Proposed regulations recently released by the Treasury Department help bring added clarity to participants in the digital asset economy. But the process is far from over. Investors, centralized crypto exchanges, payment processors, some hosted wallet providers, and some decentralized exchanges are the most affected. Miners, stakers and developers are not impacted.
In a statement in the Federal Register, the Treasury Department said the regulations are based on the combination of existing authority and changes to applicable tax laws made by the Infrastructure Investment and Jobs Act (IIJA).
“These proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets, to file information returns and furnish payee statements on dispositions of digital assets effected for customers in certain sale or exchange transactions,” the Treasury Department said. “These proposed regulations would also require real estate reporting persons, who are treated as brokers concerning reportable real estate transactions, to include on filed information returns and furnished payee statements the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions.
“These real estate reporting persons would also be required to file information returns and furnish payee statements concerning real estate purchasers who use digital assets to acquire real estate in these transactions.”
Regulations summary
Treasury attempts to define “broker”, a term they acknowledge has previously been unclear. “Digital assets” include more items, including those on private ledgers. Fees from trades are to be evenly split between the buyer and seller.
Reporting will be introduced in stages, with the initial focus on rules related to 6045. Such regulations as 6045A and 6050I are anticipated to be soon addressed.
The proposals target transactions occurring after Jan. 1, 2025. The IRS is offering the inducement of penalty waivers to encourage voluntary broker reporting for earlier tax years than 2025. Brokers must know cost basis information as far back as Jan. 1, 2023, for cases where they continuously hosted customer digital assets for periods that might go back that far. Gross proceeds reporting is mandatory beginning in the 2025 tax year. Adjusted cost basis reporting gets added to the to-do list for 2026.
Proposed regulations move the ball
The proposed regulations are an excellent next step, TaxBit’s Erin Fennimore, Miles Fuller, Seth Wilks and John Schoenecker wrote in an essay on their website. An end-to-end compliance and reporting solution for the digital economy, TaxBit’s single API-powered platform for tax and accounting reduces manual work and improves operational efficiency.
“These eagerly anticipated proposed regulations go beyond the bare-bones outlines in the Infrastructure (Investment and Jobs) Act (IIJA) and anticipate a world where cryptocurrencies and other digital assets are a routine part of the economy, widely accepted by merchants and investors,” they write. “This is, hopefully, a major step towards a comprehensive framework for taxing digital assets fairly while continuing to bridge the current reporting gap.”
Fennimore, TaxBit’s vice president of tax solutions, said the eagerly anticipated proposals are the next step in bringing clarity to a new asset class. They are not the final ones, but they help market participants understand the framework and help make them comfortable bringing a product to market. The proposed regulations also address some gaps left by the IIJA regulations.
“It’s not perfect because now it’s kind of a facts and circumstances analysis,” Fennimore said. “It’s not black and white, but a cryptocurrency exchange is very similar to a traditional financial broker in that they understood they would probably fall into that broker definition.”
Who is, isn’t a broker
While some may not like what they read, the proposed regulations bring more certainty to who is and is not a broker. Brokers offer services that facilitate the sale or exchange of digital assets. This includes centralized exchanges, digital asset payment processors, and decentralized protocols where there is a degree of control or influence over the protocol to make changes.
“There was some uncertainty of companies that fall in the crypto industry like wallet providers, hardware and infrastructure for products,” Fennimore said. “The fact that they play a role in the overall lifecycle and process brings them into scope as a broker? Those were the questions and the points of uncertainty that still existed. Some of that has been closed by these proposed regulations.
“But (uncertainty) still exists for companies in the DeFi realm… It’s very interesting what we’ll see from certain companies and how enterprises respond with further questions.”
Issues for payment processors
Digital asset payment processors frequently facilitate digital sales by receiving digital assets from someone and exchanging them into digital assets or cash for someone else, such as a retail business. The regulations require digital asset payment processors to provide information on how customers liquidate their digital assets.
Fennimore said payment processors are impacted from two sides. While contending with the Section 6045 proposals, they must also adapt to changes in Section 6050W. Section 6050W details 1099K obligations. While they historically came with a high threshold, they have been reduced to $600. They are technically in effect, though there is a one-year moratorium on enforcement.
Those facilitating crypto as a means of payment are considered both payment processors and brokers. That forces them to report on payees previously ignored.
“If I am a payment processor, and now I’ve enabled this crypto product, I have this whole new host of obligations I didn’t otherwise have to, so that’s the complexity being introduced there,” Fennimore said. “I think we will see quite a bit of commentary from payment processors regarding the operational impact on their business.”
Unique aspects of digital assets
Another unique aspect digital assets bring is how intermediaries are viewed. Fennimore said it is much more nuanced in the digital realm than for traditional broker-dealers.
“What makes it unique is the overall number of entities involved in the lifecycle,” she explained. “You may have a very traditional situation where you’re interacting via satellite exchange, and that’s one institution in the mix, but you may not know behind the scenes that there are five different companies along that journey. It’s much more complex than what I’ve seen in TradFi, and I think it’s due to the actual nature of cryptocurrency and the various roles that enterprises play in that.”
How to view asset tokenization
Fennimore said one of the hottest topics is the tokenization of assets. Everything from baseball cards and wine to real estate is being tokenized. There are many novel use cases.
When faced with uncertainty, she advises to revert to the basics. What is being tokenized? Is it real estate? Securities? Has the item risen to the level of assets from a regulatory perspective? Does it produce additional payments?
“It’s the underlying payment,” Fennimore said. “That is ultimately what every enterprise will need to look at. And then their role in facilitating that payment.”
Public hearing information
The public hearing is scheduled for Nov. 7 at 10 a.m. ET. It may be extended to Nov. 8 if demand is sufficient. Comments must be received by Oct. 30. Requests to attend the hearings must be received by 5 p.m. ET on Nov. 3.
Comments can be sent via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–122793–19). Paper submissions can be mailed to:
CC:PA:LPD: PR (REG–122793–19), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Monday through Friday between 8 a.m. and 4 p.m. to:
CC:PA:LPD: PR (REG–122793–19), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224.
All comments will be published to the public docket.
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