Rule2024-14004
Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 9, 2024
Effective
September 9, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations regarding information reporting and the determination of amount realized and basis for certain digital asset sales and exchanges. The final regulations require brokers to file information returns and furnish payee statements reporting gross proceeds and adjusted basis on dispositions of digital assets effected for customers in certain sale or exchange transactions. These final regulations also require real estate reporting persons to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate.
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[Federal Register Volume 89, Number 131 (Tuesday, July 9, 2024)]
[Rules and Regulations]
[Pages 56480-56583]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14004]
[[Page 56479]]
Vol. 89
Tuesday,
No. 131
July 9, 2024
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1, et al.
Gross Proceeds and Basis Reporting by Brokers and Determination of
Amount Realized and Basis for Digital Asset Transactions; Final Rule
Federal Register / Vol. 89 , No. 131 / Tuesday, July 9, 2024 / Rules
and Regulations
[[Page 56480]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 301
[TD 10000]
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: Final regulations.
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SUMMARY: This document contains final regulations regarding information
reporting and the determination of amount realized and basis for
certain digital asset sales and exchanges. The final regulations
require brokers to file information returns and furnish payee
statements reporting gross proceeds and adjusted basis on dispositions
of digital assets effected for customers in certain sale or exchange
transactions. These final regulations also require real estate
reporting persons to file information returns and furnish payee
statements with respect to real estate purchasers who use digital
assets to acquire real estate.
DATES:
Effective date: These regulations are effective on September 9,
2024.
Applicability dates: For dates of applicability, see Sec. Sec.
1.1001-7(c); 1.1012-1(h)(5); 1.1012-1(j)(6); 1.6045-1(q); 1.6045-4(s);
1.6045B-1(j); 1.6050W-1(j); 31.3406(b)(3)-2(c); 31.3406(g)-1(f);
31.3406(g)-2(h); 301.6721-1(j); 301.6722-1(g).
FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under
sections 1001 and 1012, Alexa Dubert or Kyle Walker of the Office of
the Associate Chief Counsel (Income Tax and Accounting) at (202) 317-
4718; concerning the international sections of the final 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 final 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).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Regulations on Income
Taxes (26 CFR part 1), the Regulations on Employment Tax and Collection
of Income Tax at the Source (26 CFR part 31), and the Regulations on
Procedure and Administration (26 CFR part 301) pursuant to amendments
made to the Internal Revenue Code (Code) by section 80603 of the
Infrastructure Investment and Jobs Act, Public Law 117-58, 135 Stat.
429, 1339 (2021) (Infrastructure Act) relating to information reporting
by brokers under section 6045 of the Code. Specifically, the
Infrastructure Act clarified the rules regarding how certain digital
asset transactions should be reported by brokers, expanded the
categories of assets for which basis reporting is required to include
all digital assets, and provided a definition for the term digital
assets. Additionally, the Infrastructure Act clarified that transfer
statement reporting under section 6045A(a) of the Code applies to
covered securities that are digital assets and added a new information
reporting provision under section 6045A(d) to require brokers to report
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, as defined in section 7701(a)(1) of the Code, that the broker
knows or has reason to know is also a broker. Finally, the
Infrastructure Act provided that these amendments apply to returns
required to be filed, and statements required to be furnished, after
December 31, 2023, and provided a rule of construction stating 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).
On August 29, 2023, the Treasury Department and the IRS published
in the Federal Register (88 FR 59576) proposed regulations (REG-122793-
19) (proposed regulations) relating to information reporting under
section 6045 by brokers, including real estate reporting persons and
certain third party settlement organizations under section 6050W of the
Code. Additionally, the proposed regulations included specific rules
under section 1001 of the Code for determining the amount realized in a
sale, exchange, or other disposition of digital assets and under
section 1012 of the Code for calculating the basis of digital assets.
The proposed regulations stated that written or electronic comments
provided in response to the proposed regulations must be received by
October 30, 2023.
The Treasury Department and the IRS received over 44,000 written
comments in response to the proposed regulations. Although <a href="https://www.regulations.gov">https://www.regulations.gov</a> indicated that over 125,000 comments were received,
this larger number reflects the number of ``submissions'' that each
submitted comment indicated were included in the posted comment,
whether or not the comment actually included such separate submissions.
All posted comments were considered and are available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request. A public hearing was held on
November 13, 2023.
Several comments requested an extension of the time to file
comments in response to the proposed regulations. These requests for
extension ranged from a few weeks to several years, but most comments
requested a 60-day extension. In response to these comments, the due
date for the comments was extended until November 13, 2023. The comment
period was not extended further for several reasons. First, information
reporting rules are necessary to make digital asset investors aware of
their taxable transactions and to make those transactions more
transparent to the IRS to reduce the tax gap. It is, therefore, a
priority that the publication of these regulations is not delayed more
than is necessary. Second, although the Infrastructure Act amended
section 6045 in November 2021 to broadly apply the information
reporting rules for digital asset transactions to a wide variety of
brokers, the broker reporting regulations for digital assets were added
to the Treasury Priority Guidance Plan in late 2019. Brokers,
therefore, have long been on notice that there would be proposed
regulations on which to comment. Third, as discussed in Part VI. of
this Summary of Comments and Explanation of Revisions, the Treasury
Department and the IRS understand that brokers need time after these
final regulations are published to develop systems to comply with the
final reporting requirements. Without further delaying the
applicability date of these much-needed regulations, therefore,
extending the comment period would necessarily reduce the time brokers
would have to develop these systems. Fourth, a 60-day comment period is
not inherently short or inadequate. Executive Order (E.O.) 12866
provides that generally a comment period should be no less than 60
days, and courts have uniformly upheld comment periods of even shorter
comment periods. See, e.g., Connecticut Light & Power Co. v. NRC,
[[Page 56481]]
673 F.2d 525, 534 (D.C. Cir. 1982), cert. denied, 459 U.S. 835, 103
S.Ct. 79, 74 L.Ed.2d 76 (1982) (denying petitioner's claim that a 30
day comment period was unreasonable, notwithstanding petitioner's
complaint that the rule was a novel proposition); North American Van
Lines v. ICC, 666 F.2d 1087, 1092 (7th Cir. 1981) (claim that 45 day
comment period was insufficient rejected as ``without merit''). Indeed,
over 44,000 comments were received before the conclusion of the comment
period ending on November 13, 2023, which demonstrates that this
comment period was sufficient for interested parties to submit
comments. Fifth, it has been a longstanding policy of the Treasury
Department and the IRS to consider comments submitted after the
published due date, provided consideration of those comments does not
delay the processing of the final regulation. IRS Policy Statement 1-
31, Internal Revenue Manual 1.2.1.15.4(6) (September 3, 1987). In fact,
all comments received through the requested 60-day extension period
were considered in promulgating these final regulations. Moreover, the
Treasury Department and the IRS accepted late comments through noon
eastern time on April 5, 2024.
The Summary of Comments and Explanation of Revisions of the final
regulations summarizes the provisions of the proposed regulations,
which are explained in greater detail in the preamble to the proposed
regulations. After considering the comments to the proposed
regulations, the proposed regulations are adopted as amended by this
Treasury decision in response to such comments as described in the
Summary of Comments and Explanation Revisions.
These final regulations concern Federal tax laws under the Internal
Revenue Code only. No interference 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.
Summary of Comments and Explanation of Revisions
I. Final Sec. 1.6045-1
A. Definition of Digital Assets Subject to Reporting
The proposed regulations required reporting under section 6045 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
or any other property in a payment transaction processed by a digital
asset payment processor (referred to in these final regulations as a
processor of digital asset payments or PDAP). The proposed regulations
defined a digital asset as a digital representation of value that is
recorded on a cryptographically secured distributed ledger (or any
similar technology), without regard to whether each individual
transaction involving that digital asset is actually recorded on the
cryptographically secured distributed ledger. Additionally, the
proposed regulations provided that a digital asset does not include
cash in digital form.
While some comments expressed support for the definition of digital
asset in the proposed regulations, other comments raised concerns that
the definition of digital asset goes beyond the statutory definition
found in amended section 6045. For example, one comment recommended
applying the definition only to assets held for investment and
excluding any assets that are used for other functions, which include,
in their view, nonfungible tokens (NFTs), stablecoins, tokenized real
estate, and tokenized commodities. Another comment recommended
narrowing the definition of digital asset to apply only to blockchain
``native'' digital assets and exempting all NFTs and other tokenized
versions of traditional asset classes, such as tokenized securities,
and other digital assets that don't function as a medium of exchange,
unit of account, or store of value. Another comment recommended that
the definition of digital asset distinguish between digital
representations of what the comment referred to as ``hard assets,''
such as gold, where the digital asset is merely a proxy for the
underlying asset versus digital assets that are not backed by hard
assets. Another comment recommended that the definition of digital
asset not include tokenized assets, including financial instruments
that have been tokenized. The final regulations do not adopt these
comments. As discussed more fully in Parts I.A.1. and A.2. of this
Summary of Comments and Explanation of Revisions, neither the statutory
language nor the legislative history to the Infrastructure Act suggest
Congress intended such a narrow interpretation of the term.
The Infrastructure Act made changes to the third party information
reporting rules under section 6045. Third party information reporting
generally contributes to lowering the income 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). It is anticipated that broker
information reporting on digital asset transactions will lead to higher
levels of taxpayer compliance because brokers will provide the
information necessary for taxpayers to prepare their Federal income tax
returns and reduce the number of inadvertent errors or intentional
omissions or misstatements shown on those returns. Because digital
assets can easily be held and transferred, including to offshore
destinations, directly by a taxpayer rather than by an intermediary,
digital asset transactions raise tax compliance concerns that are
specific to digital assets in addition to the more general tax
compliance concerns relevant to securities, commodities, and other
assets that are reportable under section 6045 and to cash payments
reportable under other reporting provisions. The Treasury Department
and the IRS have consequently concluded that the definition of digital
assets in section 6045(g)(3)(D) provides the appropriate scope for
digital assets subject to broker reporting. To the extent sales of
digital assets including NFTs, tokenized securities, and other digital
assets that may not function as a medium of exchange, unit of account,
or store of value, give rise to taxable gains and losses, these assets
should be included in the definition of digital assets. See, however,
Part I.D.3. of this Summary of Comments and Explanation of Revisions
for a description of an optional reporting rule for many NFTs that
would eliminate reporting on those NFTs when certain conditions are
met, and Part I.A.4.a. of this Summary of Comments and Explanation of
Revisions for a description of a special rule providing that assets
that are both securities and digital assets are reportable as
securities rather than as digital assets when specified conditions are
met.
Some comments asserted that the statutory definition of digital
assets is or should be limited to assets that are financial
instruments. These comments are discussed in Part I.A.2. of this
Summary of Comments and Explanation of Revisions.
Other comments raised a concern that the definition of digital
assets is ambiguous and recommended adding examples that clarify the
types of property that are and are not digital assets. For reasons
discussed more fully in Parts I.A.1., A.2., and A.3. of this Summary of
Comments and Explanation of Revisions, the final regulations include
several additional examples that illustrate and further clarify certain
types of digital assets that
[[Page 56482]]
are included in the definition, such as qualifying stablecoins,
specified nonfungible tokens (specified NFTs), and other fungible
digital assets.
One comment suggested that the term cryptographically secured
distributed ledger be defined in the final regulations as a type of
data storage and transmission file which uses cryptography to allow for
a decentralized system of verifying transactions. This comment also
stated that the definition should state that the stored information is
an immutable database and includes an embedded system of operation, and
that a blockchain is a type of distributed ledger. The final
regulations do not adopt this recommendation because clarification of
the term is not necessary and because the recommended changes are
potentially unduly restrictive to the extent they operate to restrict
future broker reporting obligations should advancements be made in how
distributed ledgers are cryptographically secured.
One comment suggested that the proposed definition of a digital
asset is overly broad because it includes transactions recorded in the
broker's books and records (commonly referred to as ``off-chain''
transactions) and not directly on a distributed ledger. Another comment
specifically supported the decision to not limit the definition to only
those digital representations for which each transaction is actually
recorded or secured on a cryptographically secured distributed ledger.
The Treasury Department and the IRS have determined that the definition
of digital asset is not overly broad in this regard because eliminating
digital assets that are traded in off-chain transactions from the
definition would fail to provide information reporting on the
significant amount of trading that occurs off-chain on the internal
ledgers of custodial digital asset trading platforms. Moreover, since
the mechanics of how an asset sale is recorded does not impact whether
there has been a taxable disposition of that asset, those mechanics
should not impact whether the underlying asset is or is not a digital
asset.
A comment suggested that the definition of a digital asset should
eliminate the phrase ``or any similar technology'' because the scope of
that phrase is unclear and could negatively impact future technology
improvements, such as privacy-preserving technology, cryptography,
distributed database systems, distributed network systems, or other
evolving technology. Another comment requested that the definition of
any similar technology be limited to instances in which the IRS
identifies such future similar technologies in published guidance. The
final regulations do not adopt this comment. Using the phrase ``any
similar technology'' is consistent with the Infrastructure Act's use of
the same term in its definition of digital assets in section
6045(g)(3)(D). Further, including any similar technology along with
cryptographically secured ledgers is necessary to ensure that brokers
continue to report on transactions involving these assets without
regard to advancements in or changes to the techniques, methods, and
technology, on which these assets are based. The Treasury Department
and the IRS are not currently aware of any existing technology that
would fit within this ``or any similar technology'' standard, but if
brokers or other interested parties identify new technological
developments and are uncertain whether they fit within the definition,
they can make the Treasury Department and the IRS aware of the new
technology and request guidance at that time.
1. Stablecoins
As explained in the preamble to the proposed regulations, the
definition of digital assets was intended to apply to all types of
digital assets, including so-called stablecoins that are designed to
have a stable value relative to another asset or assets. The preamble
to the proposed regulations noted that such stablecoins can take
multiple forms, may be backed by several different types of assets that
are not limited to currencies, may not be fully collateralized or
supported fully by reserves by the underlying asset, do not necessarily
have a constant value, are frequently used in connection with
transactions involving other types of digital assets, and are held and
transferred in the same manner as other digital assets. In addition to
fiat currency, other assets to which so-called stablecoins can be
pegged include commodities or other financial instruments (including
other digital assets). No comments were received that specifically
advocated for the exclusion of a so-called stablecoin that has a fixed
exchange rate with (that is, is pegged to) a commodity, another
financial instrument, or any other asset other than a specific
convertible currency issued by a government or a central bank
(including the U.S. dollar) (sometimes referred to in this preamble as
fiat currency). The Treasury Department and the IRS have determined
that it would be inappropriate to exclude stablecoins that are pegged
to such assets from the definition of digital assets. Accordingly, this
preamble uses the term stablecoin to refer only to the subset of so-
called stablecoins referred to in the proposed regulations that are
pegged to a fiat currency.
Numerous comments received specifically advocated for the exclusion
from the definition of digital assets stablecoins that are pegged to a
fiat currency. Numerous comments stated that failure to exclude
stablecoins from the definition of digital assets would hinder the
adoption of these stablecoins in the marketplace, deter their
integration into commercial payment systems, and undermine
Congressional efforts to establish a regulatory framework for
stablecoins that can be used to make payments. Additional comments
raised concerns about privacy, drew an analogy to the exemption in the
existing regulations for reporting on shares of money market funds, or
recommended that reporting on stablecoins be deferred until after the
substantive tax treatment of stablecoins is clarified with guidance
issued by the Treasury Department and the IRS or until a legislative
framework is established by Congress. Several other comments
recommended that reporting on stablecoins be required, noting that
stablecoins can be volatile in value and regularly vary from a one-to-
one parity with the fiat currency they are pegged to, and therefore may
give rise to gain or loss on disposition.
After consideration of the comments, the final regulations do not
exclude stablecoins from the definition of digital assets. Stablecoins
unambiguously fall within the statutory definition of digital assets as
they are digital representations of the value of fiat currency that are
recorded on cryptographically secured distributed ledgers. Moreover,
because stablecoins are integral to the digital asset ecosystem,
excluding stablecoins from the definition of digital assets would
eliminate a source of information about digital asset transactions that
the IRS can use in order to ensure compliance with taxpayers' reporting
obligations.
The Treasury Department and the IRS are aware that legislation has
been proposed that would regulate the issuance and terms of
stablecoins. If legislation is enacted regulating stablecoins, the
Treasury Department and the IRS intend to take that legislation into
account in considering whether to revise the rules for reporting on
stablecoins provided in these final regulations.
Notwithstanding that the final regulations include stablecoins in
the
[[Page 56483]]
definition of digital assets, the Secretary has broad authority under
section 6045 to determine the extent of reporting required by brokers
on transactions involving digital assets. In response to the request
for comments in the preamble to the proposed regulations on whether
stablecoins, or other coins whose value is pegged to a specified asset,
should be excluded from reporting under the final regulations, numerous
comments largely focused on stablecoins, rather than coins that track a
commodity price or the price of another digital asset. Many of these
comments requested that sales of stablecoins be exempted from broker
reporting in whole or in part because reporting on all transactions
involving stablecoins would result in a very large number of reports on
transactions involving little to no gain or loss, on the grounds that
these reports would be burdensome for brokers to provide, potentially
confusing to taxpayers and of minimal utility to the IRS. These
comments asserted that most transactions involved little or no gain or
loss because, in their view, stablecoins closely track the value of the
fiat currency to which they are pegged. Some comments recommended that
certain types of stablecoin transactions be reportable, including
requiring reporting of dispositions of stablecoins for cash or where
there is active trading in the stablecoin that is intended to give rise
to gain (or loss).
The Treasury Department and the IRS agree that transaction-by-
transaction reporting for stablecoins would result in a high volume of
reports. Indeed, according to a report by Chainalysis on the
``Geography of Cryptocurrency'' analyzing public blockchain
transactions (commonly referred to as ``on-chain'' transactions),
stablecoins are the most widely used type of digital asset, making up
more than half of all on-chain transactions to or from centralized
services between July 2022 and March 2023. Chainalysis, The 2023
Geography of Cryptocurrency Report, p. 14 (October 2023). Given the
popularity of stablecoins and the number of stablecoin sales that are
unlikely to reflect significant gains or losses, the Treasury
Department and the IRS have determined that it is appropriate to
provide an alternative reporting method for certain stablecoin
transactions to alleviate unnecessary and burdensome reporting.
Accordingly, the final regulations have added a new optional
alternative reporting method for sales of certain stablecoins to allow
for aggregate reporting instead of transactional reporting, with a de
minimis annual threshold below which no reporting is required. See Part
I.D.2. of this Summary of Comments and Explanation of Revisions.
Consistent with the proposed regulations, brokers that do not use this
alternative reporting method must report sales of stablecoins under the
same rules as for other digital assets. See Part I.D.2. of this Summary
of Comments and Explanation of Revisions for the discussion of
alternative reporting rules for certain stablecoins.
2. Nonfungible Tokens
As with stablecoins, the definition of digital assets in the
proposed regulations includes NFTs without regard to the nature of the
underlying asset, if any, referenced by the NFT. Although some comments
expressed agreement that the definition of digital asset in the statute
is broad enough to include all NFTs, other comments raised concerns
that the Secretary did not have the authority to include NFTs in broker
reporting. That is, the comments argued that while NFTs have value,
they do not constitute ``representations of value'' as required by the
statutory definition in section 6045(g)(3)(D). Classifying an NFT as a
``representation of value'' merely because it has value, these comments
asserted, would fail to give effect to the word ``representation'' in
the statute. As support for this view, one comment cited to Senator
Portman's floor colloquy reference to the intended application of the
reporting rule to ``cryptocurrency.'' 167 Cong. Rec. S6095-6 (daily ed.
August 9, 2021). Ultimately, these comments recommended excluding sales
of NFTs from the definition of digital assets. The final regulations do
not adopt these comments. Although NFTs may reference assets with
value, this does not prevent them from also ``representing value.''
Moreover, that interpretation would lead to a result that would
contravene the statutory changes to the broker reporting rules by the
Infrastructure Act. Excluding all NFTs from the definition of digital
assets merely because NFTs may reference assets with value rather than
``represent value'' would result in the exclusion of NFTs that
reference traditional financial assets. These assets have been subject
to reporting under section 6045 for nearly 40 years, and there is no
reason to exclude them from reporting now based only on the
circumstance of their trades through NFTs, rather than through other
traditional means.
Numerous comments asserted that the statutory reference to any
``representation of value'' should limit the definition of digital
assets to only those digital assets that reference financial
instruments or otherwise could be used to deliver value (such as a
method of payment). Numerous comments expressed that many NFTs, such
as, digital art and collectibles, are unique digital assets that are
bought and sold for personal enjoyment rather than financial gain and
therefore should not be subject to reporting. Similarly, other comments
raised the series-qualifier canon of statutory construction, which
provides that when a statute contains a list of closely related,
parallel, or overlapping terms followed by a modifier, that modifier
should be applied to all the terms in the list. Therefore, according to
the comments, because ``any digital asset'' is included in the section
6045(g)(3)(B) list of assets defining specified security and because
that list concludes with ``any other financial instrument,'' these
comments argue that the definition of ``digital asset'' must be limited
to assets that are, or are akin to, ``financial instruments.'' As
additional support for this suggestion, one comment cited the rule of
last antecedent, which is another canon of statutory construction and
provides that a limiting clause or phrase should ordinarily be read as
modifying only the noun or phrase that it immediately follows. That is,
because the ``other financial instrument'' clause directly follows
``any digital asset'' in the list, the definition of any digital asset
must be limited to only those digital assets that constitute financial
instruments.
The final regulations do not adopt these comments. The plain
language of the digital asset definition in section 6045(g)(3)(D)
reflects only two specific limitations on the definition: ``[e]xcept as
otherwise provided by the Secretary'' and ``recorded on a
cryptographically secured distributed ledger or similar technology as
specified by the Secretary.'' The legislative history to the
Infrastructure Act does not support the conclusion that Congress
intended the ``representation of value'' phrase to limit the definition
of digital assets to only those digital assets that are financial
instruments. To the contrary, a report by the Joint Committee on
Taxation published in the Congressional Record prior to the enactment
of the Infrastructure Act cited to and relied on the Notice 2014-21,
2014-16 I.R.B. 938 (April 14, 2014) definition of virtual currency,
which first used the phrase ``representation of value.'' 167 Cong. Rec.
S5702, 5703 (daily ed. August 3, 2021) (Joint Committee on Taxation,
Technical Explanation of Section 80603
[[Page 56484]]
of the Infrastructure Act). That virtual currency definition
specifically limited the ``representation of value'' phrase to those
assets that function ``as a medium of exchange, unit of account, and/or
store of value.'' This limitation would not have been necessary had the
``representation of value'' phrase been limited to assets that function
as financial instruments. Moreover, Congress' use of the term ``digital
asset'' instead of ``digital currency'' also supports the broader
interpretation of the term.
The final regulations also do not adopt the interpretation of the
referenced canons of statutory construction presented by the comments
because those canons should not be used to limit the definition of
digital assets in a statute that includes an explicit and unambiguous
definition of that term. Moreover, the referenced canons do not lead to
the result asserted by the comments. The series-qualifier canon is not
applicable here because not all the items in the list at section
6045(g)(3)(B) are consistent with the ``financial instrument'' language
following the list. For example, section 6045(g)(3)(B)(iii) references
any commodity, which under Sec. 1.6045-1(a)(5) of the final
regulations effective before the effective date of these final
regulations \1\ and these final regulations, specifically includes
physical assets, such as lead, palm oil, rapeseed, tea, and tin, which
are not financial instruments. The term commodity also includes any
type of personal property that is traded through regulated futures
contracts approved by the U.S. Commodity Futures Trading Commission
(CFTC), which include live cattle, natural gas, and wheat. See Sec.
1.6045-1(a)(5) of the pre-2024 final regulations. (These final
regulations also add to the definition of commodity personal property
that is traded through regulated futures contracts certified to the
CFTC.) These assets also are not financial instruments. Consequently,
the term ``any other financial instrument'' in section 6045(g)(3)(B)(v)
should not be read to limit the meaning of the items in the list that
came before it. For similar reasons, the rule of last antecedent also
does not limit the meaning of digital assets. Prior to the changes made
to section 6045 by the Infrastructure Act, the financial instruments
language followed the commodities clause. As such, when enacted the
financial instruments phrase could not have been intended to limit the
item in the list (commodity) that immediately preceded it. Accordingly,
the Treasury Department and the IRS understand the inclusion of other
financial instruments as potential specified securities as a grant of
authority to expand the list of specified securities, not as a
provision limiting the meaning of the other asset types listed as
specified securities.
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\1\ Numerous Treasury decisions have been published under Sec.
1.6045-1. See T.D. 7873, 48 FR 10302 (Mar. 11, 1983); T.D. 7880, 48
FR 12940 (Mar 28, 1983); T.D. 7932, 48 FR 57485 (Dec. 30, 1983);
T.D. 7960, 49 FR 22281 (May 29, 1984); T.D. 8445, 57 FR 53031 (Nov.
6, 1992); T.D. 8452, 57 FR 58983 (Dec. 14, 1992); T.D. 8683, 61 FR
53058 (Oct. 10, 1996); T.D. 8734, 62 FR 53387 (Oct. 14, 1997); T.D.
8772, 63 FR 35517 (Jun. 30, 1998); T.D. 8804, 63 FR 72183 (Dec. 31,
1998); T.D. 8856, 64 FR 73408 (Dec. 30, 1999); T.D. 8881, 65 FR
32152 (May 22, 2000), corrected 66 FR 18187 (April 6, 2001); T.D.
8895, 65 FR 50405 (Aug. 18, 2000); T.D. 9010, 67 FR 48754 (Jul. 26,
2002); T.D. 9241, 71 FR 4002 (Jan. 24, 2006); T.D. 9504, 75 FR 64072
(Oct. 18, 2010); T.D. 9616, 78 FR 23116 (April 18, 2013); T.D. 9658,
79 FR 12726 (Mar. 6, 2014); T.D. 9713, 80 FR 13233 (Mar. 13, 2015);
T.D. 9750, 81 FR 8149 (Feb. 18, 2016), corrected 81 FR 24702 (Apr.
27, 2016); T.D. 9774, 81 FR 44508 (Jul. 8, 2016); T.D. 9808, 82 FR
2046 (Jan. 6, 2017), corrected 82 FR 29719 (Jun. 30, 2017); T.D.
9984, 88 FR 87696 (Dec. 19, 2023). The regulations effective before
the effective date of these final regulations will collectively be
referred to as the pre-2024 final regulations.
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One comment suggested that the final regulations should limit the
definition of a digital asset to exclude NFTs not used as payment or
investment instruments to align the section 6045 reporting rules with
other rules and regulatory frameworks. One comment recommended limiting
the definition to only digital assets that can be converted to U.S.
dollars, another fiat currency, or an asset with market value. Several
comments suggested that including all NFTs in the definition of digital
assets would be inconsistent with the intended guidance announced in
Notice 2023-27, Treatment of Certain Nonfungible Tokens as
Collectibles, 2023-15 I.R.B. 634 (April 10, 2023), which indicated that
the IRS intends to determine whether an NFT constitutes a collectible
under section 408(m) of the Code by using a look-through analysis that
looks to the NFT's associated right or asset. Other comments
recommended that the final regulations limit the definition of digital
assets to exclude NFTs not used as payment or investment instruments to
align the section 6045 reporting rules with the reporting rules for
digital assets by foreign governments, such as the Council directive
(EU) 2023/2266 of 17 October amending Directive 2011/16/EU on
administrative cooperation in the field of taxation, which is popularly
known as DAC8. Yet other comments recommended that the final
regulations conform to guidelines from the Financial Action Task Force
(FATF), an inter-governmental body that sets international standards
that aim to prevent money laundering and terrorism financing. FATF
guidelines distinguish between those NFTs that are used ``as
collectibles'' from those used ``as payment or investment
instruments.'' Finally, one comment urged the Treasury Department and
the IRS to follow the Financial Accounting Standards Board (FASB)
standards, which completely exclude NFTs from their definition of
digital assets due to their nonfungible nature. FASB, Accounting
Standards Update, Intangibles--Goodwill and Other--Crypto Assets
(Subtopic 350-60), No. 2023-08, December 2023.
These final regulations do not adopt these comments because they
would make the definition of digital assets unduly restrictive. The
goal behind information reporting by brokers is to close or
significantly reduce the income tax gap from unreported income and to
provide information that assists taxpayers. Information reporting
generally can achieve that objective when brokers report to the IRS and
to their customers the information necessary for customers to report
their income. The considerations relevant to a U.S. third party
information reporting regime are not the same as the considerations
that are relevant to the definition of collectibles under section
408(m), which applies in order to determine assets that have adverse
tax consequences if acquired by certain retirement accounts and that
are subject to special tax rates. While non-tax policies relating to
combating money laundering and terrorism financing or guidelines for
generally accepted accounting standards may have some relevance, they
are not determinative for Federal tax purposes under the Code. Finally,
the Treasury Department and the IRS understand that DAC8 is intended to
apply in the same manner as a closely related OECD standard, discussed
in the next paragraph. Moreover, NFTs that are actively traded on
trading platforms appear to be used for investment purposes in addition
to any other purposes. Publicly available information reports that
trading in some NFT collections has been in the billions of dollars
over time and that 24-hour trading volume in NFTs in 2024 has ranged
from $60-410 million. This trading activity suggests that at least some
NFT collections have sufficient volume and liquidity to facilitate
their use as investments rather than as traditional collectibles.
Another comment suggested that the final regulations should limit
the definition of digital assets to exclude NFTs to align the section
6045 definition of digital assets with the definition of ``Relevant
Crypto-Asset''
[[Page 56485]]
under the Crypto-Asset Reporting Framework (CARF), a framework for the
automatic exchange of information between countries on crypto-assets
developed by the Organisation for Economic Co-operation and Development
(OECD) and to which the United States is a party. As discussed in Part
I.G.2. of this Summary of Comments and Explanation of Revisions, once
the United States implements the CARF, U.S. digital asset brokers will
need to file information returns under both these final regulations
with respect to their U.S. customers, and, under separate final
regulations implementing the CARF reporting requirements, with respect
to their non-U.S. customers that are resident in jurisdictions
implementing the CARF. These final regulations generally attempt to
align definitions with those used in the CARF to the extent possible.
In this case, however, the final regulations do not adopt this comment
because the CARF's definition of Relevant Crypto-Assets is already
consistent with a definition of digital assets that includes NFTs. As
noted in paragraph 12 of the CARF's Commentary on Section IV: Defined
terms, although NFTs are often marketed as collectibles, this function
does not prevent an NFT from being able to be used for payment or
investment purposes. ``NFTs that are traded on a marketplace can be
used for payment or investment purposes and are therefore to be
considered Relevant Crypto-Assets.'' See Part I.G.1. of this Summary of
Comments and Explanation of Revisions, for a discussion of the United
States' implementation of the CARF.
Notwithstanding that the final regulations include NFTs in the
definition of digital assets under section 6045(g)(3)(D), the Treasury
Department and the IRS have determined that, pursuant to discretion
under section 6045(a), it is appropriate to provide an alternative
reporting method for certain types of NFTs to alleviate burdensome
reporting. As discussed in Part I.D.3. of this Summary of Comments and
Explanation of Revisions, the final regulations have added a new
optional alternative reporting method for sales of certain NFTs to
allow for aggregate reporting instead of transactional reporting, with
a de minimis annual threshold below which no reporting is required. The
Treasury Department and the IRS anticipate that the de minimis annual
threshold will eliminate reporting on many low-value NFT transactions
that are less likely to be used for payment or investment purposes.
3. Closed Loop Assets
The preamble to the proposed regulations stated that the definition
of a digital asset was not intended to apply to the types of virtual
assets that exist only in a closed system and cannot be sold or
exchanged outside that system for fiat currency. The preamble also
stated that the definition of digital assets was not intended to cover
uses of distributed ledger technology for ordinary commercial purposes,
such as tracking inventory or processing orders for purchase and sale
transactions, that do not create transferable assets and are therefore
not likely to give rise to sales as defined for purposes of the
regulations. Several comments requested that the final regulations be
revised to provide an exception for closed loop uses in the regulatory
text and to add examples illustrating that these types of virtual
assets are not included in the definition of a digital asset. Another
comment recommended that the final regulations expressly limit the
definition of digital assets to only those digital assets that function
as currency as described in Notice 2014-21 or that have the capability
of being purchased, sold, or exchanged. The Treasury Department and the
IRS agree that the text of the final regulations should make clear that
transactions involving digital assets in the above-described closed
loop environments should not be subject to reporting. The final
regulations do not limit the definition of a digital asset as requested
to accommodate these comments, however, because it is not clear how the
definition could narrowly carve out only these closed loop digital
assets without also carving out other assets for which reporting is
appropriate. Instead, to address these comments, the final regulations
add transactions involving these closed loop digital assets to the list
of excepted sales that are not subject to reporting under Sec. 1.6045-
1(c)(3)(ii). See Part I.C. of this Summary of Comments and Explanation
of Revisions, for a discussion of the closed loop transactions added to
the list of excepted sales at Sec. 1.6045-1(c)(3)(ii).
4. Coordination With Reporting Rules for Securities, Commodities, and
Real Estate
The preamble to the proposed regulations noted that 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 under sections 1001 and 1012 discussed
in Part II. of this Summary of Comments and Explanation of Revisions,
these final regulations are information reporting regulations, and are
therefore not the appropriate vehicle for answering those questions.
Accordingly, the treatment of an asset as reportable as a security,
commodity, digital asset, or otherwise in these rules applies for
purposes of sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722 of
the Code, and for certain purposes of sections 1001 and 1012, and
should not be construed to apply for any other purpose of the Code,
including but not limited to determining whether a digital asset should
be classified as a security, commodity, option, securities futures
contract, regulated futures contract, or forward contract.
One comment expressed concern that promulgation of final
regulations requiring brokers to report on digital asset transactions
could be cited by other government agencies to support treating digital
assets as securities for purpose of the securities statutes, rules, and
regulations. This comment requested that these regulations not take any
position on whether digital assets are securities for these other
purposes. The Treasury Department and the IRS agree with this comment.
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 final regulations.
a. Special Coordination Rules for Dual Classification Assets
Because Sec. 1.6045-1(a)(9) of the pre-2024 final regulations
(redesignated in the proposed and final regulations as Sec. 1.6045-
1(a)(9)(i)) require reporting with respect to sales for cash of
securities as defined in Sec. 1.6045-1(a)(3) and certain commodities
as defined in Sec. 1.6045-1(a)(5), the proposed regulations included
coordination rules to provide certainty to brokers with respect to
whether a particular transaction involving securities or certain
commodities is reportable as a securities or commodities sale under
proposed Sec. 1.6045-1(a)(9)(i) (sale of securities or commodities) or
as a digital assets sale under proposed Sec. 1.6045-1(a)(9)(ii) (sale
of digital assets) and to avoid duplicate reporting obligations.
Specifically, for transactions involving the sale of a digital asset
that also constitutes the sale of a commodity or security (other than
options that
[[Page 56486]]
constitute contracts covered by section 1256(b) of the Code) (dual
classification assets), the proposed regulations provided that the
broker would report the sale only as a sale of a digital asset and not
as a sale of a security or commodity.
Numerous comments raised the concern that requiring brokers that
have been historically reporting sales of securities and commodities on
Form 1099-B, Proceeds from Broker and Barter Exchange Transactions to
report these transactions as sales of digital assets on Form 1099-DA,
Digital Asset Proceeds From Broker Transactions would force these
brokers to overhaul their existing reporting systems and potentially
cause confusion for taxpayers who are not even aware that their
securities and commodities have been tokenized. To address this
concern, some comments recommended that the digital asset definition be
revised to exclude some or all securities and commodities. Other
comments recommended revising the coordination rule so that the
reporting rules for sales of securities and commodities apply to
digital assets that are also securities or commodities. One comment
suggested applying the reporting rules for sales of securities and
commodities to any digital asset that represents a fund subject to the
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. (1940 Act
Fund), or another highly regulated product outside of 1940 Act Funds.
The final regulations do not adopt the comments recommending that
sales of dual classification assets generally be reported as sales of
securities or commodities. One of the benefits of treating dual
classification assets as digital assets is that it avoids forcing
brokers to make determinations about whether the dual classification
asset is properly classified as a security or a commodity under current
law. For example, a rule that treats all dual classification assets as
securities and commodities would require brokers to determine whether a
digital asset that represents a governance token is properly classified
as a security under final Sec. 1.6045-1(a)(3) to determine how to
report sales of that digital asset. Moreover, such a rule would affect
reporting on digital assets commonly referred to as cryptocurrencies
that fit within the definition of a commodity under final Sec. 1.6045-
1(a)(5)(i) because the trading of regulated futures contracts in that
digital asset has been certified to the CFTC. It would be inappropriate
for brokers to report these assets as sales of commodities rather than
as sales of digital assets because, as is discussed in Part I.F. of
this Summary of Comments and Explanation of Revisions, it is important
that brokers report basis for these sales.
Other comments offered recommendations designed to limit reporting
of dual classification assets under the rules governing sales of
securities and commodities. For example, one comment recommended that
the reporting rules for sales of securities and commodities apply to
any digital asset representing readily ascertainable securities or
commodities and not purely blockchain-based digital assets, such as
cryptocurrencies or governance tokens, for which treatment as
securities or commodities may be uncertain. Another comment recommended
that the reporting rules for sales of securities and commodities apply
to any digital asset that represents a non-digital asset security or
commodity otherwise reportable on Form 1099-B under the reporting rules
for sales of securities and commodities or is otherwise backed by
collateral that represents such non-digital asset. One comment
suggested applying the reporting rules for sales of securities and
commodities to any digital asset, the blockchain ledger entry for which
solely serves as a record of legal ownership of an underlying security
or commodity that is not itself a digital asset. Another comment
recommended applying the reporting rules for sales of securities and
commodities to dual classification assets that are digitally native to
a blockchain that is used simply to record ownership changes.
Recognizing that identifying digital assets that represent securities
and commodities that are not themselves digital assets could be
burdensome, one comment recommended that when information is not
available for brokers to make these determinations about dual
classification assets, the broker should report the transaction as a
sale of a digital asset. Another comment requested that the final
regulations include a safe harbor rule providing that no penalties will
be imposed on a broker who consistently and accurately reports the sale
of dual classification assets under either the reporting rules for
sales of securities and commodities (on Form 1099-B) or for sales of
digital assets (on Form 1099-DA) based on the broker's reasonable
determination that the chosen reporting method is correct because it
may be administratively difficult for brokers to examine every dual
classification asset to make a determination based on the nature of the
asset.
Numerous comments also focused on the circumstances that may give
rise to securities and commodities being treated as digital assets. For
example, one comment indicated that the proposed coordination rule
would inadvertently capture transactions involving securities and
commodities for which brokers use distributed ledger technology, shared
ledgers, or similar technology merely to facilitate the processing,
clearing, or settlement of orders between well-regulated brokers and
other financial institutions. To address this concern, several comments
recommended that the reporting rules for sales of securities and
commodities apply only to digital assets that are more appropriately
categorized within a traditional asset class (for example, as a
security with an effective registration statement filed under the
Securities Act of 1933) and that are issued, stored, or transferred
through a distributed ledger that is a regulated clearing agency system
in compliance with all applicable Federal and State securities laws.
Another comment recommended addressing this problem by making the
information required to be reported for digital asset sales (on Form
1099-DA) not more burdensome than that for securities and commodities
(on Form 1099-B). Another comment requested that, if brokers are
required to report these dual classification assets on the Form 1099-
DA, the final regulations allow brokers to optionally make appropriate
basis adjustments for dual classification assets that are securities.
This comment also recommended revising the rules in Sec. 1.6045-
1(d)(2)(iv)(B) of the pre-2024 final regulations to permit (but not
require) brokers to take into account information about a covered
security other than what is furnished on a transfer statement or issuer
statement and to provide penalty relief under certain circumstances to
brokers that take such information into account. Finally, one comment
recommended providing written clarity that even though wash sale
adjustment rules do not apply to digital assets, they still apply to
tokenized securities such as, for example, 1940 Act Funds.
The Treasury Department and the IRS have concluded that it is
generally not appropriate to permit optional approaches to reporting
dual classification assets because the underlying reporting
requirements for securities and commodities are significantly different
from those for digital assets due, in large part, to industry
differences and the timing of when the reporting rules were first
implemented. Although the proposed requirement for brokers to report
transaction identification numbers and digital asset addresses has been
[[Page 56487]]
removed in these final regulations (see Part I.D. of this Summary of
Comments and Explanation of Revisions), there are several remaining
differences in the basis reporting requirements for securities and
commodities as compared to digital assets. For example, unlike brokers
effecting sales of digital assets, brokers effecting sales of
commodities are not required to report the customer's adjusted basis
for those commodities because commodities are not included in the
definition of covered securities. Additionally, brokers effecting sales
of stock, other than stock for which the average basis method is
available under Sec. 1.1012-1(e), must generally report the adjusted
basis of these shares to the extent they were acquired for cash in an
account on or after January 1, 2011, and generally must report the
adjusted basis on shares of stock for which the average basis method is
available to the extent those shares were acquired for cash in an
account on or after January 1, 2012. These brokers of stock that are
covered securities under final Sec. 1.6045-1(a)(15)(i)(A) or (B) must
also send transfer statements to other brokers under section 6045A when
their customers move that stock to another broker.
In contrast, as discussed in Part I.F. of this Summary of Comments
and Explanation of Revisions, under the final regulations, brokers
effecting sales of digital assets that are covered securities under
final Sec. 1.6045-1(a)(15)(i)(J) are required to report the adjusted
basis of those digital assets only if they were acquired for cash,
stored-value cards, different digital assets, or certain other property
or services in the customer's account by such brokers providing
custodial services for such digital assets on or after January 1, 2026.
Additionally, these brokers are not currently required to send transfer
statements to other brokers under section 6045A when their customers
transfer digital assets that are specified securities to another
broker. Indeed, the details of how section 6045A reporting will apply
to brokers of digital assets will not be addressed until a future
notice of proposed rulemaking. Accordingly, whether the sale of a dual
classification asset is treated as a sale of a security or commodity
under final Sec. 1.6045-1(a)(9)(i) or as a sale of a digital asset
under final Sec. 1.6045-1(a)(9)(ii) has consequences beyond the
particular form that the broker must use when filing returns with
respect to those sales.
Given these different basis reporting requirements and transfer
statement obligations under section 6045A, the Treasury Department and
the IRS have determined that, except in the case of certain exceptions
described in the next several paragraphs, it is not appropriate to
treat dual classification assets as subject only to the pre-2024 final
regulations (that is, required to report the transactions under final
Sec. 1.6045-1(d)(2)(i)(A) as sales described in final Sec. 1.6045-
1(a)(9)(i)) for securities and commodities if those assets can be
traded on public blockchains and custodied by customers. Accordingly,
final Sec. 1.6045-1(c)(8)(i) provides that brokers must generally
treat sales of dual classification assets only as a sale of a digital
asset under final Sec. 1.6045-1(a)(9)(ii) and only as a sale of a
specified security that is a digital asset under final Sec. 1.6045-
1(a)(14)(v) or (vi). As such, the broker must apply the digital asset
reporting rules for the information required to be reported for such
sale and file the return on Form 1099-DA. Further, as discussed in Part
IV. of this Summary of Comments and Explanation of Revisions, brokers
are not required to send transfer statements under final Sec. 1.6045A-
1(a)(1)(vi) with respect to the transfer of these dual classification
assets that are reportable as digital assets. Additionally, final Sec.
1.6045-1(d)(2)(iv)(B) does not permit brokers to take into account any
other information, including information received from a customer or
third party, with respect to covered securities that are digital
assets, although brokers may take customer-provided acquisition
information into account for purposes of identifying which units are
sold, disposed of, or transferred under final Sec. 1.6045-
1(d)(2)(ii)(A).
However, to accommodate the comments relating to the application of
the various basis adjustment rules, including the wash sale adjustment
rules, and other important information applicable to dual
classification assets that represent an interest in a traditional
security, final Sec. 1.6045-1(c)(8)(i)(D) requires the broker to
report certain additional information with respect to any dual
classification asset that is a tokenized security. For this purpose,
any dual classification asset that provides the holder with an interest
in another asset that is a security under final Sec. 1.6045-1(a)(3),
other than a security that is also a digital asset, is a tokenized
security. This description is intended to apply when the digital asset
represents an interest in a separate, traditional, financial asset that
is reportable as a security. For example, a digital asset that
represents an ownership interest in a traditional share of stock in a
1940 Act Fund or another corporation would be a tokenized security. A
dual classification asset that is an interest in a trust or partnership
that holds assets that are securities under final Sec. 1.6045-1(a)(3),
other than securities that are also digital assets, also would be a
tokenized security.
In addition, an asset the offer and sale of which was registered
with the U.S. Securities and Exchange Commission (SEC) (other than an
asset treated as a security for securities law purposes solely as an
investment contract) is also treated as a tokenized security. This part
of the description of tokenized securities is intended to refer to a
digital asset that is also a security within the meaning of final Sec.
1.6045-1(a)(3) but does not represent an interest in a separate
financial asset. A bond that exists solely in tokenized form would be
an example of such a tokenized security, if the bond was issued
pursuant to a registration statement approved by the SEC. The reference
to whether an asset's offer and sale was registered with the SEC, other
than solely as an investment contract, is intended to limit the scope
of the term tokenized security to digital forms of traditional
financial assets, and not to capture assets native to the digital asset
ecosystem. The reference to registration of an asset's offer and sale
with the SEC is not intended to imply that such assets are necessarily
securities for Federal income tax purposes or for purposes of final
Sec. 1.6045-1(a)(3). Additionally, no inference is intended as to how
the Federal securities laws apply to sales of digital assets within the
meaning of final Sec. 1.6045-1(a)(19), as the interpretation or
applicability of those laws are outside the scope of these final
regulations.
For the avoidance of doubt, final Sec. 1.6045-1(c)(8)(i)(D)
provides that a qualifying stablecoin is not treated as a tokenized
security for purposes of these special rules. For sales of tokenized
securities, final Sec. 1.6045-1(c)(8)(i)(D) provides that the broker
must report additional information required by final Sec. 1.6045-
1(d)(2)(i)(B)(6), generally relating to gross proceeds. Final Sec.
1.6045-1(d)(2)(i)(B)(6) requires that the broker report the Committee
on Uniform Security Identification Procedures (CUSIP) number of the
security sold, any information related to options required under final
Sec. 1.6045-1(m), any information related to debt instruments under
final Sec. 1.6045-1(n), and any other information required by the form
or instructions. In addition, final Sec. 1.6045-1(c)(8)(i)(D) provides
that the broker must report additional information required by final
Sec. 1.6045-1(d)(2)(i)(D)(4) (relating to reporting for basis and
holding period) for sales of
[[Page 56488]]
tokenized securities, except that the broker is not required to report
such information for a tokenized security that is an interest in
another asset that is a security under final Sec. 1.6045-1(a)(3),
other than a security that is also a digital asset, unless the
tokenized security is also a specified security under final Sec.
1.6045-1(a)(14)(i), (ii), (iii), or (iv). Accordingly, because a trust
or partnership interest is not a specified security within the meaning
of those paragraphs, a broker is not required to report basis
information with respect to a tokenized security that is an interest in
a trust or partnership that holds assets that are securities under
final Sec. 1.6045-1(a)(3), other than securities that are also digital
assets.
Final Sec. 1.6045-1(d)(2)(i)(D)(4) provides specific rules for
reporting basis and related information for tokenized securities. It
cross-references the wash sale rules in final Sec. 1.6045-
1(d)(6)(iii)(A)(2) and (d)(7)(ii)(A)(2), which rules have also been
revised to specifically apply to tokenized securities. These wash sale
reporting rules apply only to assets treated as stock or securities
within the meaning of section 1091 of the Code. They apply regardless
of whether the taxpayer buys or sells a tokenized security. For
example, if a taxpayer sells a tokenized security (or the underlying
traditional stock or security) at a loss and buys the same tokenized
security (or the underlying traditional stock or security) within the
30-day period before or after the sale, and the other conditions to the
wash sale reporting rules are satisfied, the broker would be required
to take the wash sale reporting rules into account in reporting the
loss and the basis of the newly acquired asset. Final Sec. 1.6045-
1(d)(2)(i)(D)(4) also cross-references the average basis rules in final
Sec. 1.6045-1(d)(6)(v), which have been revised to apply to any stock
that is also a tokenized security, and the rules related to options and
debt instruments in final Sec. 1.6045-1(m) and (n). Accordingly, the
information reportable for tokenized securities on Form 1099-DA should
be similar to the information reportable for traditional securities on
Form 1099-B, except that under final Sec. 1.6045A-1(a)(1)(vi), no
transfer statement is required with respect to the transfer of
tokenized securities, though penalty relief is provided if the broker
voluntarily chooses to provide a transfer statement with respect to
tokenized securities. Additionally, until the Treasury Department and
the IRS determine which third party information is sufficiently
reliable, final Sec. 1.6045-1(d)(2)(iv)(B) provides that brokers are
not permitted to take into account information about covered securities
that are digital assets other than what is furnished on a transfer
statement or issuer statement, although brokers may take customer-
provided acquisition information into account for purposes of
identifying which units are sold, disposed of, or transferred under
final Sec. 1.6045-1(d)(2)(ii)(A). The Treasury Department and the IRS
intend to provide additional guidance on how to report tokenized
securities in the instructions to Form 1099-DA.
Final Sec. 1.6045-1(d)(2)(i)(D)(3) requires that, for purposes of
determining the basis and holding period information required in final
Sec. 1.6045-1(d)(2)(i)(D)(1) and (2), the rules related to options in
final Sec. 1.6045-1(m) apply, both with respect to the option and also
with respect to any asset delivered in settlement of an option.
Accordingly, an option that is itself a digital asset, on an asset that
is also a digital asset, is subject to the same reporting rules as
other options.
Additionally, in response to the comments described above, the
Treasury Department and the IRS have determined that the final
regulations should include three exceptions to the rules requiring that
dual classification assets be reported as digital assets, for the
reasons described herein. Those exceptions apply to dual classification
assets cleared or settled on a limited-access regulated network, to
dual classification assets that are section 1256 contracts, and to dual
classification assets that are shares in money market funds.
First, the Treasury Department and the IRS agree that it is not
appropriate to disrupt reporting on dual classification assets that are
treated as digital assets solely because distributed ledger technology
is used to facilitate the processing, clearing, or settlement of orders
between regulated financial entities. Accordingly, in response to the
comments submitted, final Sec. 1.6045-1(c)(8)(iii) adds a new
exception to the coordination rule for any sale of a dual
classification asset that is a digital asset solely because the sale of
such asset is cleared or settled on a limited-access regulated network.
Under this exception, such a sale will be treated as a sale described
in final Sec. 1.6045-1(a)(9)(i) (reportable on the Form 1099-B) and
not as a digital asset described in final Sec. 1.6045-1(a)(9)(ii)
(reportable on the Form 1099-DA). Additionally, such a sale must be
treated as a sale of a specified security under final Sec. 1.6045-
1(a)(14)(i), (ii), (iii), or (iv) to the extent applicable, and not as
a sale of a specified security that is a digital asset under final
Sec. 1.6045-1(a)(14)(v) or (vi). For all other purposes of this
section including transfers, a dual classification asset that is a
digital asset solely because it is cleared or settled on a limited-
access regulated network is not treated as a digital asset and is not
reportable as a digital asset. Accordingly, depending on the type of
the asset, the asset may be a covered security under final Sec.
1.6045-1(a)(15)(i)(A) through (G) (if purchased in an account on or
after January 1, 2011 through 2016, as applicable) rather than a
digital asset covered security under final Sec. 1.6045-1(a)(15)(i)(H),
(J) or (K) (if purchased in an account on or after January 1, 2026).
Thus, brokers are required under section 6045A to provide transfer
statements with respect to transfers of these dual classification
assets, and the rules set forth in final Sec. 1.6045-1(d)(2)(iv)(A)
and (B), regarding the broker's obligation to take into account the
information reported on those statements and certain other customer
provided information also apply.
Final Sec. 1.6045-1(c)(8)(iii)(B) sets forth three different types
of limited-access regulated network for which this rule applies. The
first type of limited-access network is described as a
cryptographically secured distributed ledger or network of
interoperable distributed ledgers that provide clearance or settlement
services and provide access only to a group of persons made up of
registered dealers in securities or commodities, banks and similar
financial institutions, common trust funds, or futures commission
merchants. Final Sec. 1.6045-1(c)(8)(iii)(B)(1)(i). As used in this
rule, an interoperable distributed ledger means a group of distributed
ledgers that permit digital assets to travel from one permissioned
distributed ledger (for example, at one securities broker) to another
permissioned distributed ledger (at another securities broker). In such
cases, while the clearance or settlement of the dual classification
asset is on a network of permissioned distributed ledgers, it is
anticipated that the asset will remain in a traditional securities or
commodities account from the perspective of an investor in the asset
and so can readily be reported as a security or commodity under
existing rules.
The second type of limited-access network is also described as a
cryptographically secured distributed ledger or network of
interoperable distributed ledgers that provide clearance or settlement
services, but this type of limited-access network is distinguishable
from the first type
[[Page 56489]]
because it is provided by an entity that has registered with the SEC as
a clearing agency, or has received an exemption order from the SEC as a
clearing agency, under section 17A of the Securities Exchange Act of
1934. Additionally, the entity must provide access to the network
exclusively to network participants, who are not required to be
registered dealers in securities or commodities, banks and similar
financial institutions, common trust funds, or futures commission
merchants, although it is anticipated that participants typically will
be securities brokers and other regulated financial institutions. Final
Sec. 1.6045-1(c)(8)(iii)(B)(1)(ii). For example, dual classification
assets cleared and settled through a central clearing agency that
clears and settles high volumes of equity and debt transactions on a
daily basis through automated systems for participants that are
financial market participants may be reportable as securities under
this exception if the clearance or settlement takes place on a
cryptographically secured distributed ledger or network of
interoperable distributed ledgers.
Finally, the third type of limited-access regulated network is a
cryptographically secured distributed ledger controlled by a single
person that is a registered dealer in securities or commodities, a
futures commission merchant, a bank or similar financial institution, a
real estate investment trust, a common trust fund, or a 1940 Act Fund,
that permits the ledger to be used solely by itself and its affiliates
(and not to any customers or investors) to clear or settle sales of
assets. Final Sec. 1.6045-1(c)(8)(iii)(B)(2). As with the other types
of limited-access regulated network, it is anticipated that from an
investor perspective the assets will remain in a traditional securities
or commodities account.
This exception in final Sec. 1.6045-1(c)(8)(iii) is limited to
dual classification assets that are digital assets solely because the
sale of such dual classification asset is cleared or settled on a
limited-access regulated network. Accordingly, a digital asset commonly
referred to as a cryptocurrency that fits within the definition of
commodity under final Sec. 1.6045-1(a)(5)(i) because the trading of
regulated futures contracts in that digital asset have been approved by
or certified to the CFTC will not be eligible for this rule because the
cryptocurrency meets the definition of a digital asset for reasons
other than because it is cleared or settled on a limited-access
regulated network. Given the requirement that the sole reason that the
security or commodity is a digital asset is that transactions involving
those assets are cleared or settled on a limited-access regulated
network, it is anticipated that brokers will have sufficient
information to be able to determine how to report the assets in
question under these revised rules. Accordingly, the request for a safe
harbor that would allow brokers to avoid penalties if they consistently
and accurately report sales of dual classification assets under either
final Sec. 1.6045-1(d)(2)(i)(A) (on Form 1099-B) or final Sec.
1.6045-1(d)(2)(i)(B) and (D) as a digital asset (on Form 1099-DA) is
not adopted as it is unnecessary.
The second exception to the general dual classification asset
coordination rule in final Sec. 1.6045-1(c)(8)(i) treating such assets
as digital assets was included in the proposed regulations. Proposed
Sec. 1.6045-1(c)(8)(iii) provided that digital asset options or other
contracts that are also section 1256 contracts should be reported under
the rules set forth in Sec. 1.6045-1(c)(5) of the pre-2024 final
regulations for contracts that are section 1256 contracts and not under
the proposed rules for digital assets. The final regulations retain
this exception and redesignate it as final Sec. 1.6045-1(c)(8)(ii).
Accordingly, under this rule, for the disposition of a contract that is
a section 1256 contract, reporting is required under Sec. 1.6045-
1(c)(5) of the pre-2024 final regulations regardless of whether the
contract disposed of is a non-digital asset contract or a digital asset
contract or whether the contract was issued with respect to digital
asset or non-digital asset underlying property. One comment raised a
concern that the proposed rule did not make it clear that information
reporting for a section 1256 contract subject to information reporting
under section 6045 should be reported on a Form 1099-B regardless of
whether the contract is or is not a digital asset. The final
regulations respond to this concern by providing additional
clarification to the text of Sec. 1.6045-1(c)(5)(i) of the pre-2024
final regulations to make it clear that reporting for all section 1256
contracts should be on Form 1099-B. Accordingly, information reporting
for section 1256 contracts in digital asset form will be on Form 1099-B
and not on Form 1099-DA.
The third exception to the general dual classification asset
coordination rule in final Sec. 1.6045-1(c)(8)(i) treating such assets
as digital assets applies to interests in money market funds. Final
Sec. 1.6045-1(c)(8)(iv) provides that brokers must treat sales of any
dual classification asset that is a share in a regulated investment
company that is permitted to hold itself out to investors as a money
market fund under Rule 2a-7 under the Investment Company Act of 1940
(17 CFR 270.2a-7) only as a sale under final Sec. 1.6045-1(a)(9)(i)
and not as a digital asset sale under final Sec. 1.6045-1(a)(9)(ii).
Accordingly, under Sec. 1.6045-1(c)(3)(vi) of the pre-2024 final
regulations, no return of information is required for these shares.
This exception is included in the final regulations because the reasons
for not requiring reporting of money market shares in traditional form
are also applicable for money market shares in digital asset form.
Notably, in either case, the disposition of money market shares by non-
exempt recipients like individuals generally will give rise to no, or
de minimis, gain or loss. Moreover, money market funds are a special
type of regulated investment company that provide a highly regulated
product widely used as a surrogate for cash.
In response to a number of comments, the Treasury Department and
the IRS considered whether an exception should apply more broadly to
tokenized shares of other 1940 Act Funds. Based on publicly available
information, the Treasury Department and the IRS are aware that some
1940 Act Funds permit their shares to be bought and sold in secondary
market transactions on a cryptographically secured distributed ledger
on a direct peer-to-peer basis--that is, an investor may transfer the
shares directly to another investor--and that those shares may be
purchased in exchange for other digital assets. The Treasury Department
and the IRS have determined that these transactions go beyond the scope
of the pre-2024 final regulations, which are applicable to sales of
securities for cash, and that such assets therefore should be reported
as digital assets. However, as described in the discussion of tokenized
securities above, the information reportable by brokers to investors
with respect to such shares of 1940 Act Funds, including the
availability of average basis reporting, generally should not change,
although the information will be reported on Form 1099-DA rather than
Form 1099-B.
Finally, the proposed regulations would have included one
additional exception to the general coordination rule that would have
treated dual classification assets as digital assets. Specifically,
proposed Sec. 1.6045-1(c)(8)(ii) provided that a digital asset that
also constitutes reportable real estate would be treated as reportable
real estate to ensure that real estate reporting persons would only
report transactions involving these sales as sales that are subject to
reporting under
[[Page 56490]]
Sec. 1.6045-4(a) of the pre-2024 final regulations and not as sales of
digital assets. One comment noted that currently, there is no State law
that permits legal title to real estate to be held via a digital asset
token. Instead, this comment explained that to transfer real estate
using digital assets, the digital asset token must hold an interest in
a legal entity (typically either a limited liability company (LLC) or a
partnership) that in turn owns the real estate. Thus, according to this
comment, each token holder owns an ownership interest in an entity, not
a claim of ownership to real estate. This comment also noted that, even
if a legal entity was not required to be formed to hold title to real
estate, these digital asset interests could potentially constitute an
unincorporated association of real estate co-owners meeting the
definition of a partnership under Sec. 301.7701-3(b)(1)(i). Either
way, this comment asserted, reporting on the sale of these interests is
not appropriate as a sale of real estate under Sec. 1.6045-4. No
comments received suggested that blockchain deeds do exist. The
Treasury Department and the IRS are not aware of any current or
proposed State law that authorizes legal title to real estate to be
held in a digital asset token. Therefore, to address this comment, the
final regulations remove this coordination rule for digital assets that
constitute reportable real estate. Accordingly, brokers should report
on sales of these interests as sales of digital assets under Sec.
1.6045-1(a)(9)(ii) (unless the sales are eligible for the special rule
under Sec. 1.6045-1(c)(8)(iii) for securities and commodities cleared
or settled on a limited-access regulated network) and not as sales of
real estate under Sec. 1.6045-4. The Treasury Department and the IRS
will continue to track developments in this area for potential future
guidance.
b. Other Coordination Rule Issues
The proposed regulations characterized assets as either digital
assets or securities based on the nature of the rights held by the
customer. Example 27 in proposed Sec. 1.6045-1(b)(27) demonstrated
that rule as applied to a fund formed to invest in digital assets, in
which the units of the fund were not recorded using cryptographically
secured distributed ledger technology. The Example concluded that
investments in the units of this fund are not digital assets because
transactions involving these fund units are not secured using
cryptography and are not digitally recorded on a ledger, such as a
blockchain. One comment requested that the final regulations clarify
that if a unit in a trust is not itself traded on a distributed ledger,
the unit in the trust should not be treated as a digital asset merely
because the assets held by the trust are digital assets. Generally, the
holder of an interest in a trust described in Sec. 301.7701-4(c) (a
fixed investment trust or FIT) is treated as directly holding its pro
rata share of each asset held by the FIT. This comment raised the
concern that this normal look through treatment could require a broker
to report transactions in FIT units as digital assets on a Form 1099-DA
even if the FIT units are not themselves digital assets. The final
regulations amend the language of proposed Sec. 1.6045-1(b)(27)
(redesignated in these final regulations as Example 20 in Sec. 1.6045-
1(b)(20)) to clarify that for purposes of section 6045, if a FIT unit
is not itself tradable on a cryptographically secured distributed
ledger, the broker is not required to look through to the FIT's assets
and should report the sale of a FIT unit under Sec. 1.6045-
1(d)(2)(i)(A) on Form 1099-B. The Example also provides that this
answer would be the same if the fund is organized as a C corporation or
partnership.
The comment also requested expansion of Sec. 1.6045-1(d)(9) of the
pre-2024 final regulations, which eliminates the need for widely held
fixed investment trusts (WHFITs) to provide duplicate reporting for
sales of securities, so that the rule would also apply to WHFIT sales
of digital assets. The Treasury Department and the IRS agree that this
suggested change is appropriate and have revised the rule in final
Sec. 1.6045-1(d)(9) accordingly. As a result, if a WHFIT sells a
digital asset, and interests in the WHFIT are held through a securities
broker, the WHFIT would report the sale information to the broker
pursuant to Sec. 1.671-5 and the broker would in turn send a Form
1099-DA (the appropriate Form 1099) to the IRS and a copy thereof to
any trust interest holder that is not an exempt recipient.
Under the proposed regulations, a notional principal contract (NPC)
that is executed in digital asset form is a digital asset. See proposed
Sec. 1.6045-1(a)(19). One comment noted that there is no broker
reporting under the pre-2024 final regulations under section 6045 for
an NPC that is not a digital asset. As a result, the comment
recommended that an NPC that is a digital asset be excluded from
reporting under section 6045. After consideration of this
recommendation, the Treasury Department and the IRS concluded that
certain payments related to NPCs in digital asset form should be
reportable as digital asset transactions and therefore decline to adopt
the recommendation in the final regulations. However, taking into
account that payments on NPCs are generally not reportable under
section 6045 under the pre-2024 final regulations, the Treasury
Department and the IRS intend to continue to study the issues related
to NPC payments. Therefore, Notice 2024-57, which is being issued
contemporaneously with these final regulations that provides that
brokers are not required to report on certain NPCs in digital form, and
that the IRS will not impose penalties under section 6721 or section
6722 for failure to file correct information returns or failure to
furnish correct payee statements with respect to these transactions
until further guidance is issued. See Part I.C.2. of this Summary of
Comments and Explanation of Revisions for a further discussion of
Notice 2024-57.
One comment requested that the final regulations provide examples
to address the proper partnership reporting obligations with respect to
digital asset interests that constitute an unincorporated association
meeting the definition of a partnership. The final regulations do not
adopt this comment as it is outside the scope of these regulations.
Another comment requested that the final regulations exempt sales of
tokenized partnerships investing in real estate from reporting under
section 6045 altogether to avoid duplicative reporting because these
partnerships are already subject to reporting such sales under the
partnership rules on Form 1065, U.S. Return of Partnership Income,
Schedule K-1, and because accountants and tax advisors that file
Schedules K-1 have more accurate information than brokers regarding the
proceeds and basis information partners need for preparing their
Federal income tax returns. The Treasury Department and the IRS have
concluded that partnership interests that invest in real estate should
not be treated any differently than partnership interests that invest
in other assets. Accordingly, no exception from reporting is made for
digital assets representing partnership interests that invest in real
estate.
B. Definition of Brokers Required to Report
1. Custodial Digital Asset Brokers and Non-Custodial Digital Asset
Brokers
a. Custodial Industry Participants
Prior to the enactment of the Infrastructure Act, section
6045(c)(1)
[[Page 56491]]
defined a 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. The pre-2024 final regulations under
section 6045 applied 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 either (1) 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, or (2) as a
principal in the sale. See Sec. 1.6045-1(a)(1), and (a)(10)(i) and
(ii) of the pre-2024 final regulations (redesignated in these final
regs as final Sec. 1.6045-1(a)(1) and (a)(10)(i)(A) and (C),
respectively). Under these rules, certain digital asset industry
participants that take possession of a customer's digital assets, such
as operators of custodial digital asset trading platforms and certain
digital asset hosted wallet providers, as well as persons that interact
as principals and counterparties to transactions with their customers,
such as owners of digital asset kiosks and certain issuers of digital
assets who regularly offer to redeem those digital assets, would also
generally be considered brokers with respect to digital asset sales.
These industry participants that act as principals and
counterparties or as agents to effect digital asset transactions on
behalf of their customers (custodial industry participants) are
generally financial institutions, such as money services businesses
(MSBs), under the Bank Secrecy Act (31 U.S.C. 5311 et seq.). Fin-2019-
G001, ``Application of FinCEN's Regulations to Certain Business Models
Involving Convertible Virtual Currencies,'' May 9, 2019 (2019 FinCEN
Guidance). Anti-money laundering (AML) obligations apply to financial
institutions, such as MSBs as defined by the Financial Crimes
Enforcement Network (FinCEN), futures commission merchants and
introducing brokers obligated to register with the CFTC, and broker-
dealers and mutual funds obligated to register with the SEC. ``Leaders
of CFTC, FinCEN, and SEC Issue Joint Statement on Activities Involving
Digital Assets,'' October 11, 2019. For example, MSBs are required
under regulations issued by the Financial Crimes Enforcement Network
(FinCEN) of the Treasury Department to develop, implement, and maintain
an effective AML program that is reasonably designed to prevent the MSB
from being used to facilitate the financing of terrorist activities and
money laundering. See 31 CFR part 1022.210(a). AML programs for MSBs
generally include, among other things, policies, procedures, and
internal controls reasonably designed to assure compliance with
FinCEN's regulations, as well as a requirement to verify customer-
related information. MSBs are also required to register with, and make
certain reports to FinCEN, and maintain certain records about
transmittals of funds. See 31 CFR part 1022; 2019 FinCEN Guidance.
Accordingly, operators of custodial digital asset trading platforms,
digital asset hosted wallet providers, and digital asset kiosks have
information about their customers and, in many cases, have already
reported digital assets sales by these customers under either section
6045 or 6050W. Consistent with the statutory and regulatory definitions
of broker that existed prior to the Infrastructure Act as well as
amended section 6045, the final regulations apply to operators of
custodial digital asset trading platforms, digital asset hosted wallet
providers, and digital asset kiosks.
Numerous comments agreed that custodial digital asset trading
platforms were appropriately treated as brokers under the proposed
regulations, and several comments agreed that digital asset hosted
wallet providers should also be treated as brokers. One comment
requested that the final regulations exclude from the definition of a
broker digital asset hosted wallet providers that do not have direct
access to the information necessary to know the nature of the
transactions processed or the identities of the parties to the
transaction. The Treasury Department and the IRS do not agree that a
specific exclusion from the definition of broker for digital asset
hosted wallet providers is necessary or appropriate. The pre-2024 final
regulations defined broker generally to mean 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. The definition of effect
under the pre-2024 final regulations treats agents as effecting sales
only if the nature of the agency is such that the agent ordinarily
would know the gross proceeds of the sale. Accordingly, a digital asset
hosted wallet provider that acts as an agent for its customer would be
subject to reporting under section 6045 with respect to its customer's
sale of digital assets only to the extent that the digital asset hosted
wallet provider ordinarily would know the gross proceeds from that
sale.
Another comment requested that the regulations make clear that
acting as a broker with respect to one customer does not mean that the
person has a reporting obligation with respect to all customers. This
requested guidance relates to Sec. 1.6045-1(c)(2) of the pre-2024
final regulations, which was not amended. This provision makes it clear
that a broker is only required to make a return of information for
sales that the broker effects for a customer (provided the broker
effects that sale in the ordinary course of a trade or business to
effect sales made by others). Accordingly, the final regulations do not
adopt this comment because the change it requests is unnecessary.
Another comment requested that the regulations be clarified to state
that the determination of whether a person is a broker is determined on
an annual basis and being a broker in one year does not mean that the
person is a broker in another year. This requested guidance relates to
a portion of Sec. 1.6045-1(a)(1) from the pre-2024 final regulations
that was not proposed to be amended and would apply broadly to all
brokers under sections 6045 and 6045A, not just those who effectuate
sales of digital assets. Accordingly, the final regulations do not
adopt this comment because it is outside the scope of these
regulations.
b. Non-Custodial Industry Participants
Unlike custodial industry participants, which generally act as
principals or as agents to effect digital asset transactions on behalf
of their customers, industry participants that do not take possession
of a customer's digital assets (non-custodial industry participants),
\2\ such as operators of non-custodial digital asset trading platforms
(sometimes referred to as decentralized exchanges or DeFi) and unhosted
digital asset wallet providers, normally do not act as custodial agents
or principals in effecting their customers' transactions. Instead,
these non-custodial industry participants offer other services, such as
providing interface services enabling their customers to interact with
trading protocols. To resolve any uncertainty over whether these non-
custodial digital asset service providers are brokers, section 80603(a)
of the Infrastructure Act amended the definition of broker under
section 6045 to add ``any person who, for consideration, is responsible
for regularly providing any service effectuating transfers of digital
assets on
[[Page 56492]]
behalf of another person'' (the new digital asset middleman rule). 167
Cong. Rec. S5702, 5703. To implement this new digital asset middleman
rule, the proposed regulations provided that, subject to certain
exclusions, any person that provides facilitative services that
effectuate sales of digital assets by customers is 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. Proposed Sec.
1.6045-1(a)(21)(iii)(A) provided that a facilitative service includes
the provision of a 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, providing
access to digital asset trading platforms, providing an automated
market maker system, providing order matching services, providing
market making functions, providing services to discover the most
competitive buy and sell prices, or providing escrow or escrow-like
services to ensure both parties to an exchange act in accordance with
their obligations. The proposed regulations also carved out certain
services from this definition, such as certain distributed ledger
validation services--whether through proof-of-work, proof-of-stake, or
any other similar consensus mechanism--without providing other
functions or services, as well as certain sales of hardware, and
certain licensing of software, where the sole function is to permit
persons to control private keys which are used for accessing digital
assets on a distributed ledger. To ensure that existing brokers of
property already subject to broker reporting would be considered to
effect sales of digital assets when they accept, or otherwise process,
certain digital asset payments and to ensure that digital asset brokers
would be considered to effect sales of digital assets received as
payment for digital asset transaction costs, proposed Sec. 1.6045-
1(a)(21)(iii)(B) provided that a facilitative service also includes the
services performed by such brokers in accepting or processing those
digital asset payments.
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\2\ 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, including the
Bank Secrecy Act and its implementing regulations, which are outside
the scope of these regulations.
---------------------------------------------------------------------------
The Treasury Department and the IRS received numerous comments
directed at these new digital asset middleman rules. One comment
recommended the adoption of an IRS-approved central entity service
provider to the digital asset marketplace that could gather customer
tax identification information and receive, aggregate, and reconcile
information from various custodial and non-custodial industry
participants. Another comment recommended allowing the use of an
optional tax attestation token to facilitate tax compliance by non-
custodial industry participants. Many other comments recommended that
non-custodial industry participants not be treated as brokers. Comments
also expressed concerns that the proposed definitions of a facilitative
service in proposed Sec. 1.6045-1(a)(21)(iii)(A) and position to know
in proposed Sec. 1.6045-1(a)(21)(ii) are overbroad and would,
consequently, result in duplicative reporting of the same transactions.
Numerous comments said the broad definition of a broker would stifle
American innovation and drive the digital asset industry to move
offshore. Additionally, many of the comments indicated that certain
non-custodial industry participants have not collected customer
information under AML programs, and therefore do not have systems in
place to comply with the proposed reporting by the applicability date
for transactions on or after January 1, 2025.
The Treasury Department and the IRS do not agree that non-custodial
industry participants should not be treated as brokers. 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. Section 80603(a) of the Infrastructure Act clarified the
definition of broker under section 6045 to include 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.'' 167 Cong. Rec.
S5702, 5703. However, the Treasury Department and the IRS would benefit
from additional consideration of issues involving non-custodial
industry participants. The Treasury Department and the IRS have
determined that the issuance of these final regulations requiring
custodial brokers and brokers acting as principals to report digital
asset transactions should not be delayed until additional consideration
of issues involving non-custodial industry participants is completed
because custodial brokers and brokers acting as principals carry out a
substantial majority of digital asset transactions. Clarifying
information reporting for the substantial majority of digital asset
transactions, consistent with the applicability dates set forth in the
proposed regulations, will benefit both taxpayers, who can use the
reported information to prepare their Federal income tax returns, and
the IRS, which can focus its enforcement resources on taxpayers who are
more likely to have underreported their income from digital asset
transactions and custodial brokers and brokers acting as principals who
may not be meeting their reporting obligations. Accordingly, the
proposed new digital asset middleman rules that apply to non-custodial
industry participants are not being finalized with these final
regulations. The Treasury Department and the IRS continue to study this
area and, after full consideration of all comments received, intend to
expeditiously issue separate final regulations describing information
reporting rules for non-custodial industry participants. Until this
further regulatory guidance is issued, the final regulations reserve on
the definition of position to know in final Sec. 1.6045-1(a)(21)(ii)
and a portion of the facilitative service definition in final Sec.
1.6045-1(a)(21)(iii)(A). Additionally, because comments were received
addressing the breadth of the specific exclusions provided for certain
validation services, certain sales of hardware, and certain licensing
of software, the final regulations also reserve on these exclusions.
The Treasury Department and the IRS recognize that persons that are
solely engaged in the business of providing validation services without
providing other functions or services, or persons that are solely
engaged in the business of selling certain hardware, or licensing
certain 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, are not digital asset brokers. Accordingly,
notwithstanding reserving on the underlying rule to provide time to
study the comments received, the final regulations retain the examples
in final Sec. 1.6045-1(b)(2)(ix) and (x), which conclude that persons
conducting these actions do not constitute brokers.
The final regulations do not, however, reserve on the portion of
the facilitative services definition in final Sec. 1.6045-
1(a)(21)(iii)(B), which was included to ensure that sales of digital
assets conducted by certain persons other than non-custodial industry
participants are treated as effected by a broker under
[[Page 56493]]
final Sec. 1.6045-1(a)(10). For example, proposed Sec. 1.6045-
1(a)(21)(iii)(B), which provided that a facilitative service includes
the acceptance of digital assets by a broker in consideration for
property reportable under proposed Sec. 1.6045-1(a)(9)(i) and for
broker services, was retained and redesignated as final Sec. 1.6045-
1(a)(21)(iii)(B)(1) and (3), respectively. Persons that conduct these
actions have complete knowledge about the underlying transaction
because they are typically acting as the counterparty. Thus, knowledge
is not identified as a specific element of the definition of
facilitative services for these persons to be treated as conducting
facilitative services. Proposed Sec. 1.6045-1(a)(21)(iii)(B) also
provided that a facilitative service includes any service provided by a
real estate reporting person with respect to a real estate transaction
in which digital assets are paid by the buyer in full or partial
consideration for the real estate. This rule has been retained with
some modifications to the knowledge requirement which must be met
before a real estate reporting person will be treated as conducting
facilitative services. See Part I.B.4. of this Summary of Comments and
Explanation of Revisions, for a discussion of the modified rule, now in
final Sec. 1.6045-1(a)(21)(iii)(B)(2), with respect to treating real
estate reporting persons as performing facilitative services and,
thereby, as digital asset middlemen under the final regulations.
Additionally, to ensure that a digital asset kiosk that does not act as
an agent or dealer in a digital asset transaction will nonetheless be
considered a digital asset middleman capable of effecting sales of
digital assets under final Sec. 1.6045-1(a)(10)(i)(D), final Sec.
1.6045-1(a)(21)(iii)(B)(5) provides that the acceptance of digital
assets in return for cash, stored-value cards, or different digital
assets by a physical electronic terminal or kiosk is a facilitative
service. Like persons that accept digital assets in consideration for
property reportable under proposed Sec. 1.6045-1(a)(9)(i) and for
broker services, knowledge is not identified as a specific element of
the definition of facilitative services for these kiosks to be treated
as conducting facilitative services because these kiosks are typically
acting as the counterparty in the digital asset sale transaction.
Finally, as discussed in Part I.B.2. of this Summary of Comments and
Explanation of Revisions, final Sec. 1.6045-1(a)(21)(iii)(B)(4) treats
certain PDAPs that receive digital asset payments from one party
(buyer) and pay those digital assets, cash, or different digital assets
to a second party as performing facilitative services and, thereby, as
digital asset middlemen under the final regulations.
Taken together, these final regulations apply only to digital asset
industry participants that take possession of the digital assets being
sold by their customers, such as operators of custodial digital asset
trading platforms, certain digital asset hosted wallet providers,
certain PDAPs, and digital asset kiosks, as well as to certain real
estate reporting persons that are already subject to the broker
reporting rules. As a result, this preamble does not set forth nor
discuss comments received relating to the application of the proposed
regulations to non-custodial industry participants (other than persons
that operate digital asset kiosks and process payments without taking
custody thereof). The Treasury Department and the IRS will continue to
consider comments received addressing non-custodial arrangements and
plan to expeditiously publish separate final regulations addressing
information reporting rules for non-custodial digital asset service
providers after issuance of these final regulations.
2. Processors of Digital Asset Payments
PDAPs enable persons (buyers) to make payments to second parties
(typically merchants) using digital assets. In some cases, the buyer
pays digital assets to the PDAP, and the PDAP in turn pays those
digital assets, U.S. dollars, or different digital assets to the
merchant. In other cases, the PDAP may not take custody of the digital
assets, but instead may instruct or otherwise give assistance to the
buyer to transfer the digital assets directly to the merchant. The PDAP
may also have a relationship with the merchant specifically obligating
the PDAP to process payments on behalf of the merchant.
a. The Proposed Regulations
The proposed regulations used the term digital asset payment
processors instead of PDAPs. To avoid confusion associated with the use
of the acronym for digital asset payment processors, which may have a
different meaning within the digital asset industry, and for ease in
reading this preamble, this preamble solely uses the term PDAP, even
when referencing the proposed regulations and comments made with
respect to the proposed regulations.
The proposed regulations treated PDAPs as brokers that effect sales
of digital assets as agents for the buyer. Proposed Sec. 1.6045-
1(a)(22)(i)(A) defined a PDAP as a person who in the ordinary course of
its business regularly stands ready to effect digital asset 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
addition, recognizing that some payment recipients might be willing to
receive payments facilitated by an intermediary in digital assets
rather than cash in a circumstance in which the PDAP temporarily fixes
the exchange rate on the digital asset payment that is transferred
directly from a customer to that payment recipient, proposed Sec.
1.6045-1(a)(22)(ii) treated 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 PDAP in exchange for different
digital assets or cash paid to the second person.
The proposed regulations also included in the definition of a PDAP
certain payment settlement entities and certain entities that make
payments to payment settlement entities that are potentially subject to
reporting under section 6050W. Specifically, proposed Sec. 1.6045-
1(a)(22)(i)(B) provided that a PDAP includes a third party settlement
organization (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). Additionally, proposed Sec. 1.6045-1(a)(22)(i)(C)
provided that the definition of a PDAP 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.
Proposed Sec. 1.6045-1(a)(9)(ii)(D) provided that a sale includes
all these types of payments processed by PDAPs. Finally, proposed Sec.
1.6045-1(a)(2)(ii)(A) provided that the customer in a PDAP transaction
includes the person who transfers the digital assets or directs the
transfer of the digital assets to the PDAP to make payment to the
second person.
[[Page 56494]]
b. Definition of PDAP, PDAP Customer, and PDAP Sales
Several comments stated that some PDAPs contract only with
merchants to process and settle digital asset payments on the behalf of
those merchants. That is, despite the buyer benefitting from the
merchant's relationship with the PDAP, the buyer is not the customer of
the PDAP in these transactions. Consequently, these comments warned,
PDAPs are unable to leverage any customer relationship to collect
personal identification information and other tax documentation--
including Form W-9, Request for Taxpayer Identification Number and
Certification, or Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding and Reporting
(Individuals)--from buyers. Another comment asserted that treating
PDAPs as brokers conflicts with or expands the current FinCEN
regulatory AML program requirements for regulated entities to perform
due diligence on their customers. Several comments noted that this lack
of customer relationship would exacerbate the privacy concerns of the
buyers if PDAPs working for the merchant were required to collect tax
documentation from buyers. Moreover, these comments raised the concern
that collecting this documentation from buyers is even more challenging
for one-time small retail purchases because buyers would be unwilling
to comply with tax documentation requests at the point of sale. Other
comments disagreed with these comments and stated that there is a
business relationship between PDAPs and buyers that would make
reporting appropriate. Indeed, one comment asserted that PDAPs are
technically money transmitters under FinCEN regulations and, as such,
are already subject to the AML program obligations, described in Part
I.B.1. of this Summary of Comments and Explanation of Revisions, with
respect to the person making payments. See 31 CFR part 1010.100(ff)(5).
Other comments recommended that the definition of broker be aligned
with the concepts outlined in FATF to, in their view, clarify that a
broker must be a legal person who exercises some measure of control or
dominion over digital assets on behalf of another person.
In response to these comments, the Treasury Department and the IRS
have concluded that the circumstances under which a person processing
digital asset payments for others should be required to report
information on those payments to the IRS under section 6045 should be
narrowed pending additional consideration of the issues and comments
received concerning non-custodial arrangements discussed in Part
I.B.1.b. of this Summary of Comments and Explanation of Revisions.
Under the final regulations, a PDAP is required to report digital asset
payments by a buyer only if the processor already may obtain customer
identification information from the buyer in order to comply with AML
obligations. In such cases, the processor has the requisite
relationship with the buyer to collect additional tax documentation to
comply with information reporting requirements. Accordingly, final
Sec. 1.6045-1(a)(2)(ii)(A) modifies the proposed definition of
customer as it applies to PDAPs to limit the circumstances under which
a buyer would be considered the customer of a PDAP. Specifically, under
this revised definition, the buyer will be treated as a customer of the
PDAP only to the extent that the PDAP has an agreement or other
arrangement with the buyer for the provision of digital asset payment
services and that agreement or other arrangement provides that the PDAP
may verify such person's identity or otherwise comply with AML program
requirements, such as those under 31 CFR part 1010, applicable to that
PDAP or any other AML program requirements. For this purpose, an
agreement or arrangement with the PDAP includes any alternative payment
services arrangement such as a computer or mobile application program
under which, as part of the PDAP's customary onboarding procedures, the
buyer is treated as having agreed to the PDAP's general terms and
conditions. The PDAP may also be required to report information on the
payment to the merchant on whose behalf the PDAP is acting.
Several comments raised the concern that, to the extent there is no
contractual relationship between the PDAP and the buyer, the buyer is
not the PDAP's customer, and that the proposed regulations, therefore,
exceed the Secretary's authority under section 6045(a), which requires
persons doing business as a broker to ``make a return . . . showing the
name and address of each customer [of the broker], with such details
regarding gross proceeds.'' These comments recommended that the final
regulations provide that a PDAP that does not have a contractual
relationship with a buyer is not a broker with respect to that buyer.
Another comment suggested the regulations should not apply to PDAPs at
all without a clear congressional mandate. The Treasury Department and
the IRS do not agree that section 6045 requires specific statutory
language with respect to each type of broker that already fits within
the definition of broker under section 6045(c)(1). Section 6045(c)(2)
defines the term customer as ``any person for whom the broker has
transacted any business.'' This definition does not require that the
specific transaction at issue be conducted by the broker for the
customer. Accordingly, if a PDAP transacts some business with the
buyer--such as would be the case if the buyer sets up a payment account
with the PDAP--then there is statutory authority to require that the
PDAP report on the buyer's payments, even though the activities
performed by that PDAP were performed pursuant to a separate
contractual agreement with a merchant.
One comment expressed confusion with the definition of PDAP in the
proposed regulations. Specifically, this comment requested
clarification as to why the definition listed a third party settlement
organization separately in proposed Sec. 1.6045-1(a)(22)(i)(B) rather
than merely as a subset of the description provided in proposed Sec.
1.6045-1(a)(22)(i)(A), in which the person regularly facilitates
payments from one party to a second party by receiving digital assets
from the first payment and exchanging those digital assets into cash or
different digital assets paid the second party. Another comment
expressed confusion over why the processor agreement rules in proposed
Sec. 1.6045-1(a)(22)(ii) and (iii) include a provision treating the
payment of digital assets to a second party pursuant to a processor
agreement that fixes the exchange rate (processor agreement
arrangement) as a sale effected by the PDAP. This comment also
recommended deleting the processor agreement arrangement paragraphs
from the definition of a PDAP and moving them to the definition of
gross proceeds.
The definition of a PDAP in the proposed regulations included
descriptions of ways that a person could facilitate a payment from one
party to a second party. Many of these descriptions involved
circumstances in which the buyer transfers the digital asset payment to
the PDAP, followed by the PDAP transferring payment to a second party.
Several of the descriptions involved circumstances in which the PDAP
does not take possession of the payment, but instead instructs the
buyer to make a direct transfer of the digital asset payment to the
second party, or otherwise, pursuant to a processor agreement,
temporarily fixes the
[[Page 56495]]
exchange rate to be applied to the digital assets received by the
second party.
The Treasury Department and the IRS understand that many of the
transactions described in the proposed regulations in which the PDAP
does not take possession of the payment are undertaken today by non-
custodial industry participants. In light of the decision discussed in
Part I.B.1. of this Summary of Comments and Explanation of Revisions to
further study the application of the broker reporting rules to non-
custodial industry participants, the Treasury Department and the IRS
have determined that the definition of PDAP and the definition of a
sale effected by a PDAP (PDAP sales) in these final regulations should
apply only to transactions in which PDAPs take possession of the
digital asset payment. Additionally, given the complexity of the multi-
part definition of PDAP in the proposed regulations and in response to
the public comments, the Treasury Department and the IRS have
determined that all types of payment transactions that were included in
the various subparagraphs of the definition should be combined into a
single simplified definition. This single definition includes the
requirement that a person must receive the digital assets in order to
be a PDAP and also covers all transactions--and not just those
transactions described in proposed Sec. 1.6045-1(a)(22)(i)(B) and
(C)--in which the PDAP receives a digital asset and transfers that same
digital asset to the second party.
Accordingly, final Sec. 1.6045-1(a)(22) defines a PDAP as a person
who in the ordinary course of a trade or business stands ready to
effect sales of digital assets by regularly facilitating payments from
one party to a second party by receiving digital assets from the first
party and paying those digital assets, cash, or different digital
assets to the second party. Correspondingly, final Sec. 1.6045-
1(a)(9)(ii)(D) revises and simplifies the proposed regulation's
definition of a sale processed by a PDAP to include the payment by a
party of a digital asset to a PDAP in return for the payment of that
digital asset, cash, or a different digital asset to a second party.
Accordingly, if a buyer uses a stablecoin or other digital asset to
make payment to a PDAP that then transfers the stablecoin, another
digital asset, or cash to the merchant, the transaction is a PDAP sale.
Additionally, as discussed in Part I.D.4. of this Summary of Comments
and Explanation of Revisions, the final regulations provide that any
PDAP sale that is also a sale under one of the other definitions of
sale under final Sec. 1.6045-1(a)(9)(ii)(A) through (C) (non-PDAP
sale) that is subject to reporting due to the broker effecting the sale
as a broker other than as a PDAP must be treated as a non-PDAP sale.
Thus, for example, an exchange of digital assets that a custodial
broker executes between customers will not be treated as a PDAP sale,
but instead will be treated as a sale of digital assets in exchange for
different digital assets under final Sec. 1.6045-1(a)(9)(ii)(A)(2).
One comment recommended that the regulations be clarified so as not
to treat the PDAP as a broker to the extent it does not have sufficient
information about the transaction to know it is a sale. Another comment
stated that PDAPs do, in fact, maintain detailed records of all
transactions for both merchants and buyers. The final regulations adopt
this comment by adding services performed by a PDAP to the definition
of facilitative service provided the PDAP has actual knowledge or
ordinarily would know the nature of the transaction and the gross
proceeds therefrom to ensure that payments made using digital assets
are treated as sales effected by a broker. Final Sec. 1.6045-
1(a)(21)(iii)(B)(4). Accordingly, in a circumstance in which the PDAP
processes a payment on behalf of a merchant and that payment comes from
a buyer with an account at the PDAP, the PDAP would ordinarily have the
information necessary to know that the transaction constitutes a sale
and would know the gross proceeds. As such, that PDAP will be treated
under the final regulations as effecting the sale transaction under
Sec. 1.6045-1(a)(10)(i)(D) for the buyer-customer as a digital asset
middleman under Sec. 1.6045-1(a)(21). In contrast, in a circumstance
in which the PDAP does not process the payment on behalf of the
merchant, the PDAP would ordinarily not have actual knowledge or other
information that would allow the processor to ordinarily know the
nature of the transaction. Accordingly, assuming nothing else about the
transaction provides the PDAP with either actual knowledge or
information that would allow the processor to ordinarily know the
nature of the transaction, the payment processor would not be treated
as providing a facilitative service that effects a sale transaction
under these regulations.
One comment stated that PDAPs do not have the infrastructure to
collect and store customer identification information or to report
transactions involving buyers who do not have accounts with the PDAP.
Another comment expressed concern about asking individuals to provide
personal identifying information to PDAPs, which could occur in the
middle of a busy store. Another comment requested guidance on how PDAPs
should collect sensitive taxpayer information. Several comments
expressed concern about the increased risk these rules would create
with respect to the personal identifying information collected by PDAPs
because that information could be held by multiple brokers. Several
other comments stated that extending information reporting to PDAPs
would create surveillance concerns because it could allow the IRS to
collect data on merchandise or services purchased or provided.
The Treasury Department and the IRS understand that PDAPs that
comply with FinCEN and other regulatory requirements are required to
collect and in some cases report customer identification information,
and have concluded that such PDAPs will likewise be able to implement
the systems necessary to, or contract with service providers who can,
protect sensitive information of their customers. It is appropriate to
have PDAPs collect, store, and report customer identification
information for Federal tax purposes because reporting on digital asset
payment transactions is important to closing the income tax gap
attributable to digital asset transactions. Indeed, reporting is
particularly helpful to buyers in these payment transactions because
they may not understand that the use of digital assets to make payments
is a transaction that may generate a taxable gain or loss. Finally, the
final regulations do not require the reporting of any information
regarding the specific services or products purchased by buyers in
payment transactions. Accordingly, the IRS could not use this
information reporting to track or monitor the types of goods and
services a taxpayer purchases using digital assets.
c. Other PDAP Issues
Comments also raised various other policy and practical objections
to including PDAPs in the definition of broker. Specifically, comments
suggested that requiring PDAPs to collect tax documentation information
for all purchases may halt the development of digital assets as an
efficient and secure payment system or may drive customers to not use
PDAPs to make their payments, potentially exposing them to more fraud
by unscrupulous merchants. Other comments complained that these rules
would punish buyers who choose to pay with digital assets and confuse
buyers
[[Page 56496]]
paying with stablecoins, who expect transactions to be no different
than cash transactions. Several comments asserted that the benefits of
having PDAPs report on digital asset payments made by buyers was not
worth the cost because most tax software programs are able to track and
report accurately the gains and losses realized in connection with
these payment transactions. These comments asserted that for taxpayers
already taking steps to comply with their Federal income tax
obligations, an information reporting regime that provides only gross
proceeds information with respect to these transactions would not
produce particularly useful information. Even for other taxpayers,
another comment suggested that reporting by PDAPs provided only limited
utility because determining a gain or loss on each purchase would still
involve a separate search for cost basis information.
The final regulations do not adopt these comments. Information
reporting facilitates the preparation of Federal income tax returns
(and reduces the number of inadvertent errors or intentional
misstatements shown on those returns) by taxpayers who engage in
digital asset transactions. Information reporting is particularly
important in the case of payment transactions involving the disposition
of digital assets, which many taxpayers do not realize must be reported
on their Federal income tax returns. Clear information reporting rules
also helps the IRS to identify taxpayers who have engaged in these
transactions, and thereby help to reduce the overall income tax gap.
Moreover, regarding the impact of these regulations on the development
of digital assets as an efficient and secure payment system, the final
regulations will assist digital asset owners who are currently forced
to closely monitor and maintain records of all their digital asset
transactions to correctly report their tax liability at the end of the
year because they will receive the necessary information from the
processor of the transactions. Eliminating these high entry costs may
allow more potential digital asset owners with little experience
accounting for dispositions of digital assets in payment transactions
to enter the market.
Several comments recommended against having PDAPs report on buyers
disposing of digital assets because these PDAPs already report on
merchants who receive these payments under section 6050W to the extent
the payments are for goods or services. These comments raised concerns
that this duplicative reporting for the same transaction would harm the
IRS, create an undue burden for brokers, and cause confusion for buyers
making payments. The final regulations do not adopt these comments
because the reporting is not duplicative. The reporting under section
6050W reports on payments made to the merchant. That reporting is not
provided to the buyers making those payments, and therefore does not
address the gross proceeds that the buyer must report on the buyer's
Federal income tax returns.
Another comment suggested that the treatment of digital asset
payments should be analogous to that of cash payments. That is, since
PDAPs are not required to report on buyers making cash payments, they
should not be required to report on buyers making payments with digital
assets. The final regulations do not adopt this comment because a buyer
making a cash payment does not have a taxable transaction while a buyer
making a payment with digital assets is engaging in a sale or exchange
that requires the buyer to report any gain or loss from the disposition
on its Federal income tax return.
Other comments raised the concern that reporting by PDAPs would
result in duplicative reporting to the buyer because the buyer's wallet
provider or another digital asset trading platform may report these
transactions. See Part I.B.5. of this Summary of Comments and
Explanation of Revisions for a discussion of how the multiple broker
rules provided in these final regulations would apply to PDAPs.
Another comment recommended only subjecting PDAPs to broker
reporting if they exchange digital assets into fiat currency. The final
regulations do not adopt this comment because digital assets are a
unique form of property which can be used to make payments.
Accordingly, given that digital assets are becoming a more popular form
of payment, it is important that taxpayers making payments with digital
assets be provided the information they need to report these
transactions on their Federal income tax returns.
Notwithstanding that the final regulations require PDAPs to report
on PDAP sales, as discussed in Part I.D.2. of this Summary of Comments
and Explanation of Revisions, the final regulations provide a $10,000
de minimis threshold for qualifying stablecoins below which PDAPs will
not have to report PDAP sales using qualifying stablecoins.
Additionally, the Treasury Department and the IRS have determined that,
pursuant to discretion under section 6045(a), it is appropriate to
provide additional reporting relief for certain low-value PDAP sales
using digital assets other than qualifying stablecoins that are less
likely to give rise to significant gains or losses. As discussed in
Part I.D.4. of this Summary of Comments and Explanation of Revisions,
the final regulations have added a de minimis annual threshold for PDAP
sales below which no reporting is required.
3. Issuers of Digital Assets
Proposed Sec. 1.6045-1(a)(1) modified the definition of broker 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. One comment
focused on stablecoin issuers and recommended against treating such
issuers as brokers because it is unclear how they would be in a
position to know the gain or loss of their customers. Issuers of
digital assets that regularly offer to redeem those digital assets will
know the nature of the sale and the gross proceeds from the sale when
they redeem those digital assets. Accordingly, it is appropriate to
treat these issuers as brokers required to report the gross proceeds of
the redemption just as obligors that regularly issue and retire their
own debt obligations are treated as brokers and corporations that
regularly redeem their own stock also are treated as brokers under
Sec. 1.6045-1(a)(1) of the pre-2024 final regulations. Moreover, since
these issuers do not provide custodial services for their customers
redeeming the issued digital assets, they are not required to report on
the customer's adjusted basis under final Sec. 1.6045-1(d)(2)(i)(D).
As such whether they are able to know their customer's gain or loss is
not relevant to whether they should be treated as brokers under these
regulations.
4. Real Estate Reporting Persons
The proposed regulations provided 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 generally be
required to make an information return with respect to that transaction
under proposed Sec. 1.6045-4(a). To ensure that real estate reporting
persons report on real estate buyers making payment in such
transactions with digital assets, the proposed regulations also
included these real estate buyers in the definition of customer and
included the services performed with respect to these transactions by
real estate reporting persons in the definition of facilitative
[[Page 56497]]
services relevant to the definition of a digital asset middleman.
One comment raised the concern that in some real estate
transactions, direct (peer to peer) payments of digital assets from
buyers to sellers may not be reflected in the contract for sale. In
such transactions, the real estate reporting person would not
ordinarily know that the buyers used digital assets to make payment.
The Treasury Department and the IRS have concluded that it is not
appropriate at this time to require real estate reporting persons who
do not know or would not ordinarily know that digital assets were used
by the real estate buyer to make payment to report on such payments.
Accordingly, the definition of facilitative service in final Sec.
1.6045-1(a)(21)(iii)(B)(2) has been revised to limit the services
provided by real estate reporting persons that constitute facilitative
services to those services for which the real estate reporting person
has actual knowledge or ordinarily would know that digital assets were
used by the real estate buyer to make payment directly to the real
estate seller. For this purpose, a real estate reporting person is
considered to have actual knowledge that digital assets were used by
the real estate buyer to make payment if the terms of the real estate
contract provide for payment using digital assets. Thus, for example,
if the contract for sale states that the buyer will make payment using
digital assets, either fixed as to number of units or fixed as to the
value, the real estate reporting person would be treated as having
actual knowledge that digital assets were used to make payment in the
transaction notwithstanding that such person might have to query the
buyer and seller regarding the name and number of units used to make
payment. Additionally, a separate communication to the real estate
reporting person, for example, to ensure that the value of the digital
asset payment is reflected in any commissions or taxes due at closing,
would constitute actual knowledge by the real estate reporting person
that digital assets were used by the real estate buyer to make payment
directly to the real estate seller.
One comment recommended that to relieve burden on the real estate
reporting person, the form on which the real estate seller's gross
proceeds are reported (Form 1099-S, Proceeds From Real Estate
Transactions) be revised with a check box to indicate that digital
assets were paid in the transaction and with a new box for the buyer's
name, address, and tax identification number (TIN). These revisions
would allow the real estate reporting person to file one Form 1099-S
instead of one Form 1099-DA (with respect to the real estate buyer) and
one Form 1099-S (with respect to the real estate seller). The final
regulations do not make this suggested change because it would be
inappropriate to include both parties to the transaction on the same
information return. The broker reporting regulations require copies of
Form 1099-S to be furnished to the taxpayer, and it would be
inappropriate to require disclosure of either party's TIN to the other.
For a discussion of how the multiple broker rule would apply to a real
estate transaction involving a real estate reporting person and a PDAP,
see Part I.B.5. of this Summary of Comments and Explanation of
Revisions.
Notwithstanding these decisions regarding the appropriateness of
reporting under these regulations by real estate reporting persons, as
discussed in Part VII. Of this Summary of Comments and Explanation of
Revisions, the applicability date for reporting has been delayed and
backup withholding relief has been provided for real estate reporting
persons.
5. Exempt Recipients and the Multiple Broker Rule
a. Sales Effected for Exempt Recipients
The proposed regulations left unchanged the exceptions to reporting
provided under Sec. 1.6045-1(c)(3)(i) of the pre-2024 final
regulations for exempt recipients, such as certain corporations,
financial institutions, tax exempt organizations, or governments or
political subdivisions thereof. Thus, the proposed regulations did not
create a reporting exemption for sales of digital assets effected on
behalf of a customer that is a digital asset broker. Several comments
recommended that custodial digital asset brokers be added to the list
of exempt recipients under the final regulations because the comments
asserted that these brokers are subject to rigorous oversight by
numerous Federal and State regulators. In response to the request that
custodial digital asset brokers be added to the list of exempt
recipients, final Sec. 1.6045-1(c)(3)(i)(B)(12) adds digital asset
brokers to the list of exempt recipients for sales of digital assets,
but limits such application to only U.S. digital asset brokers because
brokers that are not U.S. digital asset brokers (non-U.S. digital asset
brokers) are not currently subject to reporting on digital assets under
these final regulations. See Part I.G. of this Summary of Comments and
Explanation of Revisions for the definition of a U.S. digital asset
broker and a discussion of the Treasury Department's and the IRS's
plans to implement the CARF. Additionally, the list also does not
include U.S. digital asset brokers that are registered investment
advisers that are not otherwise on the list of exempt recipients (Sec.
1.6045-1(c)(3)(i)(B)(1) through (11) of the pre-2024 final regulations)
because registered investment advisers were not previously included in
the list of exempt recipients. For this purpose, a registered
investment adviser means a registered investment adviser registered
under the Investment Advisers Act of 1940, 15 U.S.C. 80b-1, et seq., or
as a registered investment adviser with a state securities regulator.
See Part I.B.5.b. of this Summary of Comments and Explanation of
Revisions for the documentation that a broker effecting a sale on
behalf of a U.S. digital asset broker (other than a registered
investment adviser) must obtain pursuant to final Sec. 1.6045-
1(c)(3)(i)(C)(3) to treat such customer as an exempt recipient under
final Sec. 1.6045-1(c)(3)(i)(B)(12).
b. The Multiple Broker Rule
The proposed regulations also did not extend the multiple broker
rule under Sec. 1.6045-1(c)(3)(iii) of the pre-2024 final regulations
to digital asset brokers. Comments overwhelmingly requested that the
final regulations implement a multiple broker rule applicable to
digital asset brokers to avoid burdensome and confusing duplicative
reporting. Several comments recommended that the rule in Sec. 1.6045-
1(c)(3)(iii) of the pre-2024 final regulations, which provides that the
broker that submits instructions to another broker, such as a digital
asset trading platform, should have the obligation to report the
transaction to the IRS, not the broker that receives the instructions
and executes the transaction, because the brokers that submit
instructions are in a position to provide reporting information to
those clients with whom they maintain a direct relationship, while the
latter are not. Another comment recommended requiring only the digital
asset broker that has the final ability to consummate the sale to
report the transaction to the IRS unless that broker has no ability to
backup withhold. Another comment recommended allowing digital asset
brokers to enter into contracts for information reporting to establish
who is responsible for reporting the transaction to the IRS. Finally,
several comments recommended that, when two digital asset brokers would
otherwise have a reporting obligation with respect to a sale
transaction, that only the digital asset broker crediting
[[Page 56498]]
the gross proceeds to the customer's wallet address or account have the
obligation to report the transaction to the IRS because this is the
broker that has the best ability to backup withhold.
As discussed in Part VI. Of this Summary of Comments and
Explanation of Revisions, backup withholding on these transactions is a
necessary and essential tool to ensure that important information for
tax enforcement is reported to the IRS. Because the broker crediting
the gross proceeds to the customer's wallet address or account is in
the best position to backup withhold on these transactions if the
customer does not provide the broker with the necessary tax
documentation, final Sec. 1.6045-1(c)(3)(iii)(B) adopts a multiple
broker rule for digital asset brokers that would require the broker
crediting the gross proceeds to the customer's wallet address or
account to report the transaction to the IRS when more than one digital
asset broker would otherwise have a reporting obligation with respect
to a sale transaction. The relief for the broker that is not the broker
crediting the gross proceeds to the customer's wallet address or
account, however, is conditioned on that broker obtaining proper
documentation from the other broker as discussed in the next paragraph.
Additionally, the final regulations do not adopt the suggested rule
that would allow a broker to shift the responsibility to report to
another broker based on an agreement between the brokers because the
broker having the obligation to report in that case may not have the
ability to backup withhold. A broker, of course, is not prohibited from
contracting with another broker or with another third party to file the
required returns on its behalf.
Numerous comments provided recommendations in response to the
request in the proposed regulations for suggestions to ensure that a
digital asset broker would know with certainty that the other digital
asset broker involved in a transaction is also a broker with a
reporting obligation under these rules. One comment raised a concern
with a rule requiring the broker obligated to report to provide notice
to the other broker that it will make a return of information for each
sale because that requirement would be overly burdensome. Another
comment recommended that the broker obtain from the obligated broker a
Form W-9 that has been modified to add an exempt payee code for digital
asset brokers and a unique broker identification number. Another
comment recommended that, absent actual knowledge to the contrary, a
broker should be able to rely on a reasonable determination based on
another broker's name or other publicly available information it has
about the other broker (sometimes referred to as the eye-ball test)
that the other broker is a U.S. digital asset broker. To avoid any gaps
in reporting, another comment recommended against allowing brokers to
treat other brokers as U.S. digital asset brokers based on actual
knowledge or the existing presumption rules. Finally, another comment
recommended that the IRS establish a registration system and searchable
database for digital asset brokers like that used for foreign financial
institutions under 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).
Because of the risk that the multiple broker rule could result in
no reporting, the final regulations do not adopt the so-called eye-ball
test or the existing presumption rules for determining if another
broker is a U.S. digital asset broker. The final regulations also do
not adopt an IRS registration system for U.S. digital asset brokers
because the IRS is still considering the benefits and burdens of a
registration system for both the IRS and brokers. Instead, the final
regulations adopt a rule that to be exempt from reporting under the
multiple broker rule, a broker must obtain from another broker a Form
W-9 certifying that the other broker is a U.S. digital asset broker
(other than a registered investment adviser that is not otherwise on
the list of exempt recipients (Sec. 1.6045-1(c)(3)(i)(B)(1) through
(11) of the pre-2024 final regulations). Because the current Form W-9
does not have this certification, the notice referred to in Part VII.
Of this Summary of Comments and Explanation of Revisions will permit
brokers to rely upon a written statement that is signed by another
broker under penalties of perjury that the other broker is a U.S.
digital asset broker until sometime after the Form W-9 is revised to
accommodate this certification. It is contemplated that the
instructions to the revised Form W-9 will give brokers who have
obtained private written certifications a reasonable transition period
before needing to obtain a revised Form W-9 from the other broker.
One comment requested clarification regarding which broker--the
real estate reporting person or the PDAP--is responsible for filing a
return with respect to the real estate buyer in a transaction in which
the real estate buyer transfers digital assets to a PDAP that in turn
transfers cash to the real estate seller. The multiple broker rule
included in final Sec. 1.6045-1(c)(3)(iii)(B) would apply in this case
if the real estate reporting person is aware that the PDAP was involved
to make the payment on behalf of the real estate buyer and obtains from
the PDAP the certification described above that the PDAP is a U.S.
digital asset broker. If the transaction is undertaken in any other
way, it is unclear that the real estate reporting person would know the
identity of the PDAP or whether that PDAP was required to report on the
transaction. Accordingly, the real estate reporting person would be
required to report on the transaction without regard to whether the
PDAP also is required to report. It is anticipated that taxpayers will
only rarely receive two statements regarding the same real estate
transaction; however, when they do, taxpayers will be able to inform
the IRS should the IRS inquire that the two statements reflect only one
transaction.
Another comment requested guidance on how the information reporting
rules would work with respect to a digital asset hosted wallet provider
that contracts with another business to perform the hosted wallet
services for the broker's customers on the broker's behalf. In response
to the comment, the final regulations clarify that a broker should be
treated as providing hosted wallet services even if it hires an agent
to perform some or all of those services on behalf of the broker and
without regard to whether that hosted wallet service provider is also
in privity with the customer. Additionally, to ensure this
interpretation is incorporated in the final regulations, the final
regulations revise the definition of covered security in final Sec.
1.6045-1(a)(15)(i)(J) to reference brokers that provide custodial
services for digital assets, rather than hosted wallet services for
digital assets, to clarify that services provided by the brokers'
agents will be ascribed to the broker without regard to the specific
custodial method utilized. To the extent a hosted wallet provider acts
as an agent of the broker and is in privity with the customer, the
multiple broker rules described herein should avoid duplicative
reporting.
Finally, as discussed in Part I.B.1. of this Summary of Comments
and Explanation of Revisions, the Treasury Department and the IRS are
continuing to study the question of how a multiple broker rule would
apply to the non-custodial digital asset industry.
[[Page 56499]]
C. Definition of Sales Subject to Reporting
1. In General
The proposed regulations modified the definition of a sale subject
to reporting to include the disposition of a digital asset in exchange
for cash, one or more stored-value cards, or a different digital asset.
In addition, the proposed regulations included in the definition of
sale 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 or in consideration for the
services of a broker. Finally, the proposed regulations provided that a
sale includes certain digital asset payments by a customer that are
processed by a PDAP.
Several comments recommended that the definition of sale not
include exchanges of digital assets for different digital assets or
certain other property because such reporting would be impractical for
brokers, confusing for taxpayers, and not consistent with the reporting
rules for non-digital assets. Another comment recommended limiting
reporting to off-ramp transactions, which signify the taxpayer's exit
from an investment in digital assets. In contrast, another comment
supported the requirement for information reporting on exchanges of
digital assets for different digital assets because taxpayers must
report all taxable gain or loss transactions of this type that occur
within their taxable year.
The final regulations do not adopt the comments to limit the
definition of sale to cash transactions. Digital assets are unique
among the types of assets that are subject to reporting under section
6045 because they are commonly exchanged for different digital assets
in trading transactions, for example an exchange of bitcoin for ether.
Some digital assets can readily function as a payment method and, as
such, can also be exchanged for other property in payment transactions.
As explained in Notice 2014-21, and clarified in Revenue Ruling 2023-
14, 2023-33 I.R.B. 484 (August 14, 2023), the sale or exchange of a
digital asset that is property has tax consequence that may result in a
tax liability. Thus, when a taxpayer disposes of a digital asset to
make payment in another transaction, the taxpayer has engaged in two
taxable transactions: the first being the disposition of the digital
asset and the second being the payment associated with the payment
transaction. In contrast, when a taxpayer disposes of cash to make
payment, the taxpayer has, at most, only one taxable transaction.
Accordingly, these regulations require reporting on sales and certain
exchanges of digital assets because substantive Federal tax principles
do not treat the use of digital assets to make payments in the same way
as the use of cash to make payments.
Unlike digital assets, traditional financial assets subject to
broker reporting are generally disposed of for cash. That is why the
definition of sale in Sec. 1.6045-1(a)(9)(i) only requires reporting
for cash transactions. In contrast, the barter exchange rules in Sec.
1.6045-1(e) do require reporting on property-for-property exchanges
because the barter industry, by definition, applies to property-for-
property exchanges and not only cash transactions. Accordingly, the
modified definition of sale for digital assets exchanged for other
property reflects the differences in the underlying transactions as
compared to traditional financial assets, not the disparate treatment
of similarly situated transactions based solely on technological
differences. Moreover, the purpose behind information reporting is to
make taxpayers aware of their taxable transactions so they can report
them accurately on their Federal income tax returns and to make those
transactions more transparent to the IRS to reduce the income tax gap.
Another comment raised a concern that including exchanges of
digital assets for property and services exceeded the authority
provided to the Secretary by the Infrastructure Act. The Treasury
Department and the IRS do not agree with this comment. The term
``sale'' is not used in section 6045(a), which provides broadly that
the Secretary may publish regulations requiring returns by brokers with
details regarding gross proceeds and other information the Secretary
may require by forms or regulations. Nothing in section 6045 limits
``gross proceeds'' to the results of a sale rather than an exchange and
the term sale was first defined in the regulations under section 6045
long before the enactment of the Infrastructure Act. Moreover, the
Infrastructure Act modified the definition of broker to include certain
persons who provide services effectuating transfers of digital assets,
which are part of any exchange of digital assets. Accordingly, the
changes made by the Infrastructure Act do not provide any limitations
on how the Secretary can define the term when applied to the digital
asset industry. Another comment suggested that treating the exchange of
digital assets for other digital assets or services as a taxable event
is impractical and harmful to taxpayers, and that digital assets should
be subject to tax only when taxpayers sell those assets for cash. See
Part II.A. of this Summary of Comments and Explanation of Revisions for
discussion of that issue.
2. Definition of Dispositions
Several comments raised questions about whether the definition of
sale, which includes any disposition of a digital asset in exchange for
a different digital asset, applies to certain dispositions that may or
may not be taxable. For this reason, several comments recommended that
the final regulations not require reporting on certain transactions
until substantive guidance is issued on the tax treatment of those
transactions. One comment specifically mentioned reporting should not
be applied to transactions involving what it referred to as the
``wrapping'' or ``unwrapping'' of tokens for the purpose of obtaining a
token that is otherwise like the disposed-of token in order to use the
received token on a particular blockchain. In contrast, another comment
suggested that the final regulations should require reporting wrapping
and unwrapping transactions. One comment suggested that exchanges of
digital assets involving ``liquidity pool'' tokens should also be
subject to reporting under the final regulations. Another comment
suggested that the final regulations provide guidance on whether
reporting is required on exchanges of digital assets for liquidity pool
or ``staking pool'' tokens because these transactions typically
represent contributions of tokens when the contributor's economic
position has not changed. This comment also suggested, if these
contributions are excluded from reporting, that the Treasury Department
and the IRS study how information reporting rules apply when the
contributors are ``rewarded'' for these ``contributions'' or when they
receive other digital assets in exchange for the disposition of these
pooling tokens. Another comment recommended, instead, that the final
regulations explicitly address the information reporting requirements
associated with staking rewards and hard forks and recommended that
they should be treated like taxable stock dividends for reporting
purposes. Another comment recommended that the final regulations
address whether digital asset loans and short sales of digital assets
will be subject to reporting. The comment expressed the view that the
substantive tax treatment of such loans is unresolved, and further
suggested that the initial exchange of a digital asset for
[[Page 56500]]
an obligation to return the same or identical digital asset and the
provision of cash, stablecoin, or other digital asset collateral in the
future may well constitute a disposition and, in the absence of a
statutory provision like section 1058 of the Code, may be taxable.
The Treasury Department and the IRS have determined that certain
digital asset transactions require further study to determine how to
facilitate appropriate reporting pursuant to these final regulations
under section 6045. Accordingly, in response to these comments, Notice
2024-57 is being issued with these final regulations that will provide
that until a determination is made as to how the transactions
identified in the notice should be reported, brokers are not required
to report on these identified transactions, and the IRS will not impose
penalties for failure to file correct information returns or failure to
furnish correct payee statements with respect to these identified
transactions.
One comment recommended that an exchange of digital assets for
governance tokens or any other exchange for tokens that could be
treated as a contribution to an actively managed partnership or
association also be excluded from reporting under section 6045 until
the substantive Federal tax consequences of these contributions are
addressed in guidance. The final regulations do not adopt this
recommendation. Whether exchanges of digital assets for other digital
assets could be treated as a contribution to a partnership or
association is outside the scope of these regulations. Additionally,
because the potential for duplicate reporting also exists for non-
digital asset partnership interests, Treasury Department and the IRS
have concluded that different rules should not apply to sales of
digital asset partnership interests. Finally, the more general question
of whether reporting on partnership interests (in digital asset form or
otherwise) under section 6045 is appropriate in light of the potential
for duplicate reporting is outside the scope of this regulations
project.
The preamble to the proposed regulations requested comments
regarding whether the broker reporting regulations should apply to
include initial coin offerings, simple agreements for future tokens,
and similar contracts, but did not propose such reporting. One comment
recommended that initial coin offerings, simple agreements for future
tokens, and similar contracts should be covered by broker reporting
under the final regulations while another comment asserted that this
reporting would not be feasible. Upon consideration of the comments,
the Treasury Department and the IRS have determined that the issues
raised by these comments require further study. Accordingly, the final
regulations do not adopt the comment's recommendations. However, the
Treasury Department and the IRS may consider publishing additional
guidance that could require broker reporting for such transactions.
3. Exceptions for Certain Closed Loop Transactions
As discussed in Part I.A.3. of this Summary of Comments and
Explanation of Revisions with respect to closed loop digital assets,
the Treasury Department and the IRS do not intend the information
reporting rules under section 6045 to apply to the types of virtual
assets that exist only in a closed system and cannot be sold or
exchanged outside that system for fiat currency. Rather than carve
these assets out from the definition of a digital asset, however, the
final regulations add these closed loop transactions to the list of
excepted sales that are not subject to reporting under final Sec.
1.6045-1(c)(3)(ii). Inclusion on the list of excepted sales is not
intended to create an inference that the transaction is a sale of a
digital asset under current law. Instead, inclusion on the list merely
means that the Treasury Department and the IRS have determined that
information reporting on these transactions is not appropriate at this
time.
One comment recommended that the definition of digital assets be
limited to exclude from reporting transactions involving dispositions
of NFTs used by loyalty programs. The comment explained that these
loyalty programs do not permit customers to transfer their digital
asset tokens by sale or gift outside of the program's closed (that is,
permissioned) distributed ledger. The final regulations add these
loyalty program transactions to the list of excepted sales for which
reporting is not required. This exception is limited, however, to those
programs that do not permit customers to transfer, exchange, or
otherwise use, the tokens outside of the program's closed distributed
ledger network because tokens that have a market outside the program's
closed network raise Federal tax issues similar to those with other
digital assets that are subject to reporting.
Another comment recommended that video game tokens that owners have
only a limited ability to sell outside the video game environment be
excluded from the definition of digital assets because sales of these
tokens represent a low risk of meaningful Federal tax non-compliance.
The final regulations do not treat sales of video game tokens that can
be sold outside the video game's closed environment as excepted sales.
Instead, as with the loyalty program tokens, the final regulations
limit the excepted sale treatment to only those dispositions of video
game tokens that are not capable of being transferred, exchanged, or
otherwise used, outside the closed distributed ledger environment.
Several comments requested that the final regulations exclude from
reporting transactions involving digital representations of assets that
may be transferred only within a fixed network of banks using
permissioned distributed ledgers to communicate payment instructions or
other back-office functions. According to these comments, bank networks
use digital assets as part of a messaging service. The comments noted
that these digital assets have no intrinsic value, function merely as a
tool for recordkeeping, and are not freely transferable for cash or
other digital assets outside the system. To address these transactions,
one comment recommended that the definition of digital asset be limited
to only those digital assets that are issued and traded on
permissionless (that is, open to the public) distributed ledgers. Other
comments requested that the exception apply to permissioned
interoperable distributed ledgers, that is, digital assets that can
travel from one permissioned distributed ledger (for example, at one
bank) to another permissioned distributed ledger (at another bank).
The Treasury Department and the IRS are concerned that a broadly
applicable restriction on the definition of digital assets could
inadvertently create an exception for other digital assets that could
be involved in transactions that give rise to taxable gain or loss.
Accordingly, to address these comments, the final regulations add
certain transactions within a single cryptographically secured
distributed ledger, or network of interoperable distributed ledgers, to
the list of excepted sales for which reporting is not required.
Specifically, final Sec. 1.6045-1(c)(3)(ii)(G) provides that an
excepted sale includes the disposition of a digital asset representing
information with respect to payment instructions or the management of
inventory that does not consist of digital assets, which in each case
does not give rise to sales of other digital assets within a
cryptographically secured distributed ledger (or network of
interoperable distributed ledgers) if access to the distributed ledgers
(or network of interoperable distributed
[[Page 56501]]
ledgers) is restricted to only users of such information and if the
digital assets disposed of are not capable of being transferred,
exchanged, or otherwise used, outside such distributed ledger or
network. No inference is intended that such transactions would
otherwise be treated as sales of digital assets. This exception,
however, does not apply to sales of digital assets that are also sales
of securities or commodities that are cleared or settled on a limited-
access regulated network subject to the coordination rule in final
Sec. 1.6045-1(c)(8)(iii). See Part I.A.4.a. of this Summary of
Comments and Explanation of Revisions for an explanation of the special
coordination rule applicable to securities or commodities that are
cleared or settled on a limited-access regulated network.
The final regulations also include a general exception for closed-
loop transactions in order to address other such transactions not
specifically brought to the attention of the Treasury Department and
the IRS. Because the Treasury Department and the IRS do not have the
information available to evaluate those transactions, this exception
applies only to a limited class of digital assets. The digital assets
must be offered by a seller of goods or provider of services to its
customers and exchangeable or redeemable only by those customers for
goods or services provided by such seller or provider, and not by
others in a network. In addition, the digital asset may not be capable
of being transferred, exchanged, or otherwise used outside the
cryptographically secured distributed ledger network of the seller or
provider and also may not be sold or exchanged for cash, stored-value
cards, or stablecoins at a market rate inside the seller or provider's
distributed ledger network.
The treatment of closed-loop transactions as excepted sales
discussed here is not intended to be broadly applicable to any digital
asset sold within a permissioned distributed ledger network because
such a broad exception could generate incentives for the creation of
distributed ledger networks that are nominally permissioned but are, in
fact, open to the public. If similar digital assets that cannot be sold
or exchanged outside of a controlled, permissioned ledger and that do
not raise new tax compliance concerns are brought to the attention of
the Treasury Department and the IRS, transactions involving those
digital assets may also be designated as excepted sales under final
Sec. 1.6045-1(c)(3)(ii)(A).
4. Other Exceptions
One comment requested that utility tokens that are limited to a
particular timeframe or event be treated like closed system tokens. The
final regulations do not adopt this suggestion because not enough
information was provided for the Treasury Department and the IRS to
determine whether these tokens are capable of being transferred,
exchanged, or otherwise used, outside of the closed distributed ledger
environment. Another comment requested that digital assets used for
test purposes be excluded from the definition of digital assets.
According to this comment, test blockchain networks allow users to
receive digital assets for free or for a nominal fee as part of the
creation and testing of software. These networks have sunset dates
beyond which the digital assets created cannot be used. The final
regulations do not adopt this comment because not enough information
was provided to know if these networks are closed distributed ledger
environments or if the tokens are capable of being transferred,
exchanged, or otherwise used, prior to the network's sunset date.
One comment requested that the final regulations be revised to
prevent the application of cascading transaction fees in a sale of
digital assets for different digital assets when the broker withholds
the received digital assets to pay for such fees. For example, a
customer exchanges one unit of digital asset AB for 100 units of
digital asset CD (first transaction), and to pay for the customer's
digital asset transaction fees, the broker withholds 10 percent (or 10
units) of digital asset CD. The comment recommended that the sale of
the 10 units of CD in the second transaction be allocated to the
original transaction and not be separately reported. The Treasury
Department and the IRS have determined that a limited exception from
the definition of sale should apply to cascading digital asset
transaction fees. Specifically, final Sec. 1.6045-1(c)(3)(ii)(C)
excepts a sale of digital asset units withheld by the broker from
digital assets received by the customer in any underlying digital asset
sale to pay for the customer's digital asset transaction costs. The
special specific identification rule in final Sec. Sec. 1.6045-
1(d)(2)(ii)(B)(3) and 1.1012-1(j)(3)(iii) ensures that the sale of the
withheld units does not give rise to gain or loss. See Part VI.B. of
this Summary of Comments and Explanation of Revisions for a discussion
of the application of this excepted sales rule when the sale of such
withheld units gives rise to an obligation by the broker under section
3406 to deduct and withhold a tax.
D. Information To Be Reported for Digital Asset Sales
1. In General
The proposed regulations required that for each digital asset sale
for which a broker is required to file an information return, the
broker report, among other things, the date and time of such sale set
forth in hours, minutes, and seconds using Coordinated Universal Time
(UTC). The proposed regulations requested comments regarding whether
UTC time was appropriate and whether a 12-hour clock or a 24-hour clock
should be used for this reporting. Some comments agreed with reporting
the time of sale based on UTC time; however, other comments suggested
using the customer's local time zone as configured on the platform or
in the wallet. Other comments suggested that it is not technologically
or operationally feasible to use the time zone of the customer's
domicile. Another comment raised the concern that reporting in
different time zones from the broker's time zone would make the broker
and the IRS unable to reconcile backup withholding, timely tax
deposits, and other annual filings. Still other comments requested
broker flexibility in reporting the time of sale, provided the broker
reported the time of the customer's purchases and sales consistently.
Several other comments raised the concern that reporting on the time of
transaction was excessively burdensome due to the number of tax lots
that the broker's customers could potentially acquire and sell in a
single day. Another comment suggested that the information reported
with respect to the time of the transaction should be the same as the
information reported on the Form 1099-B for traditional asset sales
unless there is a compelling reason to do otherwise. Additionally,
several comments suggested that the burden of developing or modifying
systems to report the time of sale was not warranted because the time
of sale within a date (that is reported) does not generally impact
customer holding periods if the broker treats the time zone of
purchases and sales consistently.
The final regulations adopt the recommendation to remove the
requirement to report the time of the transaction. The Treasury
Department and the IRS are concerned about the burdensome nature of the
time reporting requirement and the administrability of reconciling
different times for customer transactions and backup withholding
deposits. Additionally, the issues raised by the time of sale with
respect to digital asset year-end transactions are
[[Page 56502]]
generally the same as for traditional asset sales. It is expected that
brokers will determine the date of purchase and date of sale of a
customer's digital assets based on a consistent time zone so that
holding periods are reported consistently, and that brokers will
provide customers with the information necessary for customers to
report their year-end sale transactions accurately.
The proposed regulations also required that, for each digital asset
sale for which a broker is required to file an information return and
for which the broker effected the sale on the distributed ledger, the
broker report the transaction identification (transaction ID or
transaction hash) associated with the digital asset sale and the
digital asset address (or digital asset addresses if multiple) from
which the digital asset was transferred in connection with the sale.
Additionally, for transactions involving sales of digital assets that
were previously transferred into the customer's hosted wallet with the
broker (transferred-in digital asset), the proposed regulations
required the broker to report the date and time of such transferred-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. Numerous comments raised privacy and surveillance concerns
associated with the requirement to report transaction ID and digital
asset address information. These comments noted that a person or entity
who knows the digital asset address of another gains access not only to
that other user's purchases and exchanges on a blockchain network, but
also the entire transaction history associated with that user's digital
asset address. One comment expressed concern that reporting transaction
ID and digital asset addresses would link the transaction history of
the reported digital asset addresses to the taxpayer, thus exposing the
financial and spending habits of that taxpayer. Other comments
expressed that reporting this information also creates a risk that the
information could be intercepted by criminals who could then attempt to
extort or otherwise gain access to the private keys of identified
persons with digital asset wealth. In short, many comments expressed
strongly stated views that requiring this information creates privacy,
safety, and national security concerns and could imperil U.S. citizens.
Other comments suggested that the information reporting rules
should balance the IRS's need for transparency with the taxpayer's
interest in privacy. Thus, reporting of transaction IDs and digital
asset addresses should not be required because the information exceeds
the information that the IRS needs to confirm the value of reported
gross proceeds and cost basis information. Further, another comment
asserted that the IRS does not need transaction ID and digital asset
address information because the IRS already has powerful tools to audit
taxpayers and collect this information on audit. Other comments raised
concerns with the burden of this requirement for custodial brokers.
Citing the estimate of the start-up costs required to put systems in
place to comply with the proposed regulations' broker reporting
requirements, another comment raised the concern that many industry
participants are smaller businesses with limited funding and resources
that cannot afford to build infrastructure to securely store this
information. Another comment raised the concern that reporting of
transaction ID and digital asset address information would make the
Form 1099-DA difficult for taxpayers to read. Another comment noted
that this information is not helpful to taxpayers, who should already
know this information. Other comments suggested that the reporting
standard for digital assets should not be any more burdensome than it
is for securities, and that any additional data fields for digital
assets would force traditional brokers that also effect sales of
digital assets to modify their systems. Another comment suggested that
the final regulations should not require the reporting of transaction
ID and digital asset address information in order to align the
information reported under section 6045 with the information required
under the CARF, a draft of which would have required the reporting of
digital asset addresses but ultimately did not include such a
requirement.
Some comments offered alternative solutions for providing the IRS
with the visibility that this information would provide. For example,
one comment suggested that because of the large number of digital asset
transactions, brokers should only report the digital asset addresses
(not transaction IDs) associated with transactions. Another comment
recommended the use of impersonal tax ID numbers that would not reveal
the customer's full identity to address privacy concerns. Another
comment suggested it would be less burdensome to require reporting of
account IDs rather than digital asset addresses. Another comment
suggested that the reporting of this information be optional or
otherwise limited to transactions that involve a high risk of tax
evasion or non-compliance or that otherwise exceed a large threshold.
Another comment recommended the use of standardized tax lot
identification like the securities industry. Another comment
recommended instructing brokers to retain this information for later
examination. Another comment recommended that brokers not report this
information but, instead, be required to retain this information to
align with the CARF reporting requirements.
The Treasury Department and the IRS considered these comments.
Although transaction ID and digital asset address information would
provide uniquely helpful visibility into a taxpayer's transaction
history, which the IRS could use to verify taxpayer compliance with
past tax reporting obligations, the final regulations remove the
obligation to report transaction ID and digital asset address
information. The Treasury Department and the IRS have concluded,
however, that this information will be important for IRS enforcement
efforts, particularly in the event a taxpayer refuses to provide it
during an examination. Accordingly, final Sec. 1.6045-1(d)(11)
provides a rule that requires brokers to collect this information with
respect to the sale of a digital asset and retain it for seven years
from the due date for the related information return filing. This
collection and retention requirement, however, would not apply to
digital assets that are not subject to reporting due to the special
reporting methods discussed in Parts I.D.2. through I.D.4. of this
Summary of Comments and Explanation of Revisions. The seven-year period
was chosen because the due date for electronically filed information
under section 6045 is March 31 of the calendar year following the year
of the sale transaction. Because most taxpayers' statute of limitations
for substantial omissions from gross income will expire six years from
the April 15 filing date for their Federal income tax return, a six-
year retention period from the March 31 filing date would end before
the statute of the limitations expires. Therefore, the final
regulations designated a seven-year period for brokers to retain this
information to ensure the IRS will have access to all the records it
needs during the time that the taxpayer's statute of limitations is
open. The IRS intends to monitor the information reported on digital
assets and the extent to which taxpayers
[[Page 56503]]
comply with providing this information when requested by IRS personnel
as part of an audit or other enforcement or compliance efforts. If
abuses are detected that hamper the IRS's ability to enforce the Code,
the Treasury Department and the IRS may reconsider this decision to
require brokers to maintain this information in lieu of reporting it to
the IRS.
Another comment raised the concern that custodial brokers may not
have transaction ID and digital asset address information associated
with digital assets that were transferred-in to the broker before the
applicability date of these regulations. This comment recommended that
the reporting requirement be made effective only for assets that were
transferred-in to the custodial broker on or after January 1, 2023, to
align with the enactment of the Infrastructure Act. The Treasury
Department and the IRS understand that brokers may not have transaction
ID and digital asset address information associated with digital assets
that were transferred-in to the broker before the applicability date of
these regulations. The Treasury Department and the IRS, however,
decline to adopt an applicability date rule with respect to the
collection and retention of this information because some brokers may
receive the information on transferred-in assets and to the extent they
do, that information should be produced when requested under the IRS's
summons authority. Accordingly, brokers should maintain transaction ID
and digital asset address information associated with digital assets
that were transferred-in to the broker before the applicability date of
this regulation to the extent that information was retained in the
ordinary course of business.
The proposed regulations also required that for each digital asset
sale for which a broker is required to file an information return, that
the broker report whether the consideration received in that sale was
cash, different digital assets, other property, or services. Numerous
comments raised the concern that reporting the specific consideration
received is too intrusive and causes security concerns. The final
regulations do not make any changes in response to these comments
because the language in the proposed (and final) regulations does not
require brokers to report the specific goods or services purchased by
the customer, but instead requires the broker to report on the category
type that the consideration falls into. For example, if digital asset A
is used to make a payment using the services of a PDAP for a motor
vehicle, the regulations require the PDAP to report that the
consideration received was for property (as opposed to cash, different
digital assets, broker services, or other property). The purpose of
this rule is to allow the IRS to be able to distinguish between sales
involving categories of consideration because sales for cash do not
raise the same valuation concerns as sales for different digital
assets, other property, or services. In cases in which digital assets
are exchanged for different digital assets, however, the Form 1099-DA
may request brokers to report that specific digital asset received in
return because of the enhanced valuation concerns that arise in these
transactions. Another comment suggested that providing the gross
proceeds amount in a non-cash transaction would not be helpful or
relevant. The final regulations do not adopt this comment because gross
proceeds reporting on non-cash transactions is, in fact, helpful and
relevant to customers who must include gains and losses from these
transactions on their Federal income tax returns.
The proposed regulations would have required the broker to report
the name of the digital asset sold. One comment noted that there is no
universal convention or standard naming convention for digital assets.
As a result, many digital assets share the same name or even the same
ticker symbol. This comment recommended that the final regulations
allow brokers the flexibility to provide enough information to
reasonably identify the digital asset at issue. This comment also
recommended that brokers be given the ability to provide the name of
the trading platform where the transaction was executed to ensure that
the name of the digital asset is clearly communicated. The final
regulations do not adopt this comment because it is more appropriate to
address these issues on the Form 1099-DA and its instructions.
The proposed regulations also required that, for each digital asset
sale for which a broker is required to file an information return, the
broker report the gross proceeds amount in U.S. dollars regardless of
whether the consideration received in that sale was cash, different
digital assets, other property, or services. One comment recommended
that brokers not be required to report gross proceeds in U.S. dollars
for transactions involving the disposition of digital assets in
exchange for different digital assets, but instead be required to
report only the name of the digital asset received and the number of
units received in that transaction. Although this suggestion would
relieve the broker from having to determine the fair market value of
the received digital assets in that transaction, the final regulations
do not adopt this suggestion because the U.S. dollar value of the
received digital assets is information that taxpayers need to compute
their tax gains or losses and the IRS needs to ensure that taxpayers
report their transactions correctly on their Federal income tax
returns.
The proposed regulations required brokers to report sales of
digital assets on a transactional (per-sale) basis. One comment
recommended that the final regulations alleviate burden on brokers and
instead provide for aggregate reporting, with a separate Form 1099-DA
filed for each type of digital asset. The final regulations do not
adopt this recommendation. Transactional reporting on sales of digital
assets is generally necessary so that the amount received in a digital
asset sale can be compared with the basis of those digital assets to
determine gain or loss. Transactional reporting is most helpful to
taxpayers who must report these transactions on their Federal income
tax returns and to the IRS to ensure taxpayers report these
transactions on their Federal income tax returns.
Several comments recommended that final regulations include a de
minimis threshold for digital asset transactions that would exempt from
reporting minor sale transactions--and in particular payment
transactions--falling below that threshold. One comment suggested that
such a de minimis threshold could help to prevent taxpayers from moving
their digital assets to self-custodied locations that may be outside
the scope of broker reporting. One comment recommended that brokers not
be required to obtain tax documentation from customers (and therefore
not report on those customers' tax identification numbers) for
taxpayers with annual transactions below a de minimis threshold. A few
comments recommended that separate de minimis thresholds or reduced
reporting requirements be applied to brokers with lower transaction
volumes during a start-up or transitional period. Some comments
recommended aggregate annual thresholds for this purpose, for example
based on the customer's aggregate gross proceeds or aggregate net gain
for the year from these transactions, whereas other comments
recommended per-transaction thresholds based either on gross proceeds
or net gain generated from each transaction. One comment suggested that
whatever threshold is applied, that it only be used for PDAPs.
Except as discussed in Parts I.B.2., I.D.2., and I.D.3. of this
Summary of Comments and Explanation of Revisions (involving payment
sale transactions and certain transactions involving
[[Page 56504]]
qualifying stablecoins and specified NFTs), the final regulations do
not adopt an additional de minimis threshold for digital asset sales
for several reasons. First, any per-transaction threshold for the types
of digital assets not subject to the de minimis thresholds discussed in
Parts I.B.2., I.D.2., and I.D.3. of this Summary of Comments and
Explanation of Revisions would not be easy for brokers to administer
because these thresholds are more easily subject to manipulation and
structuring abuse by taxpayers, and brokers are unlikely to have the
information necessary to prevent these abuses by taxpayers, for example
by applying an aggregation or anti-structuring rule. Second, the de
minimis threshold for qualifying stablecoins will already give brokers
the ability to avoid reporting on dispositions of $10,000 in qualifying
stablecoins, which are the types of digital assets that are least
likely to give rise to significant gains or losses, and the de minimis
threshold for payment sale transactions will give PDAPs the ability to
avoid reporting on dispositions of other types of digital assets that
do not exceed $600. Third, extending any additional annual threshold to
sales of these other types of digital assets that are more likely to
give rise to tax gains and losses will leave taxpayers without the
information they need to compute those gains and losses and will leave
the IRS without the information it needs to ensure that taxpayers
report all transactions required to be reported on their Federal income
tax returns. Fourth, information reporting without taxpayer TINs is
generally of limited utility to the IRS for verifying taxpayer
compliance with their reporting obligations. Finally, a separate de
minimis threshold or reduced reporting requirements for small brokers
would be relatively easy for brokers to manipulate and would leave the
customers of such brokers without essential information.
2. Optional Reporting Rules for Certain Qualifying Stablecoins
a. Description of the Reporting Method
As discussed in Part I.A.1. of this Summary of Comments and
Explanation of Revisions, the Treasury Department and the IRS have
determined that it is appropriate to permit brokers to report certain
stablecoin sales under an optional alternative reporting method to
alleviate burdensome reporting for these transactions. This reporting
method was developed after careful consideration of the comments
submitted recommending a tailored exemption from reporting for certain
stablecoin sales. These recommendations took different forms, including
requests for exemptions for certain types of stablecoins and
recommendations against granting an exemption for other types of
stablecoins. One comment suggested that reporting relief would not be
appropriate for dispositions of stablecoins for cash or property other
than different digital assets. These so-called ``off-ramp
transactions'' convert the owner's overall digital asset investment
into a non-digital asset investment and, the comment stated, could
provide taxpayers and the IRS with the opportunity to reconcile and
verify the blockchain history of such stablecoins to ensure that
previous digital asset transactions were reported. The Treasury
Department and the IRS agree that reporting is appropriate and
important for off-ramp transactions involving stablecoins because the
IRS would be able to use this information to gain visibility into
previously unreported digital asset transactions.
Several comments recommended requiring reporting on stablecoin
sales when the reporting reflects explicit trading activity around
fluctuations involving the stablecoin. Because stablecoins do not
always precisely reflect the value of the fiat currencies to which they
are pegged, trading activity associated with fluctuations in
stablecoins are more likely to generate taxable gains and losses. The
Treasury Department and the IRS have concluded that traders seeking to
profit from stablecoin fluctuations are likely to sell these
stablecoins for cash (in an off-ramp transaction) or for other
stablecoins that have not deviated from their designated fiat currency
pegs. Accordingly, the Treasury Department and the IRS have concluded
that reporting on sales of stablecoins for different stablecoins is
also appropriate to assist in tax administration.
In discussing other types of transactions, several comments noted
that a disposition of a stablecoin for other digital assets often
reflects mere momentary ownership of the stablecoin in transactions
that use the stablecoin as a bridge asset in an exchange of one digital
asset for a second digital asset. These comments also noted that, to
the extent that a disposition of a stablecoin for a different digital
asset does give rise to gain or loss, that gain or loss will ultimately
be reflected (albeit on a net basis) when the received digital asset is
later sold or exchanged. The Treasury Department and the IRS agree
that, in contrast to sales of stablecoins for cash or other
stablecoins, reports on sales of stablecoins for different digital
assets (other than stablecoins) are less important for tax
administration. Accordingly, the Treasury Department and the IRS have
concluded that it is appropriate to allow brokers not to report sales
of certain stablecoins for different digital assets that are not also
stablecoins.
Some comments recommended exempting sales of stablecoins from cost
basis reporting given their belief in the low likelihood that these
sales would result in gain or loss. Other comments recommended that the
final regulations permit combined or aggregate reporting for stablecoin
sales to lessen the reporting burden for brokers and the burden of
receiving returns on the IRS. The Treasury Department and the IRS agree
that basis reporting for all types of stablecoin sales may not justify
the burden of tracking and reporting those sales. Although taxpayers
that trade around stablecoin fluctuations would benefit from cost basis
reporting, the Treasury Department and the IRS have concluded that
these traders are more likely to be more sophisticated traders that are
able to keep basis records on their own. The Treasury Department and
the IRS have also concluded that allowing for reporting of stablecoins
sales on an aggregate basis would strike an appropriate balance between
the taxpayer's and IRS's need for information and the broker's interest
in a reduced reporting burden.
In addition to an overall aggregate reporting approach, numerous
comments also recommended that the final regulations include a de
minimis threshold for these stablecoin sales that would exempt
reporting on a taxpayer's stablecoin sales to the extent that
taxpayer's total gross proceeds from all stablecoin sales for the year
did not exceed a specified threshold. Several comments suggested de
minimis thresholds based on the taxpayer's aggregate net gain from
stablecoin sales for the year. Other comments recommended the use of
per-transaction de minimis thresholds, based either on the gain or loss
in the transaction or the gross proceeds from the transaction.
The Treasury Department and the IRS considered these comments to
decide whether to further reduce the overall burden on brokers and the
IRS. The final regulations do not adopt a per-transaction de minimis
threshold because any per-transaction threshold for stablecoins would
be relatively easy for customers to abuse by structuring their
transactions. Although anti-structuring rules based on the intent of
the taxpayer have been used in other information reporting regimes,
such as section 6050I of the Code, similar rules
[[Page 56505]]
would be unadministrable here. Under section 6050I, the person who
receives payment is the person who files the information returns and
will know when a payor is making multiple payments as part of the same
transaction. For purposes of section 6045 digital asset transaction
reporting, however, brokers may not have the information necessary to
determine the motives behind their customer's decisions to engage in
numerous smaller stablecoin transactions instead of fewer larger
transactions involving these stablecoins. Moreover, even for
transactions exceeding a de minimis threshold, per-transaction
reporting still has the potential to result in a very large number of
information returns, with a correspondingly large burden on brokers and
the IRS. The final regulations also do not adopt an aggregate de
minimis threshold based on gains or losses because many brokers will
not have the acquisition information necessary to determine basis,
which would be necessary in order to be able to take advantage of such
a de minimis rule, thus making the threshold less effective at reducing
the number of information returns required to be filed. Instead, the
final regulations adopt an aggregate gross proceeds threshold as
striking an appropriate balance between a threshold that will provide
the greatest burden relief for brokers and still provide the IRS with
the information needed for efficient tax enforcement. Additionally, to
avoid manipulation and structuring techniques that could be used to
abuse this threshold, the final regulations require that the overall
threshold be applied as a single threshold applicable to a single
customer's sales of all stablecoins regardless of how many accounts or
wallets that customer may have with the broker.
Numerous comments recommended various de minimis thresholds ranging
from $10 to $50,000. In determining the dollar amount that should be
used for this de minimis threshold, the Treasury Department and the IRS
considered that the gross proceeds reported for these stablecoin
transactions are unlikely to reflect ordinary income or substantial net
gain. The Treasury Department and the IRS have concluded that a larger
de minimis threshold would eliminate most of the reporting on customers
with small stablecoin holdings and likely small amounts of gain or loss
without allowing more significant sales of fiat-based stablecoins to
evade both information and income tax reporting. Accordingly, the
Treasury Department and the IRS have determined that a $10,000
threshold is the most appropriate because that threshold aligns with
the reporting threshold under section 6050I, which Congress has adopted
as the threshold for requiring certain payments of cash and cash-like
instruments to be reported.
In sum, the final regulations adopt an optional $10,000 overall
annual de minimis threshold for certain qualifying stablecoin sales and
permit sales over this amount to be reported on an aggregate basis
rather than on a transactional basis. Specifically, in lieu of
requiring brokers to report gross proceeds and basis on stablecoin
sales under the transactional reporting rules of Sec. 1.6045-
1(d)(2)(i)(B) and (C), the final regulations at Sec. 1.6045-
1(d)(10)(i) permit brokers to report designated sales of certain
stablecoins (termed qualifying stablecoins) under an alternative
reporting method described at Sec. 1.6045-1(d)(10)(i)(A) and (B). A
designated sale of a qualifying stablecoin is defined in final Sec.
1.6045-1(d)(10)(i)(C) to mean any sale as defined in final Sec.
1.6045-1(a)(9)(ii)(A) through (D) of a qualifying stablecoin other than
a sale of a qualifying stablecoin in exchange for different digital
assets that are not qualifying stablecoins. In addition, a designated
sale of a qualifying stablecoin includes any sale of a qualifying
stablecoin that provides for the delivery of a qualifying stablecoin
pursuant to the settlement of any executory c
[…truncated; see source link]Indexed from Federal Register on July 9, 2024.
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.