Draft Form for Reporting Digital Assets Raises Reporting Questions

The U.S. Treasury Department has been focusing on implementing its proposed regulations governing cryptocurrency tax reporting. A recently issued draft form accounts for all of the form requests listed in the originally proposed regulations, but still leaves many questions unanswered. It does not alter the present or future taxation of digital assets, but it does change the reporting aspect.

There has been a widespread desire for clarification related to the definition of the term “broker” as it relates to digital assets, but the persons required to file this form is currently defined in the somewhat broad terms – “centralized and certain decentralized digital asset trading platforms, crypto payment processors, real estate persons involved with cryptocurrency transactions and selected online wallets.” Due to the inclusive nature of this definition, brokers could range from crypto exchanges to certain individuals.

This new form will start reporting sales of digital assets on or after January 1, 2025. However, the cost basis reporting on the sales of digital assets will begin on or after January 1, 2026. Because brokers are charged with the responsibility to issue the forms, but likely do not have the necessary information to properly populate them, taxpayers and tax advisors will need to review these forms, as one would anticipate a number of them may indicate zero cost basis for the digital assets. It is therefore imperative that taxpayers and advisors alike make sure their records of basis are kept for this purpose. In addition to the date purchased and amount paid to determine the basis of a digital asset, the time in Coordinated Universal Time will need to be provided.

It should be noted that the form as currently drafted contains much more detailed information than a standard form required from the sale of stock. For example, it requires the exact address to which the digital asset was sent. Disclosing such information may create an issue for privacy and/or increase the chances that one may become the target of hacking. In addition, another area of anticipated reporting confusion is that brokers will not know if one makes a non-taxable transfer (such as between an owner’s multiple e-wallets) or a taxable sale. Finally, there are a few instances of inconsistencies within the form. For instance, wash sales are currently not applicable to digital assets, but the draft form includes a box for wash sales of digital assets. Is this an indication that the IRS intends to apply the wash sale rule to cryptocurrency, or perhaps raises the question of whether digital assets could be considered a security down the line?

This draft form prompts many uncertainties about the reporting requirements as it relates to digital assets. Anchin’s Private Client Group will continue to provide updates as further guidance emerges. For more information, contact your Anchin Relationship Partner, or Edward Kim, a Partner in Anchin’s Private Client Group.