Get ready for the IRS’s new digital asset reporting regulations

The Internal Revenue Service is currently drafting proposed regulations on digital asset reporting requirements, but their final direction remains uncertain.

The Tax Reporting Conference, held each May, shed some light on reporting digital assets on the new Form 1099-DA, as well as the proposed regulations. Jessalyn Dean, vice president of tax information reporting at cryptocurrency and accounting software developer Ledgible, noted that the IRS is currently working on the Crypto Asset Reporting Framework, which would regulate the U.S.’s collection and exchange of tax information about non-U.S. people to foreign people will coordinate. tax authorities.

She pointed out that the IRS’s John Sweeney, special counsel in the Office of Associate General Counsel, who spoke at the conference, noted that changes would need to be made to future iterations of the 1099 and 1042-S regulations to collect the information necessary to exchange tax data with foreign tax authorities – for example, account balances, which are not currently collected under US regulations.

“The rumor is that we should have the final regulations by the end of the year,” Dean said. “My sense is that they are waiting because they want to coordinate with the international reporting under CARF, because Sweeney said that his team is working on the CARF regulations.”

“We do not have an exact date because, among other things, the IRS must consider all public comments,” she added. “And there are more than 120,000 public comments. That makes it difficult for us or other CPAs to track down the more technical letters.”

Sweeney noted that as a result of the work on the CARF, the IRS intends to draft coordinating regulations between the CARF and US Form 1099 and Form 1042-S reporting to eliminate duplicate reporting for US and non-US crypto and digital asset providers to reduce.

“When an audience member asked about issues of character and source of blockchain events for purposes of Form 1042-S [“Foreign Person’s U.S. Source Income Subject to Withholding”] withholding and reporting on non-US persons, Sweeney noted that it was on the radar of his unit, but did not elaborate on its priority in the leadership row,” Dean noted.

The IRS has adopted a phased approach to different components, with gross proceeds reporting first, cost basis reporting second, and cost basis transfer reporting third, according to Dean: “In the second phase, only custodial brokers who hold the asset from original acquisition through its sale will be required to report cost basis This significantly limits the amount of cost basis reporting in the first years of implementation.

Among the highlights of the proposed regulations, according to Dean:

Broker definition: In most cases, the IRS has reduced the scope of the definition from the original proposal in the Infrastructure Act. By broadening the definition, they have expanded what it means to ‘make a sale’, which goes beyond the traditional view of brokers in the financial services industry. As such, miners, validators, strike pool operators and those not conducting a trade or business will typically be out of scope, while decentralized exchanges and decentralized autonomous organizations may be in scope if they have control or influence over the protocol to make changes to it to bring . As expected, centralized exchanges remain in scope as a broker. Digital asset definition: In scope are cryptocurrencies, non-fungible tokens, stablecoins, tokenized real estate, tokenized securities and commodities overseen by the Commodity Futures Trading Commission (even if it not approved by them). Out of scope are closed-loop tokens used in video games, tokenized stocks, and central bank digital currency. Wash sales. Although the IRS did not comment on this topic in the background of the proposed regulations, the proposed amendments to the regulations indicate that digital assets will be outside the scope of wash sale loss adjustments for the time being, but the lack of comment leaves open the possibility of future intent to add wash sale rules for digital assets.

The new proposed Form 1099-DA for digital assets, as expected, has a look and feel similar to Form 1099-B for reporting sales of traditional financial products, with most of the boxes corresponding to the required information listed in the proposed regulations from August 2023, according to Dean. “The inclusion of a ‘wash sale loss not allowed’ Box 11 does not mean that crypto is subject to wash sale rules,” Dean said. “This is included for purposes of digital assets that are also shares or securities already subject to wash sale rules – such as certain subscribed shares.”

“Box 11d is included to indicate that a sale was not recorded on the distributed ledger,” she continued. “This is necessary because very often digital asset addresses or transaction IDs cannot be provided because transactions have occurred within internal record-keeping systems.”