As a result of recent legislation, there are numerous federal regulations that pertain to cryptocurrency transaction reporting. 

The Infrastructure Investment and Jobs Act of 2021 (IIJA) was signed into law on Nov. 15, 2021. The IIJA (section 80603) includes IRS information reporting requirements that will require cryptocurrency exchanges to perform intermediary Form 1099 reporting for cryptocurrency transactions. Generally, these rules were supposed to apply to digital asset transactions starting in 2023, but the IRS postponed implementation, and now under final regulations brokers must report the gross proceeds for sales or exchanges of digital assets taking place on or after January 1, 2025. 

The reporting requirements will be like stock brokerage account reporting of sales transactions on a Form 1099-DA at the end of the year. Information required to be reported includes sales price, basis, acquisition and sales dates, and the character of the transaction. When a taxpayer changes brokerage firms the prior brokerage firm is required to provide basis, purchase dates, etc., to the new the broker.

The definition of brokers who must furnish Forms 1099-DA  include businesses, referred to as crypto exchanges, that are responsible for providing any transfer services for the transfer of digital assets on behalf of a taxpayer. Thus, any platform on which a taxpayer can buy and sell cryptocurrency will be required to report digital asset transactions both to the taxpayer and the IRS after the close of a tax year. In addition, for real estate transactions closing on or after January 1, 2026, real estate reporting persons treated as brokers for reportable real estate transactions are required to file information returns and furnish payee statements (Form 1099-S) with respect to real estate transactions when digital assets are used to acquire real estate. 

Occasionally a taxpayer may have a transfer that is not a sale or exchange. As an example, the taxpayer transfers cryptocurrency from their wallet at one crypto exchange to their wallet at another crypto exchange. Such a transaction is not a reportable sale or exchange, and similar to when a taxpayer switches stockbrokers, the prior exchange must provide the new exchange with the basis and purchase dates, just as a stockbroker must when the brokerage firms are changed.

Where cryptocurrency is transferred to an account other than a crypto exchange, the IIJA requires the crypto exchange to file a return with the IRS. Although the information that will be required on the return has not yet been defined, it is anticipated it will be the same that is required in a broker-to-broker transfer.

Digital asset is defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. Furthermore, the IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Currently when a business receives $10,000 or more in cash in a transaction, the business is required to report the transaction on IRS Form 8300, including the ID of the person from whom the cash was received. IIJA will require businesses to treat digital assets like cash for purposes of this reporting requirement. The $10,000 may occur in a single transaction, or a series of related transactions. Transactions between a buyer, or agent of the buyer, and a seller that occur within a 24-hour period are related transactions.

Effective Date – These digital asset reporting rules will apply to transactions beginning after January 1, 2025. Thus, the first 1099-DA filings will be in 2026.