The IRS digital asset broker reporting requirements were finalized earlier this year and impact all digital asset (i.e., cryptocurrency and Non-Fungible Tokens or NFTs) transactions beginning January 1, 2025. What do investors in digital assets need to know? How will these new regulations affect U.S. and international digital asset exchanges and brokers?
For years, the IRS has been trying to close the loop on U.S. and international digital asset transactions (and associated taxation). The bipartisan Infrastructure Investment and Jobs Act (IIJA) was signed into law late in 2021. It contained requirements for those involved in the sale of digital assets to provide more substantive and accurate reporting. The finalized requirements expand the information the IRS will be receiving regarding digital asset transactions worldwide.
Investors in Digital Assets – This is Your Final Warning!
The finalization of the IRS digital asset broker reporting requirements by the U.S. Department of the Treasury is the final warning for U.S. taxpayers investing in cryptocurrency and other digital assets here at home and around the world. Digital assets are not the tax haven many believed them to be. Digital investments, like all other investments, must be reported by U.S. taxpayers. The sale of most digital assets will result in a taxable event, either as a capital gain or loss.
The Assistant Secretary for Tax Policy at the U.S. Treasury Department, Aviva Aron-Dine, put it this way: “…investors in digital assets and the IRS will have better access to the documentation they need to easily file and review tax returns. By implementing the (IIJA’s) reporting requirements, these final regulations will help taxpayers more easily pay taxes owed under current law while reducing tax evasion by wealthy investors.”
Translation: Foreign Financial Institutions (FFIs) and sovereign tax agencies worldwide have provided electronic reports on the financial accounts and activities of U.S. taxpayers for years. The stream of information flowing into the IRS regarding these activities will expand to include digital currency transaction data beginning in 2025. Brokers of digital assets will have to provide U.S. taxpayers with substantial information on their activities in early 2026 for all 2025 transactions. Brokers will further be required to provide reports regarding the tax basis for specific digital assets in 2027 for all digital asset sales in 2026.
The IRS “Sees” You
In other words, the U.S. Department of the Treasury and the IRS are notifying U.S. taxpayers in plain language that the agency will begin receiving direct electronic reporting from digital asset dealers and cryptocurrency exchanges worldwide in a few months, starting in January 2025.
The agency will be able to ascertain the tax basis (the value of the digital asset at the time of acquisition) of digital asset currency transactions occurring after January 1, 2026. The provision of the tax basis associated with any digital asset transaction directly to the IRS precludes U.S. taxpayers from attempting to under-report capital gains in order to reduce the amount of taxes owed.
The IRS recently hired two digital currency experts – former exchange owners and executives – to provide insight into how these transactions are “hidden” to assist the IRS in its efforts to access source information and enforce tax reporting, payment, enforcement, and compliance.
The U.S. Department of the Treasury and the IRS are sending a clear message to digital currency investors and dealers alike: ‘We “see” you.’ After all, the agency obviously just wants to allow you, the U.S. taxpayer, to “more easily pay taxes owed, while reducing (the opportunity for) tax evasion…”
Finalization of the IRS digital asset broker reporting requirements is the final warning to U.S. taxpayers. Digital assets and cryptocurrency are no longer secret tools to evade taxation, and hide from the IRS.
We invite you to download our Cryptocurrency Reporting Guide, and learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.