A comprehensive guide to navigating the new IRS digital asset reporting regulations

As digital assets continue to gain prominence in financial markets, the IRS is taking significant steps to ensure firms properly report these transactions. The significance of these regulations for tax and accounting professionals cannot be overstated, as they will fundamentally change how digital asset transactions — including cryptocurrency — are tracked and reported for tax purposes. 

For accountants, these regulations will bring forth a wave of client inquiries, making it essential for firms to be well-prepared. In addition to compliance, understanding the intricacies of digital asset reporting also presents an opportunity for firms to gain a competitive edge as trusted advisors in this rapidly evolving space.

Let’s take a detailed look at these new regulations and discuss the ways in which you can best support your clients now and in the years ahead. 

Digital asset reporting regulatory overview 

As part of the Infrastructure Investment and Jobs Act (IIJA), the IRS issued final regulations regarding the reporting requirements for brokers of digital assets. The IRS designed these regulations to align reporting with the existing standards applied to traditional financial services. 

Under the new standards, brokers will be required to: 

• Report gross proceeds from digital asset sales starting in 2026 for transactions occurring in 2025 
• Report tax basis information for certain digital asset sales made in 2026, beginning in 2027 

Broadly speaking, the regulations require custodial brokers to file Form 1099-DA (“Digital Asset Proceeds From Broker Transactions”) and furnish payee statements reporting gross proceeds and, in certain circumstances, adjusted basis on sales of digital assets affected for customers. 

The IRS intends for the regulations to make digital asset investors aware of their taxable transactions and to make those transactions more transparent to the IRS itself — which is why tax and accounting professionals must take time now to prepare and adjust their processes accordingly.

Understanding broker reporting on Form 1099-DA 

Under the new rules, custodial brokers are required to report any digital asset transactions they facilitate — including details about the assets transferred, the parties involved, and the transaction amounts. 

Brokers must file information returns with the IRS showing each customer’s name and address, with details regarding gross proceeds and other required information. Brokers also must send customers a written statement with the necessary information on the return. 

If the transaction involves the sale of a covered security, the information return filed by the broker must include the customer’s adjusted basis in the security and whether any gain or loss is long term or short term. A covered security is generally a specified security acquired on or after the applicable date. Under IRC Sec. 6045(g)(3), specified securities include digital assets with an applicable date of January 1, 2023.

Who is a broker?

The final IRS regulations on reporting require reporting by brokers who take possession of the digital assets sold by their customers. These brokers include:

• Operators of custodial digital asset trading platforms. Examples include Coinbase and Kraken. 
• Certain digital-asset-hosted wallet providers. A digital-asset-hosted wallet provider is a business that creates and stores a digital currency wallet for a customer. Hosted wallets are also known as custodial wallets and act like a bank account for your cryptocurrency. 
• Digital asset kiosks. Also called a “middleman,” this is any person who provides a facilitative service concerning a digital asset sale. A facilitative service includes the acceptance of digital assets in return for cash, stored-value cards, or different digital assets to the extent provided by a physical, electronic terminal or kiosk. 
• Specific processors of digital asset payments (PDAPs). A PDAP is someone who, in the ordinary course of a trade or business, receives digital assets from one party and pays those assets, cash, or different assets to a second party. The regulations, however, limit the circumstances under which a buyer is considered the PDAP’s customer. A buyer is treated as the PDAP’s customer only if an agreement or other arrangement with the buyer allows the PDAP to verify the person’s identity or otherwise comply with anti-money laundering (AML) program requirements.

The majority of digital asset transactions today occur using these brokers. By focusing first on this group, the IRS intends these regulations to cover the greatest number of taxpayers while allowing the IRS and U.S. Treasury Department more time to consider the nuances of transactions involving noncustodial and decentralized brokers.

That said, the final regulations do not include reporting requirements for brokers who do not take possession of the digital assets being sold or exchanged, commonly known as decentralized or noncustodial brokers. For example, taxpayers may trade on a decentralized exchange directly from their noncustodial wallet. The exchange merely brings the buyer and seller together; it does not take custody of the digital asset. 

In addition to the broker reporting rules, the regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also offer backup withholding rules.

What digital assets are subject to reporting? 

The definition of a digital asset adopted by the new IRS reporting regulations is purposefully broad and is intended to cover a variety of assets recorded on a distributed ledger via cryptography. 

Digital assets subject to broker reporting include, but are not limited to, the following:

• Cryptocurrencies. These include bitcoin (BTC) and ether (ETH).
• Nonfungible tokens (NFTs). However, there is an optional aggregate reporting method for sales of certain NFTs that exceed a de minimis annual threshold.
• Stablecoins. However, there is an optional aggregate reporting method for sales of certain stablecoins that exceed a de minimis annual threshold.
• Tokenized securities. These give holders an interest in another asset that is a security — other than a security that also is a digital asset. For example, a tokenized security may represent an ownership interest in corporate stock. Note that a qualifying stablecoin is not treated as a tokenized security. 

Importantly, the regulations indicate that the use of cryptography — or a similar technology — is an essential part of the definition. So, an investment is not a digital asset if transactions are not secured using cryptography and are not digitally recorded on a distributed ledger.

In some cases, a digital asset can also be considered a commodity or security. The regulations label this asset a dual-classification asset. Brokers must generally treat the sale of a dual-classification asset as a digital asset sale, meaning they must report the required information on Form 1099-DA rather than Form 1099-B (“Proceeds From Broker and Barter Exchange Transactions”). 

There are, however, exceptions to the general rule that dual-classification assets are reported as digital assets rather than commodities or securities. 

What sales are subject to digital asset reporting? 

For purposes of the broker reporting rules, a sale includes the following transactions:

• The disposition of a digital asset for cash or a stored-value card. A stored-value card is a card — including a gift card — with a prepaid value in U.S. dollars, a convertible foreign currency, or a digital asset, without regard to whether the card is in physical or digital form.
• The disposition of a digital asset for a different digital asset.
• The delivery of a digital asset pursuant to the settlement of a forward contract, option, regulated futures contract, or similar instrument.
• The disposition of a digital asset for property of a type that is subject to broker reporting under IRC Sec. 6045, including securities and real property.
• The disposition of a digital asset in consideration for the services of a broker [Reg. 1.6045-1(a)(9)(ii)(C)].
• Certain sales affected by PDAPs.

What sales are not subject to digital asset reporting? 

In addition, there are certain transactions — known as excepted sales under the regulations — that do not need to be reported on an information return. They include:

• Cascading digital asset transaction costs. Because the specific identification rule in Regs. 1.6045-1(d)(2)(ii)(B)(3) and 1.1012-1(j)(3)(iii) ensures that the sale of the withheld units — to pay for transaction costs — does not give rise to gain or loss, that particular transaction does not need to be reported on Form 1099-DA.
• Digital asset dispositions that are part of a loyalty program offered to customers by a provider of non-digital asset goods or services. The program may not allow customers to transfer, exchange, or otherwise use the digital assets outside the closed distributed ledger network.
• The disposition of a digital asset created and designed for use within a video game. The digital asset may not be transferred, exchanged, or otherwise used outside of the video game.
• The disposition of a digital asset representing information with respect to payment instructions or the management of inventory that does not consist of digital assets. The transaction must involve a cryptographically secured distributed ledger or a network of interoperable distributed ledgers that only provide access to users of the information. In addition, the disposed digital assets cannot be transferred, exchanged, or otherwise used outside the distributed ledger or network.
• The disposition of a digital asset offered by a business to its customers that can be exchanged or redeemed only by those customers for goods or services provided by that business. This transaction is known as the general closed-loop exception. Note that the digital asset cannot be sold or exchanged for cash, stored-value cards, or qualifying stablecoins at a market rate inside the business’s distributed ledger network.

Also, until the IRS issues further guidance, brokers do not have to file information returns or furnish payee statements for:

• Wrapping and unwrapping transactions
• Liquidity provider transactions
• Staking transactions
• Certain transactions involving the lending of digital assets
• Short sales of digital assets
• Notional principal contract transactions (IRS Notice 2024-57) 

In addition, the IRS will not assert penalties under IRC Sec. 6721 or 6722 with respect to these transactions. However, no inference should be made about how these six transactions are treated for federal income tax purposes.

Optional aggregate reporting for stablecoins and NFTs 

The new IRS digital asset reporting regulations provide an optional, alternative reporting method for certain stablecoin, NFT, and PDAP transactions. This method simplifies the reporting process by allowing for a single report covering multiple transactions within a given period.

An aggregate reporting method may be used for stablecoins once sales exceed de minimis thresholds. So, a broker is not required to report sales of qualifying stablecoins if the gross proceeds — after reduction for allocable digital asset transaction costs — from all designated sales are $10,000 or less for the year. This threshold is determined on a per-customer, rather than per-account, basis. Designated sales greater than $10,000 may be reported on an aggregate basis. To accomplish this, the broker files a single Form 1099-DA that reports the combined gross proceeds of all the customer’s sales of the qualifying stablecoin.

Under the alternative reporting method for specified NFTs, Form 1099-DA reporting is not required if the customer receives $600 or less of gross proceeds during the year — after reduction for allocable digital asset transaction costs. If the customer’s gross proceeds exceed $600, the broker may report the proceeds on an aggregate basis by filing a single Form 1099-DA.

For PDAP transactions, there is the $10,000 de minimis threshold below which PDAPs will not have to report sales using qualifying stablecoins. The specified NFT de minimis rules also apply to PDAPs. PDAP transactions — other than those involving qualifying stablecoins and specified NFTs — qualify for a $600 per-customer, per-year reporting exception. PDAP transactions exceeding this threshold that do not qualify for the qualifying stablecoin or specified NFT de minimis rules must be reported on a transactional basis.

Real estate professionals and digital assets

Real estate professionals are also required to report the fair market value (FMV) of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026. If a property is sold in exchange for digital assets, these transactions must be reported accurately, adding a new layer of complexity to real estate deals.

For real estate transactions with closing dates on or after January 1, 2026, real estate professionals must report the fair market value of digital assets paid by buyers and received by sellers. However, this is only required if the real estate professional has actual knowledge or ordinarily would know that digital assets were used as consideration. A real estate professional is considered to have actual knowledge if the real estate contract’s terms provide for payment using digital assets.

According to the IRS, actual knowledge can also come from a separate communication to a real estate professional that ensures the value of the digital asset payment is reflected in any commissions or taxes due at closing.

In some situations, a real estate professional may need to report both the gross proceeds received by the seller on Form 1099-S (“Proceeds From Real Estate Transactions”) and the gross proceeds paid to the buyer for the sale of digital assets used to purchase the real estate on Form 1099-DA.

Determining basis, gain, and loss from digital asset transactions 

When determining the basis, gain, and loss from digital asset transactions, the IRS provides specific guidelines that tax professionals must follow to ensure compliance. 

• Cost basis. The cost basis is the amount paid to acquire the asset, including transaction fees. If the digital asset is received as payment or as a reward — for example, from mining — the asset's fair market value (FMV) at the time of receipt becomes the cost basis.
• Sale or exchange. When selling or exchanging digital assets, the gain or loss is calculated by subtracting the asset's cost basis from its sale price or FMV at the time of the transaction.
• Capital gain or loss. Gains from the sale of digital assets held for more than one year as an investment are taxed as long-term capital gains, while assets held for less than a year are subject to short-term capital gains, taxed at ordinary income rates.

Taxpayers must report each digital asset transaction on their tax filings, including sales, exchanges, and payments. For individuals, this is often reported on Form 8949 and Schedule D for capital gains and losses.

Maintaining compliance with new digital asset reporting requirements

As with all new regulations, maintaining compliance requires accounting firms to adopt best practices and leverage the right tools. 

Advising clients on keeping detailed records of all digital asset transactions is critical, particularly regarding the seven-year retention requirement. While brokers are not required to report transaction ID or digital asset address information on Form 1099-DA, they must collect this information for each digital asset sale and retain it for seven years from the due date of the related information return. 

According to the IRS, the seven-year retention requirement is essential for enforcement efforts, especially if the taxpayer refuses to provide it during an examination. Poor tracking of digital asset transactions can lead to misreporting, incorrect tax filings, and significant penalties. 

For accountants, this highlights the importance of software solutions that manage and report digital asset transactions, which can help firms automate much of the reporting process, reduce errors, and ensure compliance. Regular tax reviews and consultations can also help clients avoid issues with underreported gains or missing deductions on capital losses.

Backup withholding rules and their application 

The new regulations also introduce backup withholding rules for digital asset transactions, adding another layer of complexity to tax calculations. Firms must ensure they understand these rules and apply them correctly in all relevant situations.

Backup withholding is a tax withholding requirement where payers must withhold a certain percentage from taxable income payments — such as interest, dividends, and digital asset transactions — when the recipient does not provide the correct taxpayer identification number (TIN) or has underreported income.

Backup withholding can apply to digital asset transactions if a payer is making payments to an individual or business in exchange for goods or services using digital assets. If the recipient does not provide a valid TIN or is flagged for underreporting, backup withholding may be triggered.

Tax professionals should advise clients to ensure accurate TIN reporting and compliance with withholding obligations to avoid unnecessary penalties. Furthermore, businesses using digital assets for transactions must know these rules and apply backup withholding when required. 

Brokers that fail to comply with Form 1099-DA requirements can incur penalties, including the Section 6721 penalty for failing to file an information return and the Section 6722 penalty for failing to furnish a payee statement. However, IRS Notice 2024-56 provides transitional relief from reporting penalties and backup withholding for brokers who fail to file information returns or provide payee statements on time and accurately for sales and exchanges of digital assets in 2025. This relief is available provided the broker makes a good-faith effort to comply with the reporting requirements.

How accounting firms can embrace the opportunity of digital asset reporting

While adapting to the new reporting standards will likely require accounting firms to invest significant time and resources, it also presents an opportunity. 

The complexity of the regulations will no doubt drive demand for expert advice and advisory services. Accounting firms who can navigate these regulations effectively will be well-positioned to strengthen client relationships and attract new business in the digital asset space.

Staying ahead of the curve with proactive learning will protect your firm from regulatory risks and also boost crypto tax planning and advisory service opportunities with clients. To jumpstart your proficiency, check out Checkpoint Edge, which offers new digital asset taxation topics that provide valuable insight and expert commentary in navigating this complex landscape.

In addition, Thomson Reuters has partnered with Ledgible to provide accounting firms with cryptocurrency tax reporting software that streamlines the compliance workflow process. You and your staff can save time and build confidence managing the reporting of your clients’ cryptocurrency activity with tools that range from basic crypto tax calculations to transaction tracing and automated reporting that conveniently integrates with UltraTax CS and GoSystem Tax RS.

By streamlining processes and integrating new learnings, your firm can handle the new IRS digital asset reporting obligations with ease — and open the door to new advisory-based revenue streams.