United States: Much-Anticipated Tax Reporting Regulations On Digital Asset Transactions Issued

The proposed regulations provide much-needed guidance on the statutory changes to certain tax reporting requirements made by Congress in the 2021 Infrastructure Investment and Jobs Act. The 2021 law introduced additional information reporting requirements for sales and exchanges of digital assets and expanded the scope of brokers responsible for such reporting.

The new rules will generally require brokers to provide IRS Form 1099s to both customers and the IRS reporting certain dispositions of, or involving, digital assets. "Brokers" for this purpose has been defined broadly to include not only traditional custodial brokers, but certain digital asset trading platforms, digital asset payment processors and issuers of digital assets. The proposed regulations have clarified, however, that miners and stakers are generally out of scope. While brokers can be U.S. or non-U.S. persons, the latter may be exempt from reporting depending on the circumstances of the transaction.

The types of transactions covered by this reporting regime are broad and will include, among other things, sales of digital assets for cash or other digital assets, payments to digital asset payment processors, and payments with digital assets in certain real estate transactions. For purposes of these rules, "digital assets" is defined broadly and can encompasses virtual currencies, stablecoins and other digital asset tokens, including non-fungible tokens ("NFTs").

The new tax reporting rules will generally be effective beginning in 2026 with respect to transactions taking place in 2025 (or earlier with respect to some transactions involving certain derivatives).

These regulations are only proposed so they are expected to be modified to some extent to reflect public input before being finalized, likely sometime in 2024. To that end, comments on the proposed regulations, including specific questions the IRS and Treasury identified in the regulatory package, are due by October 30, 2023. A public hearing is currently scheduled for November 7-8, 2023.

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