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June 28, 2024

Finalized US Digital Asset Broker Regulations for 1099 Reporting Released

Today, June 28th, 2024, the US Treasury released finalized regulations regarding information reporting requirements for digital asset brokers. The regulations were initially proposed back in August of 2023, something we've spoken about extensively, including our leading testimony to the IRS on the proposed regulations.

With the release of these regulations, those involved in the digital asset space gained significant clarity with regards to reporting requirements and timelines moving forward. At Ledgible, we help ensure compliance for digital assets for some of the largest financial institutions in the world, like top 5 US banks, Investment firms with $1B+ AUM, and top 10 crypto exchanges - which gives us unique insight into what they mean for the industry. While our experts are busy working through the 365-page document with a fine toothed comb, we can glean some summaries and topical information, which we'll discuss below.

  • Timeline: Digital asset brokers will have to report proceeds for specific transaction beginning in calendar year 2025, just 6 months away, and will need to be reported on the nearly final 1099-DA. To understand the proposed 1099-DA, you can read our separate post by tax reporting expert and VP of TIR, Jessalyn Dean, here.
  • Collection of information: Digital asset brokers must collect and retain digital asset wallet addresses, transaction IDs, and other important information for 7 years, making that information available for inspection and audit.
  • Broker Definition: As the regulations state, "The term broker means any person, U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. A broker includes an obligor that regularly issues and retires its own debt obligations, a corporation that regularly redeems its own stock, or a person that regularly offers to redeem digital assets that were created or issued by that person. A broker also includes a real estate reporting person under §1.6045-4(e) who would be required to make an information return with respect to a real estate transaction under §1.6045- 4(a)." The regulations offer several other caveats and points of clarity, but this concrete definition of who these regulations apply to provides significant clarity over prior verbiage.
  • Cost-Basis: Cost-basis reporting will be required of certain brokers beginning on January 1, 2026. This represents an area where the Department of the Treasury is providing more time, or deferral, for compliance over the initial proposed regulations.
  • Exclusion of DeFi: The Treasury decided to specifically exclude DeFi within the scope of the regulations, noting: "The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers."

It's important to note that these are just initial learnings we've gleaned at a high level. As with any accounting and tax code, our experts will need time to digest and understand the exact legal and accounting implications these final regulations provide the industry. You can also read the IRS's summary of the finalized regulations here.

That said, Ledgible is already operationalizing efforts to enable our partners and clients to be able to comply and handle all necessary reporting obligations they are now subjected to under these final regulations. For more information about how Ledgible can help ensure digital asset compliance for your organization, you can get in touch with our team here.

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