it effects sales of digital assets for
customers. As described in Part I.C of this Explanation of Provisions,
a sale by a broker generally includes a disposition of digital assets
for cash, one or more stored-value cards, broker services, or certain
other property (including different digital assets) that are subject to
reporting under section 6045. While a merchant who provides goods,
services, or other property (rather than digital assets or cash) in
exchange for a customer's digital assets may be facilitating the
disposition of the customer's digital assets, that merchant generally
would not be treated as effecting sales of digital assets for customers
as a broker because the customer's digital assets are not being
exchanged for cash or the types of assets that cause the transaction to
be treated as a sale under the proposed regulations. If the merchant's
exchange of goods or services for digital assets is effected through a
digital asset payment processor, however, the digital assets payment
processor may be treated as a broker.
2. Digital Asset Hosted Wallet Providers
Under existing regulations, a broker includes an agent with respect
to a sale in the ordinary course of a trade or business if the nature
of the agency is such that the agent ordinarily would know the gross
proceeds of the sale. Consequently, under current law, certain
securities custodians and other agents are treated as brokers. Under
the multiple broker rule of existing Sec. 1.6045-1(c)(3)(iii), which
exempts brokers who conduct sales on behalf of other brokers, only the
broker that has the closest relationship to the customer is required to
report information under section 6045.
In the digital asset industry, some persons stand ready in the
ordinary course of a trade or business to take custody of and
electronically store the public and private keys to digital assets held
on behalf of others. These digital asset hosted wallet providers in
some cases also effect sales or possess information regarding the
digital asset sales of their customers in much the way a bank custodian
or other custodian does for securities. The proposed definition of
broker includes such a digital asset hosted wallet provider to the
extent that the digital asset hosted wallet provider also functions as
a principal in the sale of digital assets, acts as an agent for a party
in the sale if it would ordinarily know the gross proceeds from the
sale, or acts as a digital asset middleman and would ordinarily know or
be in a position to know the identity of the party that makes the sale
and the gross proceeds from the sale. If a hosted wallet provider
solely holds and transfers digital assets on behalf of its customers,
without possessing, or having the ability to possess, any knowledge of
gross proceeds from sales, the hosted wallet provider would not qualify
as a broker.
3. Digital Asset Payment Processors
A number of payment processors permit customers to make payment in
digital assets. These transactions may take various forms. In many
cases the customer pays in digital assets, and the payment processor
exchanges those digital assets for a U.S. dollar amount that is then
paid to a merchant, for example, in exchange for goods or services, or
to another intermediary recipient as with a payment card purchase. In
other cases, the payment processor transfers the digital assets to the
merchant or other recipient. In both cases, the customer has disposed
of its digital assets in a transaction that ordinarily is a gain (or
loss) recognition transaction. These proposed regulations
[[Page 59589]]
would require digital asset payment processors to provide information
on those dispositions. Payment processors (and in certain circumstances
merchant acquiring entities within the same network as payment card
issuers) may separately be required to provide information on the
merchant transaction under section 6050W, which requires reporting by
TPSOs and merchant acquiring entities. Therefore, for example, where a
TPSO effects a transaction involving the exchange of merchandise for
digital assets, the TPSO will need to report on the disposition of the
merchandise under section 6050W and on the digital asset disposition
under section 6045, assuming no exceptions apply.
A digital asset payment processor is defined in proposed Sec.
1.6045-1(a)(22)(i)(A) as a person who in the ordinary course of its
business regularly stands ready to effect digital sales by facilitating
payments from one party to a second party by receiving digital assets
from the first party and exchanging them into different digital assets
or cash paid to the second party, such as a merchant. In some cases,
payment recipients are willing to receive payments in digital assets
rather than cash and those payments are facilitated by an intermediary.
To facilitate a payment transaction in these circumstances, a digital
asset payment processor might provide the payment recipient with a
temporarily fixed exchange rate on a digital assets payment that is
transferred directly from a customer to that payment recipient. This
temporarily fixed exchange rate may also be available to the merchant
if it wishes to immediately exchange the digital assets for cash. In a
transaction of this kind, similar to other merchant transactions
involving intermediaries that provide cash to the merchants in exchange
for the merchant's provision of goods or services to the customer, the
customer disposes of its digital assets in a transaction that gives
rise to gain (or loss) and receives goods or services, while the
merchant receives or can choose to receive cash. This customer
consequently has the same obligation to determine and report its gain
or loss as in the other type of merchant transaction, and similar
reporting rules therefore should apply to the digital asset payment
processor. To address these transactions, for purposes of the
definition of a digital asset payment processor, these proposed
regulations treat the transfer of digital assets by a customer directly
to a second person (such as a vendor of goods or services) pursuant to
a processor agreement that provides for the temporary fixing of the
exchange rate to be applied to the digital assets received by the
second person as if the digital assets were transferred by the customer
to the digital asset payment processor in exchange for different
digital assets or cash paid to the second person.
This characterization of the transaction as a transfer of digital
assets by the customer to the digital asset payment processor in
exchange for the payment of different digital assets or cash to the
second person applies solely for purposes of certain definitions in
these regulations, to ensure that customer dispositions of digital
assets for consideration are subject to reporting regardless of the
details of the arrangements made by the merchant for receiving payment.
No inference is intended with respect to whether these transactions
should or may be treated as dispositions for cash for any other purpose
of the Code. The characterization of the transaction as involving a
payment of cash to the merchant for purposes of these proposed
regulations will apply regardless of whether the merchant subsequently
exchanges the digital assets received pursuant to the temporarily fixed
exchange rate, because the fixed exchange rate provided by the digital
asset payment processor both facilitates the transaction and serves as
a foundation to determine the fair market value received by the
customer in the exchange. Accordingly, to meet their information
reporting obligations in these alternatively structured payment
transactions, digital asset payment processors will need to ensure that
they obtain the required personal identifying information (that is,
name, address, and tax identification number) from the customer (that
is, the party making the payment in digital assets) in advance of these
transactions. It is anticipated that digital asset payment processors
will report gross proceeds from the disposition of digital assets by
customers but may not have the information necessary or available to
report the basis of the disposed-of digital assets unless they also
hold digital assets for those customers.
In addition, because a payment processor knows the gross proceeds
with respect to an exchange transaction when it is participating in a
transaction that is potentially reportable under existing Sec.
1.6050W-1(a)(1), the definition of a digital asset payment processor
also includes certain payment settlement entities and certain entities
that make payments to payment settlement entities that are potentially
subject to reporting under section 6050W. First, proposed Sec. 1.6045-
1(a)(22)(i)(B) provides that a digital asset payment processor includes
a TPSO (as defined in Sec. 1.6050W-1(c)(2)) that makes (or submits
instructions to make) payments using one or more digital assets in
settlement of reportable payment transactions as described in Sec.
1.6050W-1(a)(2). This treatment of a TPSO as a digital asset payment
processor applies whether or not the TPSO actually makes (or provides
the instructions to make) the payment or contracts with a third-party
electronic payment facilitator, pursuant to Sec. 1.6050W-1(d)(2), to
make (or provide the instructions to make) the payment. In addition,
this treatment of a TPSO as a digital asset payment processor applies
without regard to whether the payment to the merchant is below the de
minimis threshold described in section 6050W(e) and, thus, not
reportable under section 6050W.
Second, the definition of a digital asset payment processor in
proposed Sec. 1.6045-1(a)(22)(i)(C) includes a payment card issuer
that makes (or submits the instruction to make) payments in one or more
digital assets to a merchant acquiring entity, as defined under Sec.
1.6050W-1(b)(2), in a transaction that is associated with a reportable
payment transaction under Sec. 1.6050W-1(a)(2) that is effected by the
merchant acquiring bank. Whether a transaction is associated with a
reportable payment transaction is determined without regard to whether
the merchant acquiring bank contracts with an agent to make (or submit
the instructions to make) its payments to the merchant.
Proposed Sec. 1.6045-1(a)(2)(ii)(A) clarifies that the customer in
a digital assets payment processor transaction includes the person who
transfers the digital assets or directs the transfer of the digital
assets to the digital asset payment processor to make payment to the
second person. Thus, for example, a digital asset payment processor's
customer is the person who transfers the digital assets to that
processor even if the processor has a contractual arrangement with only
the second person, that is, the person who will ultimately receive the
cash in the payment transaction.
The Treasury Department and the IRS recognize that some
stakeholders may have concerns that providing personal identity
information in transactions where the payment processor is an agent of
a merchant may raise privacy concerns and request comments on whether
there are alternative approaches that would satisfy tax
[[Page 59590]]
compliance objectives while reducing privacy concerns.
The Treasury Department and the IRS considered whether a de minimis
threshold should apply to the reporting of merchant transactions of the
kind described above, taking into account that the cost and effort to
build a reporting system may increase if numerous small transactions
must be reported. Whether there would in fact be an increase in cost
and effort is uncertain, as in some other information reporting
contexts reporting entities have elected not to take advantage of de
minimis thresholds in order to avoid the need to monitor the size or
amount of the reportable item. Moreover, taxpayers are required to
report gain from dispositions of digital assets on their tax returns
regardless of the amount disposed of, and a taxpayer that engages in
many small dispositions of digital assets may have an aggregate amount
of gain for the taxable year that is significant. Because information
reporting assists customers in determining the proper amount of gain or
loss attributable to such dispositions, these proposed regulations do
not include a de minimis rule for reporting these merchant
transactions.
4. Other Brokers
The definition of broker in existing Sec. 1.6045-1(a)(1) is
proposed to be modified to include persons that regularly offer to
redeem digital assets that were created or issued by that person, such
as in an initial coin offering or redemptions by an issuer of a so-
called stablecoin. A stablecoin is a form of digital asset that is
intended to have a stable value relative to another asset or assets,
typically a fiat currency. Some stablecoin issuers effect redemptions
on behalf of all, or some, of their customers and know the gross
proceeds paid to their customers. Stablecoin issuers that redeem their
stablecoins are included in the definition of broker because,
notwithstanding the nomenclature ``stablecoin,'' the value of a
stablecoin may not always be stable and therefore may give rise to gain
or loss. See Additional Definitional Changes in Part I.K of this
Explanation of Provisions. These proposed regulations apply to persons
that regularly offer to redeem digital assets rather than persons who
regularly carry out redemptions to ensure reporting on the occasional
redemptions by digital asset issuers that may not regularly redeem
their issued digital assets. The Treasury Department and the IRS
request comments on the frequency with which creators or issuers of
digital assets redeem digital assets. In addition, the Treasury
Department and the IRS request comments regarding whether the broker
reporting regulations should apply to include initial coin offerings,
simple agreements for future tokens, and similar contracts.
5. Real Estate Reporting Persons
Proposed Sec. 1.6045-1(a)(1) was also modified to provide that a
real estate reporting person is a broker with respect to digital assets
used as consideration in a real estate transaction if the reporting
person would be required to make an information return with respect to
that real estate transaction under proposed Sec. 1.6045-4(a), without
regard to any reporting exceptions provided under section 6045(e)(5) or
proposed or existing Sec. 1.6045-4(c) or (d), such as the exception
for certain sales of principal residences or the exception for exempt
real estate sellers. Thus, for example, a real estate reporting person
would be required to report on a real estate buyer's exchange of
digital assets for real estate as a sale of those digital assets even
though the real estate reporting person is not required to report on
the real estate seller's exchange of the real estate for digital assets
due to the fact that the seller of that real estate is an exempt
seller, such as a corporation, under existing Sec. 1.6045-4(d).
C. Expansion of the Types of Sales Subject To Reporting
Digital assets are unique among the types of assets that are
subject to reporting under section 6045 because it is common for
digital assets to be exchanged for different digital assets. In
addition, some digital assets can readily function as a payment method
as well as an investment asset. Digital assets can be exchanged for
cash, stored-value cards, services, or other property (including
different digital assets). To avoid gaps in information reporting with
respect to this broad range of taxable exchanges, proposed Sec.
1.6045-1(a)(9)(ii) expands the definition of a sale subject to
reporting. Proposed Sec. 1.6045-1(a)(9)(ii)(A)(1) and (2) provide that
a sale includes the disposition of a digital asset in exchange for
cash, one or more stored-value cards, or a different digital asset. An
exchange for cash for these purposes includes a payment received
through the use of a check, credit card, or debit card. Proposed Sec.
1.6045-1(a)(25) defines a stored-value card as a card--whether in
physical or digital form--with a prepaid value in U.S. dollars, any
convertible foreign currency, or any digital asset. A stored-value card
includes a gift card. The Treasury Department and the IRS request
comments on whether the types of consideration for which digital assets
may be exchanged in a sale transaction is sufficiently broad to capture
current and anticipated transactions in which taxpayers regularly
dispose of digital assets for consideration.
In addition, proposed Sec. 1.6045-1(a)(9)(ii)(B) provides that a
sale of a digital asset includes the disposition of a digital asset by
a customer in exchange for property (including securities and real
property) of a type that is subject to reporting under section 6045.
Thus, for example, if a stockbroker accepts a digital asset from a
customer as payment for the customer's purchase of stock, that
disposition of the digital asset in exchange for stock will be treated
as a sale of the digital asset by that customer for purposes of section
6045. Similarly, if a real estate reporting person, as defined in
existing Sec. 1.6045-4(e), is involved in a real estate transaction in
which the real estate buyer uses digital assets as consideration in the
exchange for real property, that disposition of digital assets in
exchange for real property will be treated as a sale of the digital
assets by that real estate buyer for purposes of section 6045.
Proposed Sec. 1.6045-1(a)(9)(ii)(C) provides that a sale of
digital assets also includes a disposition of digital assets by a
customer in consideration for the services of a broker as defined in
proposed Sec. 1.6045-1(a)(1). Whether a person is a broker for
purposes of this rule, however, is determined without regard to whether
that person regularly as part of its trade or business accepts digital
assets in consideration for its services. Thus, if a stockbroker
accepts a digital asset as payment for the commission charged for a
stock purchase, the customer's disposition of the digital asset in
exchange for the broker's services will be treated as a sale of the
digital asset for purposes of section 6045 because the stockbroker is a
broker due to the fact that it regularly effects sales of stock (not
because it regularly accepts digital assets for services). In contrast,
if a landscaper accepts a digital asset as payment for landscaping
services, the customer's disposition of the digital asset in exchange
for the landscaper's services will not be treated as a sale of digital
assets for purposes of section 6045 because the determination of
whether the landscaper is a broker is made without regard to whether
that landscaper regularly accepts digital assets in consideration for
landscaping services as part of a trade or business. Proposed Sec.
1.6045-1(a)(2)(ii)(B) provides that the customer in these sales is the
person who transfers the digital
[[Page 59591]]
assets or directs the transfer of the digital assets to the broker
regardless of whether the broker is a digital asset broker. Proposed
Sec. 1.6045-1(a)(2)(ii)(C) provides that in the case of a broker that
is a real estate reporting person with respect to a real estate
transaction, the customer is the person who transfers the digital
assets or directs the transfer of the digital assets to the seller of
the real estate (or the seller's nominee or agent) to acquire the real
estate. Finally, to ensure that these sales of digital assets are
treated as effected by a broker, proposed Sec. 1.6045-1(a)(21)(iii)(B)
provides that the acceptance of digital assets in consideration for the
above-described property or services provided by a broker is a
facilitative service. As a result, the broker will be treated as
effecting these sales of digital assets as a digital asset middleman
under proposed Sec. 1.6045-1(a)(10)(i)(D).
In certain circumstances, a digital asset broker (other than a
digital asset payment processor discussed earlier in Part I.B.3 of this
Explanation of Provisions) such as a digital asset broker providing
hosted wallet services might transfer digital assets without knowing
that the transfer was part of a sale transaction. For example, a
customer might direct such a custodial broker to transfer digital
assets to the wallet of a merchant in connection with the purchase of
goods or services from that merchant. The definition of effect in
proposed Sec. 1.6045-1(a)(10) limits the sales for which such brokers
must make a report to those transactions in which the broker (as agent)
would ordinarily know the gross proceeds from the sale or (as digital
asset middleman) would ordinarily know or be in a position to know the
identity of the party that makes the sale and the gross proceeds from
the sale. Although the custodial broker in this example would
ordinarily know or be in a position to know the identity of its
customer, it is not in a position to know that the transfer was
associated with a sale or exchange transaction or the amount that the
customer received as gross proceeds from the exchange (that is, the
amount the customer received in consideration for the digital assets
surrendered). Accordingly, the transfer of digital assets by that
custodial broker to the wallet of the merchant does not constitute
effecting a sale of digital assets by that broker. In contrast, a
digital asset payment processor would typically know whether the
transfer was part of a sale transaction because that broker would have
a contractual relationship with the payment recipient as well as with
the transferor of the payment. Accordingly, in these cases the transfer
of digital assets by the digital asset payment processor (or the
direction to the customer by the digital asset payment processor to
transfer digital assets) to the wallet of the merchant would constitute
effecting a sale.
In view of the increasing use of digital assets to make payments
for goods and services or to satisfy other payment obligations through
the intermediation of digital asset payment processors, digital asset
payment processors (which may also function in other contexts as
digital asset trading platforms) are subject to these rules. To achieve
this result, proposed Sec. 1.6045-1(a)(9)(ii)(D) provides that a sale
includes payments of a digital asset by the customer to a digital asset
payment processor in exchange for that processor's payment of a
different digital asset or cash to a second person. A sale also
includes the transfer of a digital asset by a customer directly to a
second person (such as a vendor of goods or services) pursuant to a
processor agreement that provides for the temporary fixing of the
exchange rate to be applied to the digital asset received by the second
person, which is treated (under the rules setting forth the definition
of a digital asset payment processor) as if the digital asset was paid
by the customer to the digital asset payment processor in exchange for
a different digital asset or cash paid to that second person.
In the case of a digital asset payment processor that is a TPSO, a
sale also includes a customer's payment in digital assets to the
digital asset payment processor (or pursuant to instructions provided
by that digital asset payment processor or its agent) as part of a
transaction in which the digital asset payment processor pays (or is
treated as paying) the digital assets to a merchant in settlement of a
reportable payment transaction under Sec. 1.6050W-1(a)(2). This
payment is a sale of digital assets by the customer under these
proposed regulations without regard to whether the amount paid to the
merchant during the calendar year exceeds the de minimis threshold
described in section 6050W(e) or whether the digital asset payment
processor contracts with a third party to make (or provide instructions
to make) the payment to the merchant pursuant to Sec. 1.6050W-1(d)(2).
Finally, to account for payments that are reportable under section
6050W with respect to payment card transactions where a digital asset
payment processor is also a payment card issuer, a sale of digital
assets also includes a payment made in digital assets by a customer to
the payment card issuer (or pursuant to instructions provided by that
card issuer or its agent) in a transaction associated with a reportable
payment transaction under Sec. 1.6050W-1(a)(2). This treatment of the
customer's payment as a sale in this case is determined without regard
to whether the merchant acquiring bank contracts with an agent to make
(or submit the instructions to make) payment to the ultimate payee.
Thus, under this rule, in the case of a payment card purchase at a
merchant, the buyer's payment in a digital asset to the payment card
issuer will be a sale even if that payment card issuer pays the
merchant acquiring entity in the same type of digital asset because the
subsequent payment (whether in cash or in digital assets) by the
merchant acquiring entity (or its agent) to the merchant is a
reportable payment transaction under Sec. 1.6050W-1(a)(2).
A broker's customer may enter into executory contracts, or other
derivative contracts involving the future delivery of a digital asset,
where delivery under the contract also should be subject to reporting
as a digital asset sale under these proposed regulations. To ensure
that these executory or other derivative contracts do not circumvent
the proposed information reporting rules for digital assets, proposed
Sec. 1.6045-1(a)(9)(ii)(A)(3) defines a sale to include the delivery
of a digital asset pursuant to the settlement of a forward contract,
option, regulated futures contract, any similar instrument, or any
other executory contract that would be treated as a sale of the digital
asset under the regulation if the contract had not been executory.\3\
The rules in existing Sec. 1.6045-1(a)(9), redesignated in these
proposed regulations as proposed Sec. 1.6045-1(a)(9)(i), applicable to
making or taking delivery (for example, treating a closing transaction
as one or two sales depending on the nature of the contract) are cross-
referenced to apply to the delivery of digital assets pursuant to
transactions described in proposed Sec. 1.6045-1(a)(9)(ii)(A)(3).
Additionally, the rules in existing Sec. 1.6045-1(a)(9) applicable to
the circumstances under which a transaction is treated as a sale with
respect to certain contracts and options are cross-referenced to apply
to determine if similar transactions related to digital assets
constitute sales described in proposed Sec. 1.6045-1(a)(9)(ii)(A).
Accordingly, the entering into of a digital asset contract that
[[Page 59592]]
requires delivery of personal property, the initial grant or purchase
of a digital asset option, or the exercise of a purchased digital asset
call option for physical delivery (except for a contract described in
section 988(c)(5)) is not included in the definition of sale under
proposed Sec. 1.6045-1(a)(9)(ii)(A).
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\3\ No inference is intended as to when a sale of a digital
asset occurs under any other legal regime, including the Federal
securities laws and the Commodity Exchange Act, or to otherwise
impact the interpretation or applicability of those laws, which are
outside the scope of these regulations.
---------------------------------------------------------------------------
Thus, for example, the closing of a regulated futures contract that
involves making a delivery of digital assets will be treated as two
sales, one under redesignated proposed Sec. 1.6045-1(a)(9)(i) with
respect to the profit or loss on the contract, and the other under
proposed Sec. 1.6045-1(a)(9)(ii)(A)(3) on the delivery of the digital
assets. The Treasury Department and the IRS invite comments addressing
the extent to which these rules create logistical concerns for the
reporting on contracts involving the delivery of digital assets.
Additionally, the delivery of a digital asset under an executory
contract will be treated as a sale of the digital asset under these
rules if the underlying terms of the contract (for example, an exchange
of one digital asset for a different digital asset) would have given
rise to a sale under these rules if the contract had been executed when
made. In contrast, if the underlying terms of the contract would not
have been treated as a sale under these rules (for example, the direct
payment of a digital asset by a consumer to a merchant in exchange for
merchandise without the involvement of a digital asset payment
processor), then the delivery of the digital asset pursuant to this
type of executory contract will not be treated as a sale. The Treasury
Department and the IRS invite comments regarding how frequently forward
contracts involving digital assets are traded in practice, and whether
there are any additional issues that should be considered to enable
brokers to report on these transactions.
Finally, there are several types of transactions that the
definition of sale under proposed Sec. 1.6045-1(a)(9)(ii) does not
include. For example, the definition does not include a transaction in
which a customer receives new digital assets without disposing of
something else in exchange. Thus, for example, a sale does not include
a hard fork transaction, in which a customer receives new digital
assets as part of a protocol change in previously held digital assets
without disposing of different digital assets in exchange. Similarly,
the receipt by a customer of digital assets from an airdrop (or
simultaneous distribution of units of digital assets to the distributed
ledger addresses of multiple taxpayers) does not constitute the sale of
digital assets under proposed Sec. 1.6045-1(a)(9)(ii) even if the
customer's holdings in existing digital assets are the basis on which
the new digital assets were received. Additionally, the definition of
sale under proposed Sec. 1.6045-1(a)(9)(ii) does not include a
transaction in which a broker's customer receives digital assets in
return for the performance of services. Thus, for example, a sale does
not include the receipt by a broker's customer of new digital assets as
a reward in return for certain marketing-related services such as
taking a survey.
The Treasury Department and the IRS are aware that the transactions
described in this Part I.C of this Explanation of Provisions do not
address every type of transaction involving digital assets that
taxpayers engage in through entities defined in these proposed
regulations as brokers. For example, these proposed regulations do not
specify whether a loan of digital assets is required to be reported.
These proposed regulations also do not specifically address whether
reporting is required for transactions involving the transfer of
digital assets to and from a liquidity pool by a liquidity pool
provider, or the wrapping and unwrapping of a digital asset, in light
of the absence of guidance on those transactions. Comments are
requested on whether the definition of sale or other parts of the
regulations should be revised to address transactions not described in
these proposed regulations.
D. Information To Be Reported for Digital Asset Sales
Several new subparagraphs have been added to the rules contained in
existing Sec. 1.6045-1(d)(2)(i) to address the information required to
be reported with respect to digital asset sales. Much of the
information required to be reported is similar to the information that
is currently required to be reported on the Form 1099-B with respect to
securities. For example, proposed Sec. 1.6045-1(d)(2)(i)(B) requires
that for each digital asset sale for which a broker is required to file
an information return, the broker must report on the form prescribed by
the Secretary the following information:
<bullet> The customer's name, address, and taxpayer identification
number;
<bullet> The name or type of the digital asset sold and the number
of units of the digital asset sold;
<bullet> The sale date and time;
<bullet> The gross proceeds of the sale; and
<bullet> Any other information required by the form or instructions
in the manner required by the form or instructions.
Additionally, to aid the IRS in verifying valuations provided for
reported gross proceeds and in determining whether the basis claimed by
taxpayers in connection with transactions for which adjusted basis
information is not reported by the broker, proposed Sec. 1.6045-
1(d)(2)(i)(B) also requires that the broker report:
<bullet> The transaction identification (transaction ID or
transaction hash) associated with the digital asset sale, if any;
<bullet> The digital asset address (or digital asset addresses if
multiple) from which the digital asset was transferred in connection
with the sale, if any; and
<bullet> Whether the consideration received was cash, different
digital assets, other property, or services.
In addition to these listed items, if the transaction involves the
sale of a digital asset that also constitutes a sale of a security, the
broker must also provide certain information that is relevant to the
sale of securities as required by the form or instructions. It is
anticipated that this additional information will be required only for
digital assets that are digital representations of other assets that
constitute securities.
To the extent the sale is of a digital asset that was held by the
broker in a hosted wallet on behalf of the customer and that digital
asset was previously transferred into that account (transferred-in
digital asset), the broker must also report the date and time of such
transfer-in transaction, the transaction ID of such transfer-in
transaction, the digital asset address (or digital asset addresses if
multiple) from which the transferred-in digital asset was transferred,
and the number of units transferred in by the customer as part of that
transfer-in transaction. The Treasury Department and the IRS intend to
except brokers from reporting this additional information with respect
to the sale of transferred-in digital assets once rules have been
promulgated under section 6045A with respect to brokers who receive
transfer statements under section 6045A for digital assets. Until that
time, this information would be used by the IRS to verify the basis
claimed by the taxpayer in connection with the sale of the transferred-
in digital asset.
For purposes of the above reporting requirements, proposed Sec.
1.6045-1(a)(20) defines a digital asset address as the unique set of
alphanumeric characters that is generated by the wallet into which the
digital asset will be transferred. Some digital asset addresses may be
referred to as wallet addresses. Additionally, proposed Sec. 1.6045-
1(a)(26) defines a transaction identification, or transaction ID, as
the unique set of alphanumeric identification characters that a digital
asset distributed ledger associates with
[[Page 59593]]
a transaction involving the transfer of a digital asset from one
digital asset address to another. A transaction ID is alternatively
referred to as a ``Txid'' or ``transaction hash.''
The Treasury Department and the IRS recognize that the requirement
to report transaction ID information and digital asset addresses with
respect to digital asset sales and certain digital asset transfer-in
transactions may be burdensome under certain circumstances.
Accordingly, the Treasury Department and the IRS request comments
regarding whether there are other less burdensome alternatives that
would allow the IRS the ability to investigate or verify basis
information provided by taxpayers. For example, should the Treasury
Department and the IRS consider an annual aggregate digital asset sale
threshold, above which the broker would report transaction ID
information and digital asset addresses? If so, what should that
threshold be and why?
When available, drafts of the form prescribed by the Secretary will
be posted for comment at <a href="http://www.irs.gov/draftforms">www.irs.gov/draftforms</a>. Brokers will only be
required to file the form following approval of the information
collection under the Paperwork Reduction Act. The Paperwork Reduction
Act approval process requires the IRS to publish a 60-day notice and
request for comments in the Federal Register and subsequently publish a
30-day notice and request for comments in the Federal Register for the
Office of Management and Budget's (OMB) review and clearance. Proposed
Sec. 301.6721-1(g)(3)(iii) (failure to file correct information
returns) and proposed Sec. 301.6722-1(d)(2)(viii) (failure to furnish
correct payee statements) have been modified to include the form
prescribed by the Secretary pursuant to proposed Sec. 1.6045-
1(d)(2)(i)(B) in the list of forms subject to those penalties.
For sales of digital assets that are effected when recorded on a
broker's internal accounting ledger, proposed Sec. 1.6045-1(d)(4)(ii)
provides that the broker must report the sale as of the date and time
the sale was recorded on that internal ledger regardless of whether
that sale is later recorded on a distributed ledger. Reporting the time
of the transaction under a uniform time standard would eliminate any
confusion that would be caused by reporting transactions by the same
taxpayer in different local time zones. The Treasury Department and the
IRS understand that transaction timestamps undertaken on blockchains
are generally recorded using Coordinated Universal Time (UTC).
Accordingly, proposed Sec. 1.6045-1(d)(4)(ii) provides that the
reported date and time should generally be set forth in hours, minutes,
and seconds using UTC unless otherwise directed in the form prescribed
by the Secretary pursuant to proposed Sec. 1.6045-1(d)(2)(i)(B) or
instructions. It is anticipated that the time standard required by this
form prescribed by the Secretary or instructions will correspond to any
successor convention for time generally used by the industry. Proposed
Sec. 1.6045-1(d)(4)(iii) provides examples of a broker reporting time
using the UTC time convention based on a 12-hour clock (designating
a.m. and p.m. as appropriate). The Treasury Department and the IRS
request comments regarding whether it would be less burdensome to
report the time using a 24-hour clock and the extent to which all
brokers should be required to use the same 12-hour or 24-hour clock for
these purposes. The Treasury Department and the IRS also request
comments regarding whether a uniform time standard is overly burdensome
and the extent to which there are circumstances under which more
flexibility should be provided. For example, if a particular customer's
transactions are carried out only in one time zone, the customer might
prefer reporting that is based on that time zone, particularly for
transactions for which the exact date and time of acquisition or
disposition affect the determination of the customer's tax liability,
such as transactions that take place just before the end of the
customer's taxable year or that relate to the customer's holding period
for the disposed-of digital asset. The Treasury Department and the IRS
request comments regarding whether there are alternatives to basing the
transaction date on the UTC for customers who are present in a
different time zone known to the broker at the time of the transaction.
These information reporting rules will require digital asset
brokers to expend resources to develop and implement information
reporting systems to comply with the required reporting. Balancing on
the other side of that consideration is the concern that limited
information reporting by brokers has made it difficult, time-consuming,
and expensive for taxpayers to calculate their gains or losses on these
transactions and has contributed to significant underreporting by
taxpayers of gain generated by digital asset sale and exchange
transactions. Accordingly, these changes are proposed to apply to sales
and exchanges of digital assets effected on or after January 1, 2025.
No inference should be drawn from these proposed rules concerning the
reporting requirements for digital asset sale transactions entered into
before the regulations become applicable.
E. Gross Proceeds in Digital Asset Transactions
1. Determining the Gross Proceeds in a Sale Transaction
The information reporting rules for determining the gross proceeds
in a sale transaction generally follow the substantive rules for
computing the amount realized from transactions involving the sale or
other disposition of digital assets. These substantive rules are
provided under proposed Sec. 1.1001-7(b) and discussed in Part II of
this Explanation of Provisions. Accordingly, proposed Sec. 1.6045-
1(d)(5)(ii)(A) defines gross proceeds to be reported by a broker with
respect to a customer's sale of digital assets as the sum of: (i) the
total amount in U.S. dollars paid to the customer or credited to the
customer's account as a result of the sale; (ii) the fair market value
of any property received or, in the case of a debt instrument issued in
exchange for the digital asset and subject to Sec. 1.1001-1(g), the
amount realized attributable to the debt instrument as determined under
proposed Sec. 1.1001-7(b)(1)(iv) (in general, the issue price of the
debt instrument); and (iii) the fair market value of any services
received, including services giving rise to digital asset transaction
costs; reduced by the amount of the allocable digital asset transaction
costs as discussed in Part I.E.3 of this Explanation of Provisions.
Part I.E.2 of this Explanation of Provisions provides the rules
applicable to determining the fair market value of property or services
received in an exchange transaction.
In the case of a sale effected by a digital asset payment processor
on behalf of one party, proposed Sec. 1.6045-1(d)(5)(iii) provides
that the amount of gross proceeds to be reported by the digital asset
payment processor is equal to the sum of the amount paid in cash, or
the fair market value of the amount paid in digital assets by the
digital asset payment processor to a second party, plus any digital
asset transaction costs withheld (whether withheld from the digital
assets transferred by the first party or withheld from the amount due
to the second party), reduced by the amount of the allocable digital
asset transaction costs as discussed in Part I.E.3 of this Explanation
of Provisions. For purposes of this calculation, the amount paid by a
digital asset payment processor to a second person includes
[[Page 59594]]
the amount treated as paid to the second person pursuant to a processor
agreement that temporarily fixes the exchange rate between that second
person and a digital asset payment processor, which amount is
determined by reference to the fixed exchange rate.
2. Determining the Fair Market Value of Property or Services Received
in an Exchange Transaction
In determining the fair market value of property or services
received by the customer in an exchange transaction involving digital
assets, the information reporting rules generally follow the
substantive rules provided under proposed Sec. 1.1001-7(b) discussed
in Part II of this Explanation of Provisions. Accordingly, proposed
Sec. 1.6045-1(d)(5)(ii)(A) provides that in determining gross proceeds
under these rules, the fair market value should be measured as of the
date and time the transaction was effected. Additionally, except in the
case of services giving rise to digital asset transaction costs, to
determine the fair market value of services or property (including
different digital assets or real property) paid to the customer in
exchange for digital assets, proposed Sec. 1.6045-1(d)(5)(ii)(A)
provides that the broker must use a reasonable valuation method that
looks to the contemporaneous evidence of value of the services, stored-
value cards, or other property. In contrast, because the value of
digital assets used to pay for digital asset transaction costs is
likely to be significantly easier to determine than any other measure
of the value of services giving rise to those costs, the Treasury
Department and the IRS have determined for administrability purposes
that brokers must look to the fair market value of the digital assets
used to pay for digital asset transaction costs in determining the fair
market value of services (including the services of any broker or
validator involved in executing or validating the transfer) giving rise
to those costs. The Treasury Department and the IRS, however, request
comments regarding whether there are circumstances under which an
alternative valuation rule would be more appropriate.
In the case of one digital asset exchanged for a different digital
asset, proposed Sec. 1.6045-1(d)(5)(ii)(A) provides that the broker
may rely on valuations performed by a digital asset data aggregator
using a reasonable valuation method. For this purpose, a reasonable
valuation method looks to the exchange rate and the U.S. dollar
valuations generally applied by the broker effecting the exchange as
well as other brokers, taking into account the pricing, trading
volumes, market capitalization, and other relevant factors in
conducting the valuation. Because taking into account these described
factors from small volume exchangers could provide skewed valuations of
a digital asset, proposed Sec. 1.6045-1(d)(5)(ii)(C) provides that a
valuation method is not a reasonable method if the method over-weighs
prices from exchangers that have low trading volumes or if the method
under-weighs exchange prices that lie near the median price value. A
valuation method also is not a reasonable method if it inappropriately
weighs factors associated with a price that would make that price an
unreliable indicator of value. For example, if trading prices on a
digital asset trading platform are affected by structured trading that
tends to increase the price of assets beyond the price that an
unrelated purchaser with knowledge of the facts would pay, using the
prices from that digital asset trading platform may not be part of a
reasonable valuation method.
Consistent with the substantive rules discussed in Part II of this
Explanation of Provisions, if in a digital asset exchange transaction
there is a disparity between the value of the services or property
received and the value of the digital asset transferred, proposed Sec.
1.6045-1(d)(5)(ii)(B) provides that the broker must look to the fair
market value of the services or property received. If the broker
reasonably determines that the value of services or property received
cannot be valued with reasonable accuracy, proposed Sec. 1.6045-
1(d)(5)(ii)(B) provides that the fair market value of the received
services or property must be determined by reference to the fair market
value of the transferred digital asset. If the broker reasonably
determines that neither the digital asset nor the services or other
property exchanged for the digital asset can be valued with reasonable
accuracy, proposed Sec. 1.6045-1(d)(5)(ii)(B) provides that the broker
must report an undeterminable value for gross proceeds from the
transferred digital asset.
3. Determining Digital Asset Transaction Costs Allocable to the Sale in
an Exchange Transaction
Many digital asset brokers will charge a single transaction fee in
the case of an exchange of one digital asset for a different digital
asset. In some cases, these fees may be adjusted depending on the type
of digital asset acquired or disposed of in the exchange, with
transactions involving less commonly traded digital assets carrying
higher transaction fees than transactions involving more commonly
traded digital assets. The Treasury Department and the IRS considered
various approaches to allocating transaction fees and other digital
asset transaction costs that are charged in an exchange of one digital
asset for a different digital asset. Ultimately, to avoid the
administrative complexities associated with distinguishing between
special broker fee allocations that appropriately reflect the economics
of the transaction and broker fee allocations that reflect tax-
motivated requests, proposed Sec. 1.6045-1(d)(5)(iv) provides that in
the case of a sale or disposition of digital assets, the total digital
asset transaction costs paid by the customer are generally allocable to
the disposition of the digital assets. An exception applies, however,
in an exchange of one digital asset for another digital asset differing
materially in kind or in extent. In that case, one-half of any digital
asset transaction cost paid by the customer in cash or property to
effect the exchange should be allocable to the disposition of the
transferred digital asset and the other half should be allocable to the
acquisition of the received digital asset. These rules are consistent
with the substantive rules provided under proposed Sec. 1.1001-7(b)
and proposed Sec. 1.1012-1(h) discussed in Part II of this Explanation
of Provisions. Finally, proposed Sec. 1.6045-1(d)(5)(iv) defines the
term digital asset transaction costs to mean the amount paid to effect
the disposition or acquisition of a digital asset and includes
transaction fees paid to a digital asset broker, any transfer taxes
that apply, and any other commissions or other costs paid to effect the
disposition or acquisition of a digital asset.
F. Adjusted Basis Reporting for Digital Assets and Certain Financial
Contracts on Digital Assets
1. Mandatory Broker Reporting
Section 6045(g) requires a broker that is otherwise required to
make a return under section 6045(a) with respect to covered securities
to report the adjusted basis with respect to those securities. Under
section 6045(g)(3)(A), a covered security is any specified security
acquired on or after the acquisition applicable date if the security
was either acquired through a transaction in the account in which the
security is held or was transferred to that account from an account in
which the security was a covered security, but only if the broker
received a transfer statement under section 6045A with respect to that
security. Prior to the amendments made by the Infrastructure Act, the
term specified security was defined by
[[Page 59595]]
section 6045(g)(3)(B) to mean any share of stock in a corporation; any
note, bond, debenture, or other evidence of indebtedness; any commodity
or commodity derivative if the Secretary determines that adjusted basis
reporting is appropriate; and any other financial instrument with
respect to which the Secretary determines that adjusted basis reporting
is appropriate. For stock in a corporation, sections 6045(g)(3)(C)(i)
and (ii) provide that the acquisition applicable date is either January
1, 2011, or January 1, 2012, depending on whether the average basis
method is permissible under section 1012. Prior to the amendments made
by the Infrastructure Act, section 6045(g)(3)(C)(iii) provided the
acquisition applicable date for specified securities other than stock,
including for any other financial instrument with respect to which the
Secretary determines that adjusted basis reporting is appropriate, was
January 1, 2013, or such later date as determined by the Secretary.
Under the existing regulations, reporting of adjusted basis is required
only for stock, debt instruments, options on stock and debt and related
financial attributes such as interest rates or dividend yields, and
securities futures contracts.
The Treasury Department and the IRS intend to issue a separate
notice of proposed rulemaking to implement the legislative changes to
section 6045A which would require applicable persons, including
brokers, to provide transfer statements under section 6045A when
digital assets are transferred. These transfer statements are needed
for digital assets that are acquired by taxpayers in one account and
transferred to another account to provide the brokers who effect sales
of digital assets with the information necessary to report the adjusted
basis of the sold digital assets. Section 6045A addresses this
information shortfall with respect to transferred securities by
requiring that the acquiring broker or other applicable person provide
the purchase date and basis information for a transferred security to
the receiving broker. The legislative changes to section 6045A made in
section 80603(b)(2)(A) of the Infrastructure Act not only clarify that
transfer statement reporting under section 6045A(a) applies to covered
securities that are digital assets, but also add a new reporting
provision under section 6045A(d) to provide for broker information
reporting to the IRS on transfers of digital assets that are covered
securities, provided the transfer is not a sale and is not to an
account maintained by a person that the broker knows or has reason to
know is also a broker.
a. Digital Assets Acquired by Custodial Brokers and Certain Financial
Contracts on Digital Assets
Brokers who acquire digital assets for customers, provide custodial
services for these digital assets, and continue to hold those digital
assets until sale have the necessary information to determine the
customers' adjusted basis in these digital assets. By contrast, brokers
who receive a transfer of a customer's digital assets that were
acquired for that customer by another broker may not have that
information. As a result, the Treasury Department and the IRS have
determined that mandatory basis reporting under these proposed
regulations should apply only to sales of digital assets that were
previously acquired, held until sale, and then sold by a custodial
broker for the benefit of a customer. Accordingly, until rulemaking
under section 6045A is complete, the definition of a covered security
for purposes of digital asset basis reporting is limited under proposed
Sec. 1.6045-1(a)(15)(i)(J) to digital assets that are acquired in a
customer's account by a broker providing hosted wallet services.
Therefore, sale transactions effected by custodial brokers of digital
assets that were not previously acquired in the customer's account and
sale transactions effected by non-custodial brokers, such as those that
taxpayers may refer to as decentralized exchanges, are not subject to
these mandatory basis reporting rules.
In contrast to digital assets, financial contracts (such as options
and forward contracts) on digital assets that are not themselves
digital assets are not held by brokers on behalf of customers in hosted
wallets. Accordingly, the definition of a covered security subject to
mandatory basis reporting for these non-digital asset options and
forward contracts on digital assets is not limited to contracts held by
brokers providing hosted wallet services. Instead, basis reporting for
these financial contracts is required under these proposed regulations
pursuant to the expanded definition of a covered security under
proposed Sec. 1.6045-1(a)(15)(i)(H) (non-digital asset options) and
proposed Sec. 1.6045-1(a)(15)(i)(K) (non-digital asset forward
contracts) as long as they are granted, entered into, or acquired in a
customer's account at a broker or custodian pursuant to the rules in
existing Sec. 1.6045-1(a)(15)(ii).
b. Acquisition Applicable Date
The recordkeeping burden for taxpayers transacting in digital
assets can be significant. To determine whether a sale or exchange of a
digital asset gives rise to gain or loss and the holding period for the
asset, the taxpayer must know both the gross proceeds from the
transaction as well as the adjusted basis and acquisition date of the
digital asset. Determining a taxpayer's adjusted basis in a digital
asset or portion of a digital asset sold or exchanged can be a complex
endeavor, particularly for taxpayers that carry out frequent
acquisitions and sales or exchanges of digital assets, as the taxpayer
may need to track every transaction the taxpayer has carried out with
respect to that digital asset both in the current taxable year and in
prior taxable years. This is particularly true for interchangeable
digital asset units for which minute fractions of previously purchased
units can be sold on different dates. Complexity is further increased
when transaction fees paid in digital assets give rise to separate
digital asset sale transactions of the digital assets used to pay the
transaction fees. Given these recordkeeping complexities, the Treasury
Department and the IRS have determined that adjusted basis reporting by
brokers for digital assets would both improve tax administration and
assist taxpayers who sell or exchange digital assets to comply with
their own basis tracking and reporting requirements, as well as
assisting the IRS to determine whether a taxpayer has properly reported
its gain or loss. Accordingly, these proposed regulations provide that
for each sale of a digital asset that is a covered security for which a
broker is required to make a return of information, the broker must
also report the adjusted basis of the digital asset sold, the date and
time the digital asset was purchased, and whether any gain or loss with
respect to the digital asset sold is long-term or short-term (within
the meaning of section 1222 of the Code). The remainder of the
discussion in this Part I.F.1.b of this Explanation of Provisions
describes when a digital asset is treated as a covered security under
these proposed regulations.
Section 80603(b)(1) of the Infrastructure Act adds digital assets
to the list of specified securities for which basis reporting is
specifically required, provided that the digital asset is acquired on
or after January 1, 2023 (the acquisition applicable date for digital
assets). January 1, 2023, is prior to the date on which these proposed
regulations may be finalized. Accordingly, the Treasury Department
[[Page 59596]]
and the IRS considered whether the acquisition date on or after which
brokers should be required to track and report basis for digital assets
acquired in a customer's account should be January 1, 2023 or should
instead be a date after the finalization of these proposed regulations.
In considering that question, the Treasury Department and the IRS have
taken into account that while few digital assets have been in existence
for more than a few years, the value of some of those digital assets
has fluctuated significantly over relatively short periods of time. In
addition, unlike the securities industry, in which the oldest records
were first created on paper many decades ago and were then often stored
physically on paper or microfilm, the oldest records created and stored
by digital asset brokers were created and continue to be stored
electronically as a matter of business practice. Thus, a digital asset
broker has the ability to provide information regarding acquisition
date, time, and cost (adjusted basis information) to customers with
respect to digital assets previously acquired by that broker on behalf
of its customers. The Treasury Department and the IRS understand that
some digital asset brokers currently voluntarily provide this
information to customers in response to customer requests for that
information. Moreover, digital asset platforms have been aware since
the enactment of the Infrastructure Act that digital assets would be
treated as covered securities if acquired on or after January 1, 2023,
and providing basis information for digital assets acquired on or after
that date will assist taxpayers to properly prepare their tax returns
for future sales of those assets. See section 6045(g)(3)(C)(iii).
Accordingly, proposed Sec. 1.6045-1(a)(15)(i)(J) expands the
definition of a covered security for which adjusted basis reporting
will be required under proposed Sec. 1.6045-1(d)(2)(i)(C) to include
digital assets acquired in a customer's account on or after January 1,
2023, by a broker providing hosted wallet services.
As discussed in Part I.F.1.a of this Explanation of Provisions,
these proposed regulations also expand the definition of a covered
security for which adjusted basis reporting will be required under
proposed Sec. 1.6045-1(d)(2)(i)(C) to include certain non-digital
asset options on digital assets and non-digital asset forward contracts
on digital assets. Proposed Sec. 1.6045-1(a)(15)(i)(H) expands the
definition of a covered security to include non-digital asset options
on digital assets to the extent they are granted or acquired in an
account on or after January 1, 2023, and proposed Sec. 1.6045-
1(a)(15)(i)(K) expands the definition of a covered security to include
non-digital asset forward contracts on digital assets to the extent
they are granted or acquired in an account on or after January 1, 2023.
Notwithstanding the proposed use of January 1, 2023 as the
acquisition date on or after which brokers should be required to track
and report basis for digital assets acquired in a customer's account,
proposed Sec. 1.6045-1(d)(2)(i)(C) would require adjusted basis
reporting for sales of digital assets treated as covered securities and
for non-digital asset options and forward contracts on digital assets
only to the extent the sales are effected on or after January 1, 2026,
in order to allow brokers additional time to build appropriate
reporting and basis retrieval systems. That is, under these proposed
regulations a broker providing custodial services for digital asset
would be required to provide adjusted basis reporting for sales of
digital assets effected on or after January 1, 2026, if the digital
asset is acquired and continuously held by that broker in the
customer's account on or after January 1, 2023. Additionally, any type
of broker effecting sales of non-digital asset options on digital
assets and non-digital asset forward contracts on digital assets would
be required to provide adjusted basis reporting for sales of these
assets if they were granted, entered into, or acquired on or after
January 1, 2023.
2. Voluntary Broker Reporting
Some brokers may be capable of providing the information required
in these regulations with respect to digital asset sales prior to the
applicability dates, and some brokers may be capable of providing the
information required in these regulations for digital assets that are
not covered securities. To encourage reporting by digital asset brokers
that are not subject to mandatory basis reporting, these proposed
regulations apply the same penalty waiver rule to digital asset brokers
that voluntarily report adjusted basis information on noncovered
securities as currently applies to securities brokers. Accordingly,
under proposed Sec. 1.6045-1(d)(2)(iii)(A), brokers that voluntarily
report adjusted basis information with respect to sales of digital
asset-related noncovered securities (that is, digital assets acquired
prior to January 1, 2023, options on digital assets granted or acquired
in an account prior to January 1, 2023, and forward contracts on
digital assets entered into or acquired in an account on or prior to
January 1, 2023, which assets are not covered securities under proposed
Sec. 1.6045-1(a)(15)(i)(H), (J) or, (K)), are not subject to penalties
under section 6721 or 6722 for failure to report or furnish the
adjusted basis information correctly. Additionally, proposed Sec.
1.6045-1(d)(2)(iii)(B) provides that brokers that choose to report
sales of digital assets before the applicability date of these
regulations (that is, gross proceeds from the sale of digital assets
effected prior to January 1, 2025, or adjusted basis information with
respect to sales effected prior to January 1, 2026), will not be
subject to penalties under section 6721 or 6722 for failure to report
or furnish that information correctly. Brokers that choose to report on
sales of digital assets before the applicability date of these
regulations can make that report on either the Form 1099-B, Proceeds
From Broker and Barter Exchange Transactions, or, if available in time
for this reporting, the form prescribed by the Secretary pursuant to
proposed Sec. 1.6045-1(d)(2)(i)(B).
3. Determining the Adjusted Basis
To ensure that the rules governing the calculation of adjusted
basis apply to digital asset transactions, these proposed regulations
modify existing Sec. 1.6045-1(d)(6)(i) and (d)(6)(ii)(A), which
provide the general rules for determining the adjusted basis of a
security and detail how to calculate the initial basis of a security.
First, proposed Sec. 1.6045-1(d)(6)(i) and (d)(6)(ii)(A) clarify that
the rules therein apply for determining the adjusted basis of a
specified security that is subject to the broker basis reporting rules,
whether or not the asset is within the definition of security under
existing Sec. 1.6045-1(a)(3). Additionally, proposed Sec. 1.6045-
1(d)(6)(ii)(A) is modified to add, in the case of a digital asset sale,
digital asset transaction costs to the list of costs that are included
in calculating the initial basis of a specified security. Accordingly,
under proposed Sec. 1.6045-1(d)(6)(ii)(A), the initial basis of a
specified security that is a digital asset and that is acquired for
cash is the total amount paid by the customer (or credited against the
customer's account) for the specified security, increased by any
commissions, transfer taxes, and digital asset transaction costs
related to its acquisition.
The existing regulations do not permit brokers to adjust the basis
of securities acquired to reflect income recognized upon the exercise
of a compensatory option or the vesting or exercise of other equity-
based compensation arrangements, to the extent the securities were
granted or acquired on or after January 1, 2014. This decision was made
because compensation
[[Page 59597]]
information is not generally accessible to most brokers, and, in many
situations, a broker would have to accept customer-provided information
to track the compensation-related status of these arrangements.
Additionally, requiring basis reporting for securities acquired as part
of equity-based compensation arrangements would have required extensive
reprogramming of brokers' underlying databases and reporting systems.
TD 9616, 78 FR 23116, 23122 (Apr. 18, 2013). For the same reasons,
proposed Sec. 1.6045-1(d)(6)(ii)(A) adds digital asset-based
compensation arrangements to the types of services arrangements for
which brokers are prohibited from adjusting to reflect income
recognized.
These proposed regulations provide special rules for determining
the initial basis of digital assets acquired in exchange for property,
including different digital assets or real property. These rules are
provided to avoid discrepancies associated with transactions in which
the fair market value of property, including different digital assets,
transferred is not equal to the fair market value of the digital assets
received. See Proposed Sec. Sec. 1.1001-7, 1.1012-1(h), and 1.1012-
1(j) in Part II of this Explanation of Provisions in connection with
exchanges of digital assets for different digital assets. In accordance
with the principles described there, proposed Sec. 1.6045-
1(d)(6)(ii)(C)(1) provides that the initial basis of a digital asset
received in an exchange for property that is not a debt instrument
described in proposed Sec. 1.1012-1(h)(1)(v) is the fair market value
of the digital asset received at the time of the exchange, increased by
any digital asset transaction costs allocable to the acquisition of
that digital asset. Proposed Sec. 1.6045-1(d)(6)(ii)(C)(2) provides
that the total digital asset transaction costs paid by the customer in
an acquisition of digital assets are allocable to the digital assets
received. An exception is provided, however, in the case of an exchange
of one digital asset for a different digital asset differing materially
in kind or in extent. Rather, in the case of an exchange of one digital
asset for a different digital asset differing materially in kind or in
extent, one-half of any digital asset transaction costs paid in cash or
property to effect the exchange is allocable to the disposition of the
transferred digital asset and one-half is allocable to the acquisition
of the received digital asset for the purpose of determining basis
under proposed Sec. 1.6045-1(d)(6)(ii)(C)(1). These allocation rules
are consistent with the rules provided in proposed Sec. 1.1012-1(h)
discussed in Part II of this Explanation of Provisions. Finally,
proposed Sec. 1.6045-1(d)(6)(ii)(C)(1) provides that for digital
assets acquired in exchange for a debt instrument described in proposed
Sec. 1.1012-1(h)(1)(v), the initial basis of the digital asset
attributable to the debt instrument is equal to the amount determined
under the rules provided in Sec. 1.1012-1(g) (generally equal to the
issue price of the debt instrument) plus any allocable digital asset
transaction costs.
In determining the initial basis of a digital asset acquired in an
exchange, if the broker or digital asset data aggregator reasonably
determines that the value of the digital asset received cannot be
determined with reasonable accuracy, proposed Sec. 1.6045-
1(d)(6)(ii)(C)(1) provides that the fair market value of the digital
asset received must be determined by reference to the property
transferred at the time of the exchange. If the broker or digital asset
data aggregator reasonably determines that neither the value of the
digital asset received, nor the value of the property transferred can
be determined with reasonable accuracy, proposed Sec. 1.6045-
1(d)(6)(ii)(C)(1) provides that the broker must report zero for the
initial basis of the received digital asset.
Finally, these proposed regulations reserve two paragraphs at
proposed Sec. 1.6045-1(d)(6)(vii) and (ix) to accommodate final
regulations implementing safe harbor exceptions for de minimis errors
on information returns and payee statements, which are expected to be
finalized before these proposed regulations are finalized.
G. Ordering Rules
Proposed Sec. 1.6045-1(d)(2)(ii)(B) provides ordering rules that
are consistent with the ordering rules under proposed Sec. 1.1012-
1(j)(3) for a broker to determine which units of the same digital asset
should be treated as sold when the customer previously acquired, or had
transferred in, multiple units of that same digital asset on different
dates or at different prices. Under these rules, a broker must report a
sale of less than the customer's entire position in an account in
accordance with a customer's identification of the digital assets to be
sold. These proposed regulations provide, similar to the rules for
identifying lots of stock that are sold when a taxpayer sells less than
all of its shares in a particular company, that an adequate
identification is made if a customer notifies the broker no later than
the date and time of sale which units of a type of digital asset it is
selling. See Proposed Sec. Sec. 1.1001-7, 1.1012-1(h), and 1.1012-1(j)
in Part II of this Explanation of Provisions.
In cases where a customer does not provide an adequate
identification by the date and time of sale, proposed Sec. 1.6045-
1(d)(2)(ii)(B) provides that the units of the digital asset sold are
the earliest units of that type of digital asset either purchased
within or transferred into the customer's account with the broker. For
purposes of this ordering rule, units of a digital asset are treated as
transferred into the customer's account as of the date and time of the
transfer. Once rules have been promulgated under section 6045A, it is
anticipated that brokers who receive transfer statements under section
6045A with respect to transferred-in digital assets would be permitted
to use the actual purchase date of these digital assets for purposes of
determining which units are the earliest units of that type of digital
asset held in the customer's account with the broker.
H. Exceptions To Reporting
These proposed regulations leave unchanged for digital asset
brokers the exceptions to reporting provided under existing Sec.
1.6045-1(c) for exempt recipients and excepted sales. Thus, for
example, no reporting is required for sales of digital assets effected
on behalf of certain customers, such as certain corporations, financial
institutions, tax exempt organizations, or governments or political
subdivisions thereof. The Treasury Department and the IRS considered
adding registered money services businesses (MSBs), as defined in 31
CFR 1010.100(ff), to the list of recipients a broker may treat as
exempt from reporting under existing Sec. 1.6045-1(c)(3)(i)(B) but did
not do so because the Treasury Department and the IRS are not aware of
any public method for determining whether a registered MSB is compliant
with its obligations under the Bank Secrecy Act. See Part I.I.4 of this
Explanation of Provisions for a discussion of some of the obligations
of registered MSBs under the Bank Secrecy Act. A registered MSB that is
not compliant with its obligations under the Bank Secrecy Act may also
fail to comply with its obligations to report information to the IRS.
The special multiple broker rule under existing Sec. 1.6045-
1(c)(3)(iii) provides that a broker is not required to file a return of
information if it is instructed to initiate a sale on behalf of a
customer by a person that is an exempt recipient under existing Sec.
1.6045-1(c)(3)(i)(B)(6) (registered dealer in securities or
commodities), existing Sec. 1.6045-1(c)(3)(i)(B)(7)
[[Page 59598]]
(registered futures commission merchant), or existing Sec. 1.6045-
1(c)(3)(i)(B)(11) (financial institution). This rule is intended to
avoid duplicative reporting. Although the avoidance of duplicative
reporting is also a desirable goal for digital asset reporting, there
are some practical considerations that impede the extension of the
multiple broker rule to digital asset brokers that are not exempt
recipients under the existing regulations. First, in some cases it may
be difficult for a broker to determine whether a particular digital
asset platform also qualifies as a broker for purposes of these
proposed regulations. Second, even if a digital asset broker can
determine that the person that instructed the broker to initiate a sale
on behalf of a customer is also a digital asset broker, there is a
higher level of risk that the multiple broker rule would result in no
reporting of the sale than is the case with traditional financial
institutions. Unlike the three types of listed exempt recipients,
digital asset brokers are not necessarily subject to the type of
prudential or supervisory regulation that would tend to provide
assurance to the IRS that the broker will comply with its tax reporting
obligations. Accordingly, while the Treasury Department and the IRS
considered whether to add digital asset brokers to the list of exempt
recipients for which the multiple broker rule would apply, it was
decided that it was not appropriate at this time to expand the rule in
this way. The Treasury Department and the IRS, however, welcome
suggestions that could work to avoid duplicative broker reporting
without sacrificing the certainty that at least one of the multiple
brokers will report. Specifically, to what extent will a broker know
with certainty that another party involved in a transaction is also a
broker with a reporting obligation under these rules.
I. Sales Effected at an Office Outside the United States or on Behalf
of Exempt Foreign Persons
This Part I.I describes the provisions in these proposed
regulations relating to when U.S. brokers and, in some cases, non-U.S.
brokers may treat a customer as an exempt foreign person and therefore
not be required to report on digital asset sales effected for the
customer. These rules are based on the rules in the existing
regulations that provide that reporting is not required with respect to
customers that may be treated as exempt foreign persons.
The Organisation for Economic Development and Co-operation has
developed and approved the Crypto-Asset Reporting Framework (CARF),
which is a framework for the reporting and automatic exchange of
information on crypto-assets. The Treasury Department and the IRS are
currently considering how the United States could implement the CARF,
so that the IRS could receive information on sales effected for U.S.
taxpayers by non-U.S. brokers through an automatic exchange of
information with other countries that have implemented the CARF. It is
anticipated that implementation of CARF by the United States would
require the modification of the proposed regulations described in this
Part I.I to ensure that U.S. brokers collect the information required
to be exchanged under the framework, to the extent that the collection
of that information is permitted under U.S. law, and to exempt some
non-U.S. brokers from collecting certain information required under the
proposed regulations. For example, the modifications may require
reporting by U.S. brokers of certain information on transactions
effected for customers that are treated under these proposed
regulations as exempt foreign persons and relieve certain non-U.S.
brokers of reporting under section 6045 on sales effected for U.S.
customers if the IRS is entitled to receive information on such
transactions from a foreign tax administration pursuant to an automatic
exchange of information mechanism. Any modified rules would be reissued
for notice and comment.
Under existing Sec. 1.6045-1(a)(1), a U.S. payor or middleman is
considered a broker (and therefore subject to the reporting rules under
section 6045) with respect to sales effected at an office inside the
United States and sales effected at an office outside the United
States, while a non-U.S. payor or middleman is considered a broker (and
therefore subject to the reporting rules under section 6045) only with
respect to sales it effects at an office inside the United States. A
U.S. payor or middleman includes a U.S. person (including a foreign
branch of a U.S. person), a controlled foreign corporation (as defined
in Sec. 1.6049-5(c)(5)(i)(C)), certain U.S. branches, a foreign
partnership with controlling U.S. partners and a U.S. trade or
business, and a foreign person for which 50 percent or more of its
gross income is effectively connected with a U.S. trade or business. A
non-U.S. payor or middleman is a payor or middleman other than a U.S.
payor or middleman.
A sale is treated as effected at an office located outside the
United States under existing Sec. 1.6045-1(g)(3)(iii)(A) if the broker
completes the acts necessary to effect the sale outside the United
States pursuant to instructions directly transmitted to that office
from outside the United States by the broker's customer. If, however,
specified indicia of U.S.-based activity are associated with a
customer's sale (such as if the customer has transmitted instructions
to the foreign office of the broker from within the United States, or
gross proceeds are transferred into an account maintained by the
customer in the United States), the sale (which would otherwise be
treated as effected at an office outside the United States) will be
treated as effected at an office inside the United States. See existing
Sec. 1.6045-1(g)(3)(iii)(B). Even when a sale is treated as effected
at an office inside the United States by a broker that is a non-U.S.
payor or middleman, existing Sec. 1.6045-1(c)(3)(ii)(B) excepts the
sale from reporting if the broker is a foreign financial institution
that reports with respect to the account of the customer for which the
sale was effected under the broker's requirements under chapter 4 of
the Code or an applicable intergovernmental agreement to implement the
provisions commonly known as the Foreign Account Tax Compliance Act
(FATCA) of the Hiring Incentives to Restore Employment Act of 2010,
Public Law 111-147, 124 Stat. 71 (March 18, 2010).
Regardless of the location of the sale and whether a broker is a
U.S. or non-U.S. payor, reporting under section 6045 also does not
apply to sales effected for a customer that a broker may treat as an
exempt recipient or as an exempt foreign person. See existing Sec.
1.6045-1(c)(3) and (g)(1). Under existing Sec. 1.6045-1(c)(3)(i)(C), a
broker may treat a customer as an exempt recipient based on a Form W-9,
Request for Taxpayer Identification Number and Certification, the
broker's actual knowledge that the customer is an exempt recipient, or
applicable indicators, depending on the type of exempt recipient
status. Except in circumstances under which a broker is permitted to
presume a customer is a foreign person, to treat the customer as an
exempt foreign person a broker must obtain for a customer a beneficial
owner withholding certificate, such as a Form W-8BEN, Certificate of
Foreign Status of Beneficial Owner for United States Tax Withholding
and Reporting (Individuals). Alternatively, for a sale effected at an
office outside the United States, brokers may use documentary evidence
to establish that a customer is an exempt foreign person. Documentary
evidence can include a driver's license, other government issued
identification, or certain other information supporting the customer's
foreign status. See
[[Page 59599]]
existing Sec. Sec. 1.6045-1(g)(1)(i) (referencing the documentation
requirements of Sec. 1.6049-5(c)) and 1.6049-5(d)(2) and (3)
(presumption rules applicable in absence of reliable documentation).
Finally, payments that are reportable under section 6045 may also be
subject to backup withholding under section 3406, generally when a
broker has failed to obtain a valid Form W-9 for a customer, subject to
certain exceptions.
The existing regulations under section 6045 rules were written
based on a business model for securities that assumed that brokers
would have offices at physical locations where customer transactions
may be booked, and that brokers would generally have direct, in-person
contact with their customers. In comparison to the business model of
securities brokers that existed at the time the existing regulations
were promulgated, digital asset brokers typically interact with, and
effect sales on behalf of, customers entirely online, without any in-
person interactions with the customer. This business model means that
brokers can transact with customers across jurisdictional borders,
without necessarily having a branch or place of business in the
jurisdiction where the customers are located. These proposed
regulations therefore provide rules to adapt the concept of effecting a
sale at an office outside the United States and the rules relating to
exempt foreign persons to the digital asset broker business model.
Under these proposed regulations, the determination of whether a
sale is effected at an office inside or outside the United States is
generally not based on the physical location where the acts necessary
to effect a sale of digital assets are undertaken. Instead, proposed
Sec. 1.6045-1(g)(4) classifies a broker as a U.S. digital asset
broker, a CFC digital asset broker, or a non-U.S. digital asset broker,
and provides rules for determining the location of a digital asset sale
for each type of broker. That is, the determination of whether a sale
is treated as effected at an office outside the United States begins
with reference to the classification of the broker under these proposed
regulations, rather than being an independent determination based on
the location of the brokers' activities. In general, sales by U.S.
digital asset brokers are treated as effected at an office inside the
United States, and sales by CFC digital asset brokers and non-U.S.
digital asset brokers are treated as effected at an office outside the
United States, although there are circumstances under which sales
effected by such brokers are treated as effected at an office inside
the United States. These proposed regulations also incorporate certain
modifications to the requirements for how each of these three types of
brokers determine the foreign status of a customer for purposes of
determining when the customer may be treated as an exempt foreign
person. For CFC digital asset brokers and non-U.S. digital asset
brokers, sales generally are not subject to backup withholding tax
under proposed regulations under section 3406, although notable
exceptions apply when the broker is considered to be conducting
substantial business within the United States or when the broker has
actual knowledge that the customer is a U.S. person.
1. Rules for U.S. Digital Asset Brokers
Under proposed Sec. 1.6045-1(g)(4)(i)(A), a U.S. digital asset
broker is a U.S. payor or middleman (as defined in Sec. 1.6049-
5(c)(5)), other than a controlled foreign corporation within the
meaning of Sec. 1.6049-5(c)(5)(i)(C), that effects sales of digital
assets for customers. A U.S. payor or middleman that is considered a
U.S. digital asset broker for this purpose includes a U.S. person
(including a foreign branch of a U.S. person), a U.S. branch of a
foreign entity described in Sec. 1.1441-1(b)(2)(iv) that is treated as
a U.S. person for purposes of withholding and reporting on specified
payments under chapters 3, 4, and 61 of the Code, a foreign partnership
with controlling U.S. partners and a U.S. trade or business, and a
foreign person for which 50 percent or more of its gross income is
effectively connected with a U.S. trade or business. As U.S. payors,
U.S. digital asset brokers are treated as brokers under proposed Sec.
1.6045-1(a)(1) with respect to all sales of digital assets they effect
for their customers.
Proposed Sec. 1.6045-1(g)(4)(ii) provides rules for a U.S. digital
asset broker to determine the location of digital asset sales and the
foreign status of its customers. Under these rules, all sales of
digital assets effected by a U.S. digital asset broker are considered
effected at an office inside the United States. Under these proposed
regulations, a U.S. digital asset broker is required to report
information with respect to sales effected for its customers unless the
broker can treat the customer as an exempt recipient under existing
Sec. 1.6045-1(c)(3) or as an exempt foreign person. Finally, a payment
by a U.S. digital asset broker that is reportable under section 6045
may also be subject to backup withholding under section 3406 when the
broker has failed to obtain a valid Form W-9 for a customer, subject to
certain exceptions.
To treat a customer as an exempt foreign person, unless there is an
applicable presumption rule that allows that treatment under proposed
Sec. 1.6045-1(g)(4)(vi)(A)(2), a U.S. digital asset broker must obtain
from the customer a valid beneficial owner withholding certificate
described in Sec. 1.1441-1(e)(2)(i) and (ii), such as a Form W-8BEN
for a customer who is an individual, and must apply the reliance rules
under proposed Sec. 1.6045-1(g)(4)(vi) with respect to the beneficial
owner withholding certificate. Similar to the existing rules for
securities brokers, proposed Sec. 1.6045-1(g)(4)(ii)(B) provides that
a broker that obtains a beneficial owner withholding certificate from
an individual may rely on the beneficial owner withholding certificate
only if it includes a certification that the beneficial owner has not
been, and at the time the beneficial owner withholding certificate is
furnished reasonably expects not to be, present in the United States
for a period aggregating 183 days or more during each calendar year to
which the beneficial owner withholding certificate pertains. This
certification is incorporated onto Form W-8BEN through the
representation on that form that the person signing the form is an
exempt foreign person in accordance with the instructions to the form,
which instructions reference this requirement. U.S. digital asset
brokers may not rely on documentary evidence such as a foreign driver's
license or a government identification card to determine whether a
customer may be treated as an exempt foreign person.
The rules described in the preceding paragraph are generally
similar to those that apply under existing law for securities brokers
that are U.S. payors or middlemen, except with respect to sales
effected at an office outside the United States. The proposed rules for
U.S. digital asset brokers differ from the rules for securities brokers
in this case because securities brokers that are U.S. payors may rely
on documentary evidence for sales effected at an office outside the
United States. This approach was not adopted in these proposed
regulations because of the difficulty of determining whether a sale of
a digital asset is effected at an office inside or outside the United
States. The Treasury Department and the IRS request comments on the
approach adopted by these proposed regulations. If a commenter offers
suggestions for an alternative approach that could be used to
differentiate between a U.S. digital asset broker's U.S. business and
non-U.S. business for purposes of allowing
[[Page 59600]]
different documentation to be used for the broker's non-U.S. business,
the Treasury Department and the IRS request that the commenter explain
how the alternative approach could be objectively applied and why the
alternative would not be readily subject to manipulation.
See Part I.I.5 of this Explanation of Provisions for further
discussion of the documentation, reliance, and presumption rules that
U.S. digital asset brokers must apply to treat their customers as
exempt foreign persons.
2. Rules for CFC Digital Asset Brokers Not Conducting Activities as
Money Services Businesses
Under proposed Sec. 1.6045-1(g)(4)(i)(B), a CFC digital asset
broker is a controlled foreign corporation (as defined in Sec. 1.6049-
5(c)(5)(i)(C)) that effects sales of digital assets for customers.
Under these proposed regulations, a CFC digital asset broker must use
different rules to determine the place of a digital asset sale and the
foreign status of its customers based on whether the CFC digital asset
broker is considered under these proposed regulations to be conducting
activities as an MSB (conducting activities as an MSB), with respect to
sales of digital assets. See Part I.I.4 of this Explanation of
Provisions for discussion of the rules for CFC digital asset brokers
conducting activities as MSBs with respect to sales of digital assets
as well as the rationale behind those rules.
Under these proposed regulations, a sale effected by a CFC digital
asset broker not conducting activities as an MSB is considered a sale
effected at an office outside the United States. These CFC digital
asset brokers, like U.S. digital asset brokers, report on all sales
other than sales effected for an exempt recipient (as defined in
existing Sec. 1.6045-1(c)(3)(i)(B)) or an exempt foreign person. See
proposed Sec. 1.6045-1(a)(1) (providing that for a sale effected at an
office outside the United States, a broker includes only a U.S. payor
or U.S. middleman). Requiring CFC digital asset brokers generally to
report all sales, like U.S. digital asset brokers, is consistent with
the existing regulations for securities brokers, which treat controlled
foreign corporations as U.S. payors or middlemen, and which require
U.S. payors or middlemen to report both on sales effected at an office
inside the United States and on sales effected an office outside the
United States (unless an exception applies).
Under these proposed regulations, a CFC digital asset broker not
conducting activities as an MSB is permitted to rely on documentary
evidence, rather than a withholding certificate, to determine whether a
customer is an exempt foreign person. This rule is also consistent with
the existing regulations for securities brokers, under which a broker
may rely on documentary evidence to determine that a customer is an
exempt foreign person if the broker effects the sale at an office
outside the United States. The existing regulations for traditional
brokers determine where a sale is effected by looking to, among other
things, the location of the office that completes the acts necessary to
effect the sale. A securities broker that is a controlled foreign
corporation is likely to effect sales at an office outside the United
States and thus may rely on documentary evidence to treat a customer as
an exempt foreign person. Therefore, although these proposed
regulations have a different framework than the existing regulations,
unless the CFC digital asset broker is conducting activities as an MSB
(as discussed in Part I.I.4 of this Explanation of Provisions), the
same basic principles generally apply to controlled foreign
corporations under both the proposed and existing regulations. Finally,
also unlike a U.S. digital asset broker, a CFC digital asset broker not
conducting activities as an MSB is not subject to backup withholding
with respect to reportable sales unless it has actual knowledge that
the customer is a U.S. person. Thus, if a CFC digital asset broker not
conducting activities as an MSB has actual knowledge that a customer is
a U.S. person, and the customer does not provide a valid Form W-9 to
the broker, the broker must both report a sale or exchange of a digital
asset by that customer to the IRS and backup withhold on the gross
proceeds of the transaction.
3. Rules for Non-U.S. Digital Asset Brokers That Are Not Conducting
Activities as Money Services Businesses
A non-U.S. payor or non-U.S. middleman under Sec. 1.6049-5(c)(5)
that effects sales of digital assets on behalf of customers is a non-
U.S. digital asset broker under proposed Sec. 1.6045-1(g)(4)(i)(C). A
non-U.S. digital asset broker must use different rules to determine the
location of its digital asset sales and, for sales that are effected
within the United States, the foreign status of its customers is based
on whether the broker is considered conducting activities as an MSB.
See Part I.I.4 of this Explanation of Provisions for discussion of the
rules for non-U.S. digital asset brokers conducting activities as MSBs
as well as the rationale behind those rules.
Under these proposed regulations, a sale effected by a non-U.S.
digital asset broker not conducting activities as an MSB is generally
treated as effected at an office outside the United States unless the
broker collects documentation or information that indicates that the
customer has connections to the United States or may be a U.S. person.
For a sale effected at an office outside the United States, a non-U.S.
digital asset broker not conducting activities as an MSB would not be
considered a broker under proposed Sec. 1.6045-1(a)(1) and would not
be required to report the sale under proposed Sec. 1.6045-1(c).
These proposed regulations do not require non-U.S. digital asset
brokers that are not conducting activities as MSBs to obtain
documentation from customers prior to making a payment to the customer.
However, these non-U.S. digital asset brokers may be obligated to
collect documentation or information from customers under applicable
anti-money laundering laws or other applicable laws (referred to as an
AML program), or may otherwise collect information on customers under
the broker's policies and procedures, and that documentation or
information may include information that indicates that a customer has
connections to the United States or may be a U.S. person (as described
in the following paragraph). In such a case, these proposed regulations
treat the sale as effected at an office inside the United States and
require the non-U.S. digital asset broker to report a sale effected on
behalf of this customer after the broker obtains that documentation or
information, unless the broker determines that the customer is an
exempt foreign person or an exempt recipient (as defined in existing
Sec. 1.6045-1(c)(3)(i)(B)) or the broker closes the account before
effecting the sale for the customer. However, these proposed
regulations limit the indicators of a connection to the United States
to those that are contained in the documentation or information that is
part of the broker's account information for the customer. This is
intended to limit the efforts that a broker must make to determine if
there are U.S. indicia for the customer and to allow brokers to
automate their searches for U.S. indicia. Additionally, a non-U.S.
digital asset broker not conducting activities as an MSB is not subject
to backup withholding with respect to reportable sales unless it has
actual knowledge that the customer is a U.S. person. Thus, if a non-
U.S. digital asset broker not conducting activities as an MSB has
actual knowledge that a customer is a
[[Page 59601]]
U.S. person, and the customer does not provide a valid Form W-9 to the
broker, the broker must both report a sale or exchange of a digital
asset by that customer to the IRS and backup withhold on the gross
proceeds of the transaction.
Under proposed Sec. 1.6045-1(g)(4)(iv), a digital asset sale
effected by a non-U.S. digital asset broker that is not conducting
activities as an MSB will be considered effected at an office inside
the United States (and thus potentially subject to reporting and backup
withholding as described in the prior paragraph) if, before the payment
is made, the broker collects documentation or other information that is
part of the broker's account information for the customer and the
documentation or information that shows any of the following U.S.
indicia: (i) a customer's communication with the broker using a device
(such as a computer, smart phone, router, server or similar device)
that the broker has associated with an internet Protocol (IP) address
or other electronic address indicating a location within the United
States; (ii) a U.S. permanent residence or mailing address for the
customer, current U.S. telephone number and no non-U.S. telephone
number for the customer, or the broker's classification of the customer
as a U.S. person in its records; (iii) cash paid to the customer by a
transfer of funds into an account maintained by the customer at a bank
or financial institution in the United States, cash deposited with the
broker by a transfer of funds from such an account, or if the
customer's account is linked to a bank or financial account maintained
within the United States; (iv) one or more digital asset deposits into
the customer's account at the broker were transf
[…truncated; see source link]Indexed from Federal Register on August 29, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.