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September 12, 2023

US proposed digital asset rules would redefine key terms and introduce new standards

  • The proposed regulations explain in detail which digital assets would be covered by the new tax reporting regime and who qualifies as a "broker" obligated to comply with these rules.
  • The proposed regulations anticipate that the first reporting of gross proceeds from sales of digital assets will be for sales occurring on or after January 1, 2025, and the following year, so brokers will need to provide information about basis from positions acquired as early as January 1, 2023.
  • The IRS does not explain how to backup withhold on digital assets or address whether a loan of digital assets must be reported.
  • The proposed regulations generally determine where a sale is effected based on the status of the broker, not the physical location where the sale of digital assets is undertaken, and provide three categories of brokers for purposes of determining the location of a digital asset sale — US digital asset broker, CFC digital asset broker and non-US digital asset broker.

In highly-anticipated regulations on digital asset reporting (REG-1122793-19), the IRS proposed to implement changes to IRC Section 6045 made by the Infrastructure Investment and Jobs Act (IIJA) in 2021, while also changing several other key regulations. The package adopts many of the longstanding concepts and terms that apply to sales of securities, including the reporting of a customer's tax basis and gross proceeds from a sale; it also redefines key terms and introduces new standards that apply uniquely to digital assets.

The IRS contends that the lack of information reporting for digital asset sales is a major hindrance to tax compliance. In the past, the IRS has used "John Doe" summonses to obtain information about crypto traders from selected US platforms. Certain crypto brokers have reported on Form 1099-K or 1099-B in the past, without clear direction that such reporting was required. To provide certainty and alleviate the need for the summonses, Congress took legislative action.

The proposed regulations answer big questions, the biggest being which digital assets are covered by the new tax reporting regime, and who qualifies as a "broker" obligated to comply with these rules. The proposed regulations would generally require reporting a "sale" any time a digital asset is exchanged for cash or property differing materially in kind or extent from the original digital asset.

Effective dates and other important milestones

The IIJA indicated that reporting would begin in 2024 for sales of digital assets acquired on or after January 1, 2023. In Announcement 2023-2 (December 23, 2022), the IRS stated that, unless a broker voluntarily reports sales and transfers, "[b]rokers will not be required to report or furnish additional information with respect to dispositions of digital assets under [IRC S]ection 6045, or issue additional statements under [IRC S]ection 6045A, or file any returns with the IRS on transfers of digital assets under [IRC S]ection 6045A(d) until those new final regulations under [IRC S]ections 6045 and 6045A are issued." (See Tax Alert 2023-0035).

The proposed regulations anticipate that brokers' first reporting of the gross proceeds from sales of digital assets will be for sales occurring on or after January 1, 2025, and will be filed in 2026.

Notwithstanding the delay introduced by Announcement 2023-2, the proposed regulations would require brokers to provide information about basis from positions acquired as early as January 1, 2023, for sales occurring on or after January 1, 2026. Brokers would also need to provide the date and time of those acquisitions and whether gain or loss on the sale was short-term or long-term.

EY observes: Given the complexity of these new regulations, and the need to collect basis information as of January 1, 2023, brokers must confirm they have systems today that can comply with these proposed regulations. Brokers choosing to wait until the final regulations are published to plan and build new systems to comply with the basis tracking and reporting rules will only have months to do so. However, it is likely that any systems planned without the benefit of the final regulations will need to be adjusted.

Comments on the proposed regulations are due by October 30, 2023. The IRS has requested comments on 49 specific topics and two more general topics, including, for example, exceptions for transactions involving non-digital assets that use a distributed ledger technology and whether the reporting responsibilities for transactions on a decentralized exchange are appropriately limited to those with effective control. Treasury and the IRS have scheduled a public hearing for November 7, 2023, at IRS headquarters in Washington DC.

The Preamble states that "later phases" of the regulations will address the statement required under IRC Section 6045A(a) when a broker transfers digital assets to another broker, and reporting of non-broker transfers to the IRS under IRC Section 6045A(d).

What is a "digital asset" and which digital assets are included?

A digital asset is defined in the proposed regulations as "any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology)," also known as a blockchain. Cryptocurrencies like bitcoin and ether are digital assets. The Preamble notes that the ledger need not be widely or publicly distributed. Not every transaction must be recorded on the blockchain, so the practice of some exchanges to keep their own ledgers does not change the status of a particular type of token; the IRS likens this practice to holding securities in "street name." According to the Preamble, the definition was intended to be expansive based on the language in the statute and taxpayers' need for information reporting on digital assets that could give rise to gain or loss for income tax purposes. Digital assets include:

  • Stablecoins, which are tokens whose value is pegged to another asset, typically a fiat currency (e.g., USDT and USDC, which are pegged to the US dollar)
  • Non-fungible tokens (NFTs), which represent unique assets, such as artwork, and are not interchangeable with each other
  • Tokens that satisfy the definition for digital assets and also are characterized as securities, commodities or derivatives under non-tax legal regimes

The proposed regulations would specifically require the reporting of NFTs, noting in the Preamble that NFTs are a "popular investment" and can readily be transferred, giving rise to gain or loss that would be relevant for taxpayers. The Preamble also states that sales of tokens that are both securities and digital assets for tax purposes should be reported under the rules for digital assets. While there is no similar explicit tie-breaker for digital assets that are also commodities, it appears that they too should be treated as digital assets for reporting purposes.

The guidance specifically excludes certain digital assets and applications, such as:

  • Central bank digital currencies (CBDCs) and other government-issued currencies in digital form
  • Closed-looped virtual assets such as video game tokens, which can only be used in-game and cannot be sold for fiat
  • Blockchain technology used for "ordinary commercial purposes that do not create new transferable assets," such as an inventory or order-tracking system

CBDCs are considered "cash," which is specifically excluded from the digital asset category. The expansion of "cash" also has implications for transactions in traditional securities and commodities, which are reportable only when conducted "for cash."

Digital assets are treated as "covered securities" that require basis tracking only if they are acquired:

  • On or after January 1, 2023
  • In a customer's account
  • By a broker providing hosted wallet services
  • In exchange for
    • Cash
    • Stored-value cards
    • Different digital assets
    • Property the sale of which is reportable on Form 1099-B (e.g., securities or commodities)
    • The services of a broker

EY observes: Although certain digital assets are known as "covered securities," that does not necessarily mean that they are securities for other tax purposes or for nontax purposes. The designation of digital assets as "securities" in the proposed regulations is limited to IRC Sections 1001, 1012, 3406, 6045, 6045A, 6045B, 6050W, 6721 and 6722.

Reporting requirements for digital assets are described later in "Scope of Reporting."

Who is a broker (and who isn't)?

The proposed regulations would impose the duty to report sales on "brokers." The basic definition of broker is nearly unchanged: "any person … U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others." When sales of digital assets become reportable, however, the broker definition would effectively expand to entities that effect those sales. Foreign brokers would be treated as such only for sales "effected at an office inside the United States," which is given a new meaning in the context of digital asset sales, as described later. Certain other categories of persons transacting in digital assets would also be given broker duties.

Centralized exchanges

Unsurprisingly, the proposed regulations would consider centralized exchanges, which are the easiest way for a typical consumer to buy and sell cryptocurrencies, to be brokers. Such exchanges "effect" sales in digital assets by acting as an agent for the customers in a way that enables the exchanges to know the gross proceeds of the sale, or by acting as a principal in the sale by selling digital assets out of inventory. The revised definition of "effect" states that only "dealers" can effect sales by acting as a principal. While "dealer" is undefined in these proposed regulations, a centralized exchange that acts as a principal would seem to be within the concept.

Decentralized exchanges

Sales of digital assets do not necessarily take place on centralized exchanges. Parties to a sale may transact in a peer-to-peer manner by utilizing a decentralized platform, which the proposed regulations put under the heading of a "facilitative service," including "any service that directly or indirectly effectuates a sale of digital assets." The proposed regulations give several examples of such services, including:

  • Smart contracts
  • Automated market maker systems
  • Order matching services
  • Market-making functions
  • Escrow and escrow-like services
  • Taking digital assets as payment for securities or other property whose sale would be reportable on Form 1099-B
  • Any service performed by a real estate reporting person in a real estate transaction in which digital assets are paid by the real estate buyer

Any "person who provides" a facilitative service may be a "digital asset middleman." Acting as a digital asset middleman would cause that person to "effect" the sale, and therefore be responsible for reporting it and, if necessary, imposing backup withholding at 24% on the gross proceeds.

EY observes: The regulation package does not explain how to backup withhold on digital assets. The federal government does not accept tax deposits in the form of digital assets. The existing backup withholding rules in Treas. Reg. Section 31. 3406(h)-2(b)(2) allow a withholding agent to defer backup withholding until cash is available, potentially as late as the end of the fourth calendar year after the sale.

The Preamble notes that an unincorporated group may be treated as a partnership, and therefore a "person," for federal income tax purposes. Accordingly, the absence of a legal structure, like a corporation or limited liability company, or a formation document like a partnership agreement, would not prevent the group from being treated as a broker if it provides a facilitative service. Partnership treatment may cause a decentralized exchange (sometimes called a DEX) or digital autonomous organization (DAO) to be treated as a broker.

EY observes: The proposed regulations do not define when a person is considered to "provide" a facilitative service. It appears that merely establishing the service may be sufficient.

A provider of a facilitative service is a digital asset middleman if that person "ordinarily would know or be in a position to know" the identity of the seller and nature of the transaction due to the "nature of the service arrangement." Being "in a position to know" means (1) having the ability to set or change the terms of service to require the users to provide a name, address and taxpayer identification number (TIN), or (2) being able to tell, based on the consideration received or how the transaction was executed, that it results in gross proceeds. The proposed regulations state that a person who can change the fees charged is an "example" of the kind of person who would have "sufficient control or influence" to obtain the identity information and to determine whether the transaction results in reportable gross proceeds. Treasury and IRS have requested comments on the extent to which governance tokens represent "sufficient control or influence" over a facilitative service.

Digital asset payment processors, as described later under "Payment transactions," would also be brokers.

Exclusions from the definition of broker

The proposed regulations also include examples of activities that, standing alone, are not facilitative services that would cause the provider to be a broker, such as:

  • Validating blockchain transactions, whether through proof-of-work, proof-of-stake or any other similar consensus mechanism
  • Selling hardware or licensing software that has the sole function of permitting persons to control private keys that are used for accessing digital assets on a distributed ledger

These exceptions, however, each have restrictive additional conditions. Validators would have to be "solely engaged in the business of providing such validating services," and hardware and software providers would have to be "solely" in those businesses. Wallet software that also provides access to a trading platform would not be considered to have the "sole function" of controlling private keys, meaning that a seller of such software could be considered to provide a facilitative service.

The Preamble also states that merchants accepting digital assets as a form of payment would not be treated as "effecting" the sale because they are not "dealers" in digital assets. It appears, however, that these merchants would be "brokers" because they "stand ready" to help others convert their digital assets into goods or services. If such a broker acts as the customer's agent, it would effect the sale, regardless of its dealer status. Thus, merchants would not be completely immunized from broker reporting of digital assets unless they stayed in their lane.

Different rules for US, controlled foreign corporation (CFC) and foreign brokers

The current Form 1099-B regulations, which were written before the Foreign Account Compliance Tax Act (FATCA) rules required foreign financial institutions to report on US persons, tried to prevent US taxpayers from using offshore accounts to avoid Form 1099-B reporting. They do so by treating certain sales as "effected by a broker at an office inside the United States," which requires even a foreign broker to report the transaction. These rules also control how a broker documents foreign customers and when backup withholding applies. While nominally based on the location of the taxpayer or the broker's activities, these rules effectively draw a jurisdictional line based on the circumstances of the sale.

The proposed regulations would adopt the same terminology for digital assets, with consequences determined by whether a sale is deemed to be inside or outside the United States, but they contain a complex alternative set of jurisdictional rules that the Preamble notes is intended to address online or virtual transactions, which it assumes are the predominant way digital asset brokers effect sales with customers.

EY observes: Entities that are both traditional brokers and digital asset brokers may need to apply two distinct sets of rules for documentation, backup withholding and reporting, depending on the type of asset sold by a customer. The Preamble does not indicate an intention to extend the jurisdictional rule set to traditional brokers even though there are some traditional brokers that provide solely online services to customers.

The proposed regulations would generally determine where a sale is effected based on the status of the broker, not the physical location where the sale of digital assets is undertaken. The proposed regulations provide three categories of brokers for purposes of determining the location of a digital asset sale:

  1. US digital asset broker
  2. CFC digital asset broker
  3. Non-US digital asset broker

(a) US digital asset broker

A US digital asset broker is defined through a cross-reference to the definition of a US payor or middleman under current regulations but excludes controlled foreign corporations (CFCs). US digital asset brokers are subject to Form 1099-B reporting (and backup withholding) requirements for all sales of digital assets they effect for their customers unless the customer can be classified as an exempt recipient or non-US person. US digital asset brokers must use Forms W-8 and W-9 and the "presumption rules" that classify customers. Documentary evidence (e.g., driver's license or government ID card) cannot be used.

(b) CFC digital asset broker

The proposed rules for determining the place of a digital asset sale effected by a CFC digital asset broker would depend on whether the CFC is conducting activities as a Money Service Business (MSB), meaning "registered with the Department of the Treasury under 31 CFR 1022.380 or any successor guidance." Such businesses include "money transmitters," which can provide an on-ramp from or off-ramp to the fiat currency world from a digital asset broker.

CFC not conducting activities as an MSB

A sale would be considered effected at an office outside the United States. Nonetheless, Form 1099-B reporting would be required for all sales, other than sales effected for exempt recipients and non-US persons.

Unlike a US digital asset broker, documentary evidence (instead of only a Form W-8) could be used to establish a customer is a non-US person. It also appears that the offshore presumption rules that apply under the current regulations would apply.

Backup withholding would not be required on a sale unless the CFC has actual knowledge that the customer is a US person and does not have a valid Form W-9 for the customer. The existing rule under Treas. Reg. Section 31.3406(g)-1(e) would be extended to apply the actual knowledge test for sales effected at an office outside the United States to digital asset sales.

CFC conducting activities as an MSB

The documentation, backup withholding and reporting requirements for US digital asset brokers (outlined above) would generally apply, unless the sale were effected at a digital asset kiosk that is physically located outside the United States. Essentially the CFC would be treated in this limited instance as not conducting activities as an MSB.

EY observes: The documentation and reporting requirements for CFC and non-US digit asset brokers (discussed later) would depend on whether an entity is an MSB. Legal entities within the same control group could have different obligations.

(c) Non-US digital asset broker

Under the proposed regulations, a non-US payor or non-US middleman that effects sales of digital assets on behalf of customers is a non-US digital asset broker. Similar to the CFCs, requirements differ based on whether the broker is conducting activities as an MSB. A non-US digital asset broker conducting activities as an MSB would be treated as in essentially the same way as a US digital asset broker for purposes of the Form 1099-B reporting, documentation and backup withholding requirements (subject to the digital asset kiosk exception), similar to CFCs, as outlined previously.

For a non-US digital asset broker not conducting activities as an MSB, the rules for sales effected at an office outside the US are different from those for effecting sales at an office inside the United States.

Sale effected at an office outside the United States

A sale effected by a non-US digital asset broker not conducting activities as an MSB would generally be treated as effected outside the United States. Absent actual knowledge that a customer is a US person, no Form 1099-B reporting, tax-specific documentation or backup withholding would be required.

Sale effected at an office inside the United States if US indicia is present

A non-US digital asset broker cannot ignore documentation or information collected for other purposes, such as an anti-money laundering (AML) program. If at least one of the indicators in the following chart is present, the sale would instead be treated as effected at an office inside the United States. The rules applicable to US digital asset brokers would apply and the documentation, backup withholding and Form 1099-B reporting would generally be required to the same extent as a US digital asset broker.



Customer communicates with the broker using a device (e.g., computer, smart phone, router, server, etc.) that is associated with an IP (or other electronic) address indicating a location within the United States


Demographic indicators

Broker has any of the following information about the customer:

  • US permanent residence or mailing address
  • Current US telephone number and no non-US telephone
  • Classification as a US person in the broker's records


Cash indicators

Any of the following apply:

  • Cash is paid to the customer by a transfer of funds into an account maintained at a bank or financial institution in the US
  • Cash is deposited with the broker by a transfer of funds from such an account
  • Customer's account is linked to a bank or financial account maintained within the United States


Digital asset indicators

Either of the following apply:

  • Digital asset deposits into the customer's account at the broker were transferred from, or digital asset withdrawals from the customer's account were transferred to, a digital asset broker that the broker knows, or has reason to know, is organized within the United States
  • The customer's account is linked to a digital asset broker that the broker knows, or has reason to know, is organized within the United States


Place of birth

There is an unambiguous indication of a US place of birth for the customer

EY observes: Under the cash and digital asset indicators, a broker would needto know the location of the other entity or branch involved in the transfer. This may present operational hurdles when the other party to the transfer is a multinational institution that may have operations in the United States.

EY observes: The Preamble states that a sale does not need to be reported if the account is closed before the sale, but a transfer of digital assets out of an account with US indicia may be subject to a transfer statement or reporting requirement under the forthcoming regulations under IRC Section 6045A.

The broker could "cure" any of the prior US indicia and treat the customer as a non-US person by obtaining the following before the customer pays:


Indicia type



Communications or


cash or

digital asset indicators


  • Valid Form W-8


  • Documentary evidence and a signed statement from the customer stating that they are not a US person


Place of birth


  • Documentary evidence confirming citizenship in a country other than the United States (e.g., passport)
  • One of the following:
    • Copy of Certificate of Loss of Nationality of the US


    • Valid Form W-8 with a reasonable written explanation (explaining renunciation of US citizenship, or why US citizenship was not obtained at birth)

Scope of reporting

(a) In general

Reportable sales would include:

  • The disposition of a digital asset in exchange for cash or stored-value cards
  • A disposition of a digital asset in exchange for a different digital asset
  • The delivery of a digital asset to settle a forward contract, option, regulated futures contract, similar instrument or executory contract if the sale would have been reportable had the contract been performed when entered into
  • Exchanging a digital asset for real estate or services provided by a real estate reporting person (as further explained later)
  • Using digital assets as a form of payment through a digital asset payment processor (as further explained later)
  • Using digital assets to pay the costs of a sale of other digital assets

For sales of digital assets on and after January 1, 2025, the proposed regulations would require the reporting of:

  • The customer's name, address and TIN
  • The name and number of units of the digital asset sold
  • The sale date and time (set forth in hours, minutes and seconds using Coordinated Universal Time) (if the sale is recorded on a broker's internal ledger, the time of that record should be reported, regardless of when the transaction is recorded on a blockchain (if ever))
  • The gross proceeds amount (less allocable digital asset transaction costs)
  • Any transaction ID
  • Any digital asset address or addresses from which the digital asset was transferred in connection with the sale
  • Whether the sale was for cash or stored-value cards, or in exchange for services or other property
  • Any other information required by the form in the manner and number of copies required by the form or instructions

To the extent the digital assets were transferred into an account at the broker and held in a hosted wallet before the sale, the proposed regulations would also require the reporting of:

  • The date and time of the transfer in
  • Any transaction ID of the transfer in
  • Any digital asset address (or addresses) from which the digital asset was transferred
  • The number of units transferred in by the customer

EY observes: The requirement to report historical data for assets transferred to a broker could be a problem. Such a transfer theoretically could have occurred 10 years ago, before anyone anticipated a need to store or report the information. The Preamble states that "transfer in" information will not be required when digital assets received with a transfer statement are sold after the IRC Section 6045A regulations are promulgated, but transfers not accompanied by transfer statements, including all transfers conducted in the past, apparently will not come within that exception.

For sales on and after January 1, 2026, of digital assets that are covered securities, the broker must also report:

  • The adjusted basis of the digital asset sold
  • The date and time the digital asset was purchased
  • Whether any gain or loss on the digital asset sold is long-term or short-term

EY observes: The regulations do not explain how to determine the time the digital asset was purchased. Presumably, and similar to recording the time it was sold, it is when the asset acquisition is recorded on the ledger.

Covered securities include digital assets acquired on or after January 1, 2023, notwithstanding that the regulations describing how to compute the basis of those digital assets had not been proposed (let alone published) at that time.

The Form 1099 for reporting digital asset sale transactions has not yet been released, but the IRS news release accompanying the proposed regulations refers to the form as "Form 1099-DA." Brokers that choose to report on sales of digital assets before the applicability date of the proposed regulations can report those sales on Form 1099-B.

Brokers that voluntarily report adjusted basis information on the disposition of digital assets acquired in an account before January 1, 2023, and/or report sales of digital assets before the applicability date of the final regulations are not subject to penalties under IRC Section 6721 or 6722 for failure to report or furnish the adjusted basis information correctly on an information return.

(b) Digital asset derivatives

Treasury and the IRS recognize that brokers have been entering into derivative contracts with counterparties referencing digital assets. The proposed regulations would expand on existing requirements for options, futures and forwards to incorporate reporting on digital assets.

(c) Options

The proposed regulations would expand the Form 1099-B reporting requirements on option transactions to include options on digital assets and options on derivatives with a digital asset as an underlying property.

An option is a contract under which the holder of the option has the right (but not the obligation) to buy (in a call) or sell (in a put) a digital asset at a specified price (i.e., a strike price) on or before an expiration date. The "writer" of an option has the obligation to either sell (in a call) or buy (in a put) the underlying digital asset if the holder exercises the option, generally in exchange for an up-front payment called a premium. Options can be cash settled, where the holder of the option receives its value (if any) in cash at expiration, or physically settled by delivery of the underlying assets. When an option is cash settled, the result is reported on Form 1099. When an option is physically settled, the seller is treated as making a reportable sale at the strike price and the buyer is treated as acquiring a position for the strike price (each with appropriate adjustments for the premium paid to the writer).

The proposed regulations contain different rules for an option that is itself a digital asset (i.e., recorded (or recordable) on a blockchain), and when a traditional option is written for a digital asset, which the Preamble references as a "non-digital asset option" on a digital asset.

EY observes: It appears that Treasury and the IRS are still shaping how options could be viewed and treated. The Preamble includes two questions on options in the "Requests for Comments" section, including asking whether there is anything "factually unique" in the way options on digital assets are undertaken. It is possible that the Form 1099-B reporting requirements for options will be further clarified and revised as Treasury and the IRS gain insight into market practices and how options for digital assets are structured.

IRC Section 1256 requires certain assets to be marked to market each year; the proposed regulations would apply different rules depending on whether the option is a "Section 1256 contract," i.e., a regulated futures contract, foreign currency contract, nonequity option, dealer equity option or dealer securities futures contract. This essentially results in several types of digital asset options:

Type of option

General reporting considerations

Option is not a Section 1256 contract

Non-digital asset option

The existing Form 1099-B requirements developed for traditional securities generally apply

Digital Asset Option

The option is subject to reporting as a digital asset

Option is a Section 1256 contract

The option is subject to Form 1099-B "four box" reporting; this generally requires a calculation of profit/loss on closed contracts, unrealized profit/loss on open contracts (for the prior and current year) and aggregate profit/loss for the year

Treasury and the IRS noted that they are currently unaware of any digital asset options that are also Section 1256 contracts. Comments are requested on the prevalence of digital asset options that are also Section 1256 contracts.

As drafted, the proposed regulations would apply to an option on a digital asset, or an option on a derivative with a digital asset as an underlying property if the option is granted or acquired on or after January 1, 2023.

EY observes: Based on the language in the proposed regulations, an option would be considered in scope effective January 1, 2023, but would not be subject to reporting until January 1, 2026. Therefore, as currently drafted, the proposed regulations would require brokers to obtain information on the option back to the start of 2023 (before the proposed regulations were issued), to potentially be used in future reporting. It is possible this will be further clarified, or revised, by the IRS.

(d) Futures

The proposed regulations do not make any changes related to Form 1099-B reporting on regulated futures contracts (RFCs). An RFC is generally defined as a contract:

  • That is traded on or subject to the rules of a qualified board or exchange (i.e., a securities exchange registered with the SEC, or a contract market designated by the CFTC)
  • For which the amount that must be deposited or withdrawn depends on a system of marking to market

This existing definition of an RFC can apply to an RFC on digital assets, and to any RFCs that are themselves digital assets. Therefore, the current Form 1099-B "four box" reporting requirements continue to apply.

(e) Forwards

A forward contract is generally a contract between two parties that obligates one party to buy and the other party to sell an asset at a predetermined future date and fixed price (under the terms of the contract). The definition of a forward contract subject to Form 1099-B reporting would be expanded to include executory contracts requiring delivery of digital assets in exchange for:

  • Cash
  • Different digital assets


  • Any other property or services that would result in a sale of digital assets

As with traditional types of forward contracts, a closing transaction (lapse, expiration, settlement, abandonment or other termination of a position) for a forward contract on a digital asset is a reportable sale. Consistent with the existing rules for other forwards, the proposed regulations would not require the broker to separate the profit or loss on the contract from the profit or loss on the delivery.

EY observes: The proposed regulations would not treat a digital assets forward contract like a foreign currency forward contract, which is subject to "four box" reporting on Form 1099-B.

(f) Loans of digital assets

The proposed regulations do not address whether a loan of digital assets must be reported.

EY observes: This is potentially a significant omission. Securities loans that conform to IRC Section 1058 are treated as dispositions that do not result in recognition of gain or loss when made, and restore the lender's basis and holding period when the securities are returned. IRC Section 1058 does not cover loans of digital assets. If those loans were dispositions (in exchange for a claim against the borrower for the return of the tokens) that result in recognition of gain or loss, they would presumably be reportable in the same way as the use of a digital asset for a payment.

There have been legislative proposals to extend IRC Section 1058 to loans of digital assets, in which case no sale reporting would seem to be necessary. If, however, those proposals are not adopted before the digital asset reporting regulations become effective, brokers will need additional guidance to determine whether to report loans and their unwindings.

Basis, gross proceeds and ordering rules

While the proposed digital asset regulations primarily focus on information reporting, they also include related references to IRC Sections 1001 and 1012, which address, respectively, amounts realized/recognized for tax purposes and tax basis. These components of the guidance not only enable Form 1099 reporting of customer digital asset transactions but also serve as vital cross-references to taxpayers' substantive tax information reported on their income tax filings.

(a) Basis

Under the proposed regulations, basis would equal the cost of acquiring the digital asset, including transaction costs. While this amount is a straightforward determination in cash-based transactions, there are complexities when debt is issued to acquire digital assets, or digital assets are acquired for non-cash property. Generally, debt used to acquire a digital asset would have a value for basis purposes equal to its issue price.

The initial basis of a digital asset acquired in exchange for property that is not a debt instrument would be the fair market value (FMV) of the digital asset received at the time of the exchange, increased by any digital asset transaction costs allocable to the acquisition of that digital asset. The FMV of the digital asset received would have to be determined using a reasonable valuation method as of the date and time the exchange transaction was effected.

These valuations are performed by the broker (or its service provider, referred to as a "digital asset data aggregator" in the Preamble). In the event the FMV of the digital asset cannot be determined with reasonable accuracy, the broker should first look to the property or services transferred at the time of the exchange. If neither the value of the digital asset received, nor the value of the property or services transferred, can be determined with reasonable accuracy, the FMV of the digital asset would be treated as zero. If the broker or service provider reasonably determined that neither the value of the received services or property nor the value of the digital asset can be determined with reasonable accuracy, the broker would have to report that the gross proceeds have an undeterminable value.

(b) Gross proceeds

Amounts realized in the sale/disposal of a digital asset are not limited to cash received by customers but also include the sum of the following: the FMV of any property received, the amount of any debt issued in connection with the digital asset exchange (generally, the issue price of the debt) and the FMV of any services received. The gross proceeds from these amounts realized are then reduced by transaction costs. For Form 1099 reporting purposes, gross proceeds from the sale of a digital asset equals US dollars paid or credited to the customer plus the FMV of any property or services the customer receives (including services giving rise to digital asset transaction costs), reduced by the digital asset transaction costs.

Transaction costs associated with the disposition of a digital asset are generally allocable to the disposition, but an exception applies to digital assets that are exchanged for other digital assets that differ materially in kind or extent (e.g., an exchange of bitcoin for ether). In those instances, the transaction costs would be allocated 50% to the disposed assets and 50% to the acquired assets, forming part of the basis of the new digital asset received.

EY observes: Some brokers may not have systems in place to allocate the costs of digital asset exchanges as contemplated by the proposed regulations. That may mean that the basis of a position acquired on and after January 1, 2023, may not be reported correctly if the position is sold on or after January 1, 2026.

The FMV aspects of the proposed guidance are not entirely straightforward and will introduce operational challenges to the reporting process. While the proposed regulations would initially permit brokers to use "reasonable" valuation methodologies that take into account contemporaneous factors, a broker's latitude in exercising reasonableness would be limited by various prescriptive measures. For example, for services giving rise to digital asset transaction costs, Treasury and the IRS would require brokers to look to the FMV of the digital assets used to pay for digital asset transaction costs in ascertaining the FMV of services.

(c) Sale ordering rules

The proposed regulations set forth ordering rules for a broker to determine which units of the same digital asset should be treated as sold (and therefore, what the basis of the sold digital assets is) when the customer owns multiple units of that same digital asset that were acquired on different dates or at different prices (some of which may have been transferred to the broker). When a customer made a specific and adequate identification (spec ID) of the digital assets to be sold, the broker would be required to report the identified assets as sold, also reporting their basis if the digital assets are covered securities. The customer would have to provide the spec ID to the broker no later than the date and time of the sale. The customer would be responsible for maintaining records to substantiate the identification. Unlike the rules for securities, there would be no requirement that the broker confirm the spec ID in writing.

If the customer did not make a timely spec ID, the broker would have to apply the first-in-first-out (FIFO) cost basis selection method. This means the units of the digital asset sold are the earliest units of that type of digital asset either purchased in or transferred into the customer's account with the broker.

EY observes: While many digital asset brokers are capable of recording the cost of a purchase, brokers may not have systems that allow customers to identify particular tokens for sale or apply FIFO and accurately track the basis attributable to any tokens remaining in the customer's account for purposes of reporting basis as of January 1, 2023. Therefore, some transitional relief will likely be needed.

Payment transactions

The proposed regulations define a "digital asset payment processor" as a person who:

  • Regularly receives digital assets from one party and sends the equivalent amount of cash to a second party
  • Acts as a third-party settlement organization (TPSO) that makes payments in digital assets, or issues instructions to transfer digital assets, to settle transactions on its third-party payment network, regardless of whether it contracts with a third party to do so


  • Acts as a payment card issuer that makes payments in digital assets, or issues instructions to transfer digital assets, to a "merchant acquiring entity" in settlement of a payment card transaction

Digital asset payment processors would be "brokers" and considered to effect a sale of digital assets — no matter the size of the transaction — when they either accept digital assets and send cash to the merchant or other third party, or send digital assets to the merchant and guarantee a price for the recipient to convert the digital assets to cash (regardless of whether the conversion actually happens). Accordingly, such processors will need to collect tax documentation, backup withhold and report to the same extent as other brokers. If a digital asset payment processor transmits cash, it may be operating as an MSB and would be subject to the full force of the rules that apply to US digital asset brokers, even if the broker operates from outside the United States.

TPSOs and merchant acquiring banks would typically issue Forms 1099-K to the receiving party, in addition to any tax reporting on the sender of the digital assets.

A merchant that simply accepts digital assets as payment would not be considered a broker under the proposed regulations but may be subject to reporting as a customer of a digital asset broker when the merchant converts the digital assets received into cash or different digital assets.

Real estate transactions

The proposed regulations would modify the existing rules for the reporting of real estate transactions, which are reportable on Form 1099-S. A "real estate reporting person" for Form 1099-S purposes would be a broker of any digital assets transferred in connection with a real estate sale if the digital asset were deemed "consideration treated as cash" for Form 1099-S purposes. The real estate reporting person would be required to report the exchange of the digital assets for real estate even if the real estate transaction qualified for an exception for Form 1099-S reporting. The documentation and withholding rules that apply to other digital asset brokers would apply to real estate reporting persons as well, but the seller's proceeds in the real estate sale would not be subject to backup withholding, even if the digital asset disposition is withheld upon.

To the extent a transaction is both a sale of reportable real estate and a sale of a digital asset (for example, an NFT that represents title to real estate), it would be reported on Form 1099-S as a real estate sale, not as a sale of digital assets.

Barter exchanges

Barter exchanges, where members trade goods or services with each other, sometimes for "scrip" issued by the exchange itself, have historically been required to perform Form 1099-B reporting to members. The proposed regulations would require the exchange to report members' swaps of digital assets with each other as sales of digital assets, rather than under the barter rules. If a member exchanges digital assets for goods or services, that member would be subject to reporting as if the digital assets were sold, and the member receiving the digital assets would be subject to reporting on Form 1099-K, rather than on Form 1099-B.

Backup withholding

The existing rules under Treas. Reg. Section 31.3406(b)(3)-2(a) generally treat any payment that is made by a broker or barter exchange and must be reported under IRC Section 6045 as a reportable payment that is subject to backup withholding. Except for the addition of "digital assets" to the title of Prop. Treas. Reg. Section 31.3406(b)(3)-2, the proposed regulations would not substantively change the rules under Treas. Reg. Section 31.3406(b)(3)-2, other than to include digital asset transactions that are reportable under IRC Section 6045.

Under existing Treas. Reg. Section 31.3406(g)-1(e), a payor is not required to backup withhold on gross proceeds if the sale is effected at an office outside the United States, unless the payor has actual knowledge that the payee is a US person. Prop. Treas. Reg. Section 31.3406(g)-1(e) would apply this exception to a sale of digital assets effected at an office outside the United States by a CFC digital asset broker or non-US digital asset broker that is not conducting activities as an MSB regarding that sale of digital assets.

Adoption of the OECD's Crypto-Asset Reporting Framework

In October 2022, the OECD put forward the Crypto-Asset Reporting Framework (CARF), which requires "Reporting Crypto-Asset Service Providers" to provide information on their customers' crypto transactions. CARF and the proposed regulations both define broadly the types of persons who must report, the kinds of transactions that are reportable and the types of crypto assets subject to reporting.

The Preamble to the proposed regulations indicates that Treasury and the IRS are considering how the United States can implement CARF. CARF would require the United States to exchange information on crypto asset transactions by residents of participating jurisdictions and entities controlled by residents of a participating jurisdiction. The proposed regulations would require reporting of persons that are presumed or documented US persons. Further, as discussed previously, these proposed regulations would require reporting by non-US brokers, which could be duplicative if the US participates in CARF.


Contact Information
For additional information concerning this Alert, please contact:
Financial Services Organization
   • Tara Ferris (
   • Thomas M. Shea (
   • Jonathan Jackel (
   • Lauren Lovelace (
   • Ryan Blewitt (
   • Todd Larsen (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor


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