The Internal Revenue Service (IRS) has released final regulations that will significantly reshape how digital asset brokers report transactions involving cryptocurrency and other digital assets. Effective for sales occurring in calendar year 2025—with reporting beginning in 2026—these rules implement key provisions of the Infrastructure Investment and Jobs Act of 2021. The changes come with tight deadlines, especially around tax basis allocation, leaving brokers and taxpayers with limited time to adapt.
These regulations introduce new compliance obligations, including the use of a forthcoming Form 1099-DA, updated basis reporting requirements, and transitional relief measures. For custodial brokers—those who take possession of digital assets during transactions—understanding and preparing for these changes is now urgent.
Basis Reporting and the January 1, 2025 Deadline
Starting in 2027, custodial digital asset brokers will be required to report both the customer’s tax basis and capital gains for certain digital asset sales that occurred in 2026. This marks a major shift from current practices, particularly in how basis is tracked and allocated.
Previously, many taxpayers used a “universal wallet” approach, treating all their digital assets as part of a single pool for tracking purposes. The new rules replace this with a wallet-by-wallet method, requiring brokers to track basis within specific wallets or accounts. If a broker cannot identify the exact digital asset sold at the time of transaction, they must default to the first-in, first-out (FIFO) method for determining cost basis.
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To ease the transition, the IRS issued Revenue Procedure 2024-28, which establishes a safe harbor for reallocating unused basis as of January 1, 2025. Under this safe harbor, taxpayers who currently use a single-account tracking system can reasonably allocate unused basis across multiple wallets or accounts—provided those wallets hold the same number and type of remaining digital asset units.
This allocation must be completed by January 1, 2025. After that date, all basis allocations must comply with the final regulations. Missing this deadline could result in inaccurate reporting and potential penalties, making it a critical milestone for both brokers and individual investors.
Introducing Form 1099-DA: Digital Asset Proceeds Reporting
A cornerstone of the new framework is the introduction of Form 1099-DA, officially titled Digital Asset Proceeds From Broker Transactions. This form will be used by custodial brokers to report detailed transaction data to both customers and the IRS.
The IRS has released a draft version of Form 1099-DA and is currently accepting public feedback. Once finalized, the form will require brokers to report the following information for each reportable transaction:
- Customer’s name, address, and taxpayer identification number
- Name and quantity of the digital asset sold
- Date(s) of sale
- Gross proceeds (net of allocable transaction costs)
- Nature of consideration received (e.g., cash, stored-value cards, goods, or services)
- Any additional data required by the IRS
Brokers must also report when they become aware—or have reason to know—that a corporation in which a customer holds digital assets (that also qualify as stock) undergoes a reportable change in control or capital structure.
These requirements are substantial, but the IRS has provided some relief during the initial phase.
Transitional Relief and Reporting Exemptions
Recognizing the challenges brokers face in adapting to these new rules on short notice, the IRS issued Notice 2024-56, offering transitional relief for calendar year 2025. Under this notice:
- Brokers will not face penalties for failing to file information returns or issue payee statements if they make good faith efforts to comply.
- The backup withholding requirements under IRC Section 3406 are temporarily suspended for digital asset transactions.
This grace period gives brokers breathing room to build systems and processes without immediate penalty risk.
Additionally, Notice 2024-57 exempts six types of transactions from reporting obligations until further guidance is issued:
- Wrapping and unwrapping transactions
- Liquidity provider transactions
- Staking transactions
- Digital asset lending
- Short sales of digital assets
- Notional principal contract transactions
These exemptions acknowledge the complexity and evolving nature of decentralized finance (DeFi) activities, where traditional broker models may not apply cleanly.
Aggregate Reporting for Stablecoins and NFTs
To reduce reporting burdens for high-volume, low-value transactions, the regulations allow aggregate reporting for certain qualifying assets that meet a de minimis threshold.
Brokers may choose to report total proceeds for multiple transactions involving specific stablecoins or non-fungible tokens (NFTs) on a single Form 1099-DA, rather than itemizing each sale individually. This option is available only when individual transactions fall below a defined threshold and are of the same asset type.
This provision helps streamline compliance for brokers handling large volumes of microtransactions while still ensuring transparency for higher-value trades.
Digital Assets in Real Estate Transactions
The rules also impact real estate professionals. Starting January 1, 2026, any real estate transaction where a buyer uses digital currency to acquire property must include reporting of the fair market value of the digital assets used.
This applies regardless of whether the transaction is residential or commercial and affects closing statements and tax documentation. Real estate agents, title companies, and escrow providers should ensure their systems can capture and report this data accurately.
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Frequently Asked Questions (FAQ)
Q: What is a custodial digital asset broker?
A: A custodial broker is a platform or entity that takes possession of a customer’s digital assets during a transaction—such as centralized exchanges like Coinbase or Kraken. These entities are subject to the new reporting rules.
Q: Do I need to act before January 1, 2025?
A: Yes. Taxpayers using a universal wallet method must allocate unused basis to individual wallets by January 1, 2025, under the IRS safe harbor. Delaying this step could complicate future tax filings.
Q: Are DeFi transactions exempt from reporting?
A: Certain DeFi-related activities—including staking, liquidity provision, and wrapping—are currently exempt under Notice 2024-57. However, this relief is temporary and may change with future guidance.
Q: What happens if my broker doesn’t report my transactions?
A: Brokers making good faith efforts to comply in 2025 won’t face penalties due to transitional relief. However, starting in 2026, accurate reporting will be mandatory.
Q: How do NFTs fit into these regulations?
A: NFTs are considered digital assets under these rules. Brokers must report sales unless an exemption applies or aggregate reporting is used for qualifying low-value transactions.
Q: Is there software that can help with Form 1099-DA preparation?
A: Yes. Many tax compliance platforms are updating their systems to support Form 1099-DA generation. Brokers should evaluate integration options now.
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Final Steps for Brokers and Investors
Time is running short. With the January 1, 2025 safe harbor deadline approaching, brokers must act immediately to:
- Implement wallet-by-wallet basis tracking
- Allocate unused basis under the safe harbor
- Prepare systems for Form 1099-DA reporting
- Identify opportunities for aggregate reporting
- Monitor updates on exempt transaction types
Investors should also engage with their brokers to understand how these changes affect their tax obligations.
As digital assets become increasingly integrated into mainstream finance, regulatory clarity is essential. These final regulations represent a significant step toward transparency—but only with proactive preparation can compliance be achieved smoothly.
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