Do Digital Asset Brokers Need to Report Cryptocurrency Transactions to the IRS?

 Posted on July 31, 2024 in Taxation Law

Cryptocurrency is an increasingly popular form of currency that is used to conduct transactions online. Virtual currencies can be purchased, sold, and traded, and they may be used to pay for goods and services. However, these transactions are subject to taxes, and to ensure that they are being tracked and taxed correctly, the IRS requires reporting by the parties involved.

One issue that has arisen as the IRS addresses cryptocurrency involves the role of digital asset brokers, who may act as middlemen in transactions. New regulations have provided clarity on the requirements that apply to these brokers. For those who are involved in digital asset transactions, an attorney with knowledge and experience in the applicable tax laws can provide guidance on the requirements that may apply and the steps taxpayers can take to avoid penalties.

New Rules for Broker Reporting of Digital Asset Transactions

To ensure that it is properly monitoring cryptocurrency transactions, the IRS has established new regulations that will apply to brokers who facilitate transactions involving virtual currencies, stablecoins, and non-fungible tokens (NFTs). These brokers include:

• Custodial digital asset trading platforms: Online platforms in which people can trade cryptocurrency or other digital assets will be required to report transactions, as long as these platforms take possession of digital assets when transferring them between different parties.

• Digital asset hosted wallet providers: Online platforms that provide digital wallets that hold cryptocurrency or other digital assets on behalf of users will be required to report transactions.

• Digital asset kiosks: Operators of physical kiosks in retail stores and other locations that allow people to exchange digital assets for cash will be required to report transactions in which they take possession of assets.

• Certain processors of digital asset payments (PDAPs): Platforms and providers that receive digital asset payments from a buyer and transfer those assets to a seller must report these transactions.

The current regulations only address "custodial" transactions in which third-party brokers take possession of digital assets when transferring them between buyers and sellers. "Non-custodial" transactions in which brokers facilitate transactions without taking possession of digital assets will be addressed in future regulations. Closed-loop transactions in which digital assets remain within a closed system and cannot be exchanged for other types of assets will be excluded from the reporting requirements.

Under the new regulations, digital asset brokers will be required to report information about transactions to the IRS by filing an information return and broker report, including details about the date of a transaction and the amounts received in a digital asset sale. Certain de minimis exceptions may apply, with brokers only being required to report stablecoin transactions that exceed $10,000 and PDAPs not being required to report transactions of less than $600.

The new regulations go into effect on January 1, 2025. Starting January 1, 2026, real estate professionals will be required to report transactions in which buyers transfer digital assets to sellers.

Contact Our San Jose, CA Tax Law Attorney

As the regulations surrounding cryptocurrency and digital assets are updated, it is important for people who own these assets, businesses that accept cryptocurrency as payment or pay employees with virtual currency, and brokers of digital asset transactions to take the proper steps to report information to the IRS. At John D. Teter Law Offices, our San Jose tax lawyer understands the complex issues that arise when addressing taxes and reporting requirements, and we can help taxpayers avoid unnecessary potential penalties. To receive assistance with tax concerns related to digital assets or other types of transactions, contact us today at 408-866-1810 and arrange a consultation.