The US Treasury and the Internal Revenue Service (IRS) have proposed new regulations aimed at clarifying the taxation of digital assets in the United States. These regulations, released on August 25, 2023, aim to provide a clearer understanding of which digital assets are subject to reporting, who qualifies as a broker, and how to calculate the basis of a digital asset.

The proposed regulations expand the definition of reportable digital assets to include stablecoins, non-fungible tokens (NFTs), and tokenized stocks, excluding virtual assets limited to closed systems like video game tokens. A digital asset is defined as a representation of value recorded on a secure, distributed ledger, encompassing various types such as convertible virtual currencies, stablecoins, and NFTs.

The definition of a "broker" has also been broadened to include entities providing "facilitative services" for digital asset sales, requiring detailed transaction reporting including customer information and sale specifics. This includes entities like trading platforms, wallet providers, and payment processors.

The regulations are set to take effect for transactions occurring on or after January 1, 2025, with some reporting aspects having later effective dates. However, these regulations are still in the proposal stage and may undergo further revisions.

Tracking Crypto Income

The IRS is now tracking cryptocurrency income by asking taxpayers on Form 1040 about their crypto activities. The form specifically inquires whether individuals engaged in receiving, selling, sending, exchanging, or acquiring virtual currency. Providing false information can lead to penalties, as tax returns are legally binding statements.

New Form 1099-DA Draft

On April 18, 2024, the IRS unveiled a draft of Form 1099-DA aimed at calculating taxable gains or losses from brokered digital asset transactions. This form includes token codes and fields for wallet addresses, essential for reporting to both taxpayers and the IRS.

Industry Reaction

The proposed regulations have received criticism from the cryptocurrency industry, with some arguing that the broad definition of "digital asset middleman" could lead to confusion and over-reporting. Others have expressed concerns about the lack of guidance on how the IRS will identify brokers subject to these regulations, particularly regarding different types of activities like kiosks, payment processors, and wallet providers.

IRS Guidance

The treatment of cryptocurrency is subject to limited guidance, including notices and revenue rulings. The IRS has released several documents to provide clarity on specific aspects of cryptocurrency taxation, such as the inclusion of staking rewards in income for cash-method taxpayers and the treatment of NFTs as collectibles.