Roger M. Brown, the Global Head of Tax Strategy at Chainalysis, notes that on August 25, 2023, the U.S. Internal Revenue Service released proposed regulations that would require domestic and foreign exchanges and other types of “brokers” who “effect sales” of digital assets to (1) collect identifying information on their customers, and (2) report trading activity of U.S. customers to the IRS and those U.S. customers.
As explained by Chainalysis, U.S. taxpayers and the IRS would “receive the same type of information returns for digital assets that they receive for trading in traditional financial assets with existing brokers, such as stocks and bonds, when the regulations become effective — generally in 2025.”
As noted by Chainalysis, the regulatory package “implements portions of the Infrastructure Investment and Jobs Act, and will only have legal effect after the IRS considers comments of stakeholders and implements the regulations in temporary or final form.”
As stated in the update, brokers who “effect sales” of digital assets have documentation and reporting obligations. Under the proposed regulations, brokers “include exchanges, digital asset payment processors, digital asset kiosks, and digital asset ‘middlemen’.”
As mentioned in the update, the way a digital asset middleman is defined would cause certain entities and individuals “supporting the operation of decentralized exchanges to be treated as brokers.” In particular, a digital asset middleman is defined as any person, including a company or decentralized autonomous organization (DAO), who provides a “facilitative service” with respect “to a digital sale and would ordinarily would be in a position to know.”
As noted by Chainlaysis, the proposed regulations contain a number of exemptions to broker status. These include persons “whose activities are limited to validating transactions as part of proof of work, proof of stake, or other blockchain consensus mechanism.”
Generally, brokers must report sales of digital assets effected for their customers unless the broker can treat the customer as an “exempt foreign person” based on the documentation the broker receives or the application of certain presumptions.
The proposed regulations require a broker “to report identifying information for the U.S. taxpayer and certain information relating to the transaction.”
For purposes of the required reporting, transactions involving fungible and non-fungible tokens are “treated as digital assets subject to reporting.”
The proposed regulations state reporting for proceeds “from digital asset sales would begin for transactions occurring after January 1, 2025.”
Reporting of tax basis would begin “for transactions after January 1, 2026.”
However, where a U.S. customer of a broker “acquired a digital asset in an account of the broker on or after January 1, 2023, the post-January 1, 2026 reporting would apply to that basis where the digital asset was continuously held in the broker’s account (for brokers providing hosted wallet services).”
“Appropriately crafted,” many in the public and private sectors “may view a tax information reporting framework as positive development, as it places digital assets on regulatory par with traditional financial assets in seeking to address tax compliance challenges (and can reduce taxpayer challenges in computing taxable income).”
