Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions, 56480-56583 [2024-14004]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 131 (Tuesday, July 9, 2024)]
[Rules and Regulations]
[Pages 56480-56583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14004]



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Vol. 89

Tuesday,

No. 131

July 9, 2024

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1, et al.





Gross Proceeds and Basis Reporting by Brokers and Determination of 
Amount Realized and Basis for Digital Asset Transactions; Final Rule

Federal Register / Vol. 89 , No. 131 / Tuesday, July 9, 2024 / Rules 
and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[TD 10000]
RIN 1545-BP71


Gross Proceeds and Basis Reporting by Brokers and Determination 
of Amount Realized and Basis for Digital Asset Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding information 
reporting and the determination of amount realized and basis for 
certain digital asset sales and exchanges. The final regulations 
require brokers to file information returns and furnish payee 
statements reporting gross proceeds and adjusted basis on dispositions 
of digital assets effected for customers in certain sale or exchange 
transactions. These final regulations also require real estate 
reporting persons to file information returns and furnish payee 
statements with respect to real estate purchasers who use digital 
assets to acquire real estate.

DATES: 
    Effective date: These regulations are effective on September 9, 
2024.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.1001-7(c); 1.1012-1(h)(5); 1.1012-1(j)(6); 1.6045-1(q); 1.6045-4(s); 
1.6045B-1(j); 1.6050W-1(j); 31.3406(b)(3)-2(c); 31.3406(g)-1(f); 
31.3406(g)-2(h); 301.6721-1(j); 301.6722-1(g).

FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under 
sections 1001 and 1012, Alexa Dubert or Kyle Walker of the Office of 
the Associate Chief Counsel (Income Tax and Accounting) at (202) 317-
4718; concerning the international sections of the final regulations 
under sections 3406 and 6045, John Sweeney or Alan Williams of the 
Office of the Associate Chief Counsel (International) at (202) 317-
6933; and concerning the remainder of the final regulations under 
sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722, Roseann 
Cutrone of the Office of the Associate Chief Counsel (Procedure and 
Administration) at (202) 317-5436 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Regulations on Income 
Taxes (26 CFR part 1), the Regulations on Employment Tax and Collection 
of Income Tax at the Source (26 CFR part 31), and the Regulations on 
Procedure and Administration (26 CFR part 301) pursuant to amendments 
made to the Internal Revenue Code (Code) by section 80603 of the 
Infrastructure Investment and Jobs Act, Public Law 117-58, 135 Stat. 
429, 1339 (2021) (Infrastructure Act) relating to information reporting 
by brokers under section 6045 of the Code. Specifically, the 
Infrastructure Act clarified the rules regarding how certain digital 
asset transactions should be reported by brokers, expanded the 
categories of assets for which basis reporting is required to include 
all digital assets, and provided a definition for the term digital 
assets. Additionally, the Infrastructure Act clarified that transfer 
statement reporting under section 6045A(a) of the Code applies to 
covered securities that are digital assets and added a new information 
reporting provision under section 6045A(d) to require brokers to report 
on transfers of digital assets that are covered securities, provided 
the transfer is not a sale and is not to an account maintained by a 
person, as defined in section 7701(a)(1) of the Code, that the broker 
knows or has reason to know is also a broker. Finally, the 
Infrastructure Act provided that these amendments apply to returns 
required to be filed, and statements required to be furnished, after 
December 31, 2023, and provided a rule of construction stating that 
these statutory amendments shall not be construed to create any 
inference for any period prior to the effective date of the amendments 
with respect to whether any person is a broker under section 6045(c)(1) 
or whether any digital asset is property which is a specified security 
under section 6045(g)(3)(B).
    On August 29, 2023, the Treasury Department and the IRS published 
in the Federal Register (88 FR 59576) proposed regulations (REG-122793-
19) (proposed regulations) relating to information reporting under 
section 6045 by brokers, including real estate reporting persons and 
certain third party settlement organizations under section 6050W of the 
Code. Additionally, the proposed regulations included specific rules 
under section 1001 of the Code for determining the amount realized in a 
sale, exchange, or other disposition of digital assets and under 
section 1012 of the Code for calculating the basis of digital assets. 
The proposed regulations stated that written or electronic comments 
provided in response to the proposed regulations must be received by 
October 30, 2023.
    The Treasury Department and the IRS received over 44,000 written 
comments in response to the proposed regulations. Although https://www.regulations.gov indicated that over 125,000 comments were received, 
this larger number reflects the number of ``submissions'' that each 
submitted comment indicated were included in the posted comment, 
whether or not the comment actually included such separate submissions. 
All posted comments were considered and are available at https://www.regulations.gov or upon request. A public hearing was held on 
November 13, 2023.
    Several comments requested an extension of the time to file 
comments in response to the proposed regulations. These requests for 
extension ranged from a few weeks to several years, but most comments 
requested a 60-day extension. In response to these comments, the due 
date for the comments was extended until November 13, 2023. The comment 
period was not extended further for several reasons. First, information 
reporting rules are necessary to make digital asset investors aware of 
their taxable transactions and to make those transactions more 
transparent to the IRS to reduce the tax gap. It is, therefore, a 
priority that the publication of these regulations is not delayed more 
than is necessary. Second, although the Infrastructure Act amended 
section 6045 in November 2021 to broadly apply the information 
reporting rules for digital asset transactions to a wide variety of 
brokers, the broker reporting regulations for digital assets were added 
to the Treasury Priority Guidance Plan in late 2019. Brokers, 
therefore, have long been on notice that there would be proposed 
regulations on which to comment. Third, as discussed in Part VI. of 
this Summary of Comments and Explanation of Revisions, the Treasury 
Department and the IRS understand that brokers need time after these 
final regulations are published to develop systems to comply with the 
final reporting requirements. Without further delaying the 
applicability date of these much-needed regulations, therefore, 
extending the comment period would necessarily reduce the time brokers 
would have to develop these systems. Fourth, a 60-day comment period is 
not inherently short or inadequate. Executive Order (E.O.) 12866 
provides that generally a comment period should be no less than 60 
days, and courts have uniformly upheld comment periods of even shorter 
comment periods. See, e.g., Connecticut Light & Power Co. v. NRC,

[[Page 56481]]

673 F.2d 525, 534 (D.C. Cir. 1982), cert. denied, 459 U.S. 835, 103 
S.Ct. 79, 74 L.Ed.2d 76 (1982) (denying petitioner's claim that a 30 
day comment period was unreasonable, notwithstanding petitioner's 
complaint that the rule was a novel proposition); North American Van 
Lines v. ICC, 666 F.2d 1087, 1092 (7th Cir. 1981) (claim that 45 day 
comment period was insufficient rejected as ``without merit''). Indeed, 
over 44,000 comments were received before the conclusion of the comment 
period ending on November 13, 2023, which demonstrates that this 
comment period was sufficient for interested parties to submit 
comments. Fifth, it has been a longstanding policy of the Treasury 
Department and the IRS to consider comments submitted after the 
published due date, provided consideration of those comments does not 
delay the processing of the final regulation. IRS Policy Statement 1-
31, Internal Revenue Manual 1.2.1.15.4(6) (September 3, 1987). In fact, 
all comments received through the requested 60-day extension period 
were considered in promulgating these final regulations. Moreover, the 
Treasury Department and the IRS accepted late comments through noon 
eastern time on April 5, 2024.
    The Summary of Comments and Explanation of Revisions of the final 
regulations summarizes the provisions of the proposed regulations, 
which are explained in greater detail in the preamble to the proposed 
regulations. After considering the comments to the proposed 
regulations, the proposed regulations are adopted as amended by this 
Treasury decision in response to such comments as described in the 
Summary of Comments and Explanation Revisions.
    These final regulations concern Federal tax laws under the Internal 
Revenue Code only. No interference is intended with respect to any 
other legal regime, including the Federal securities laws and the 
Commodity Exchange Act, which are outside the scope of these 
regulations.

Summary of Comments and Explanation of Revisions

I. Final Sec.  1.6045-1

A. Definition of Digital Assets Subject to Reporting
    The proposed regulations required reporting under section 6045 for 
certain dispositions of digital assets that are made in exchange for 
cash, different digital assets, stored-value cards, broker services, or 
property subject to reporting under existing section 6045 regulations 
or any other property in a payment transaction processed by a digital 
asset payment processor (referred to in these final regulations as a 
processor of digital asset payments or PDAP). The proposed regulations 
defined a digital asset as a digital representation of value that is 
recorded on a cryptographically secured distributed ledger (or any 
similar technology), without regard to whether each individual 
transaction involving that digital asset is actually recorded on the 
cryptographically secured distributed ledger. Additionally, the 
proposed regulations provided that a digital asset does not include 
cash in digital form.
    While some comments expressed support for the definition of digital 
asset in the proposed regulations, other comments raised concerns that 
the definition of digital asset goes beyond the statutory definition 
found in amended section 6045. For example, one comment recommended 
applying the definition only to assets held for investment and 
excluding any assets that are used for other functions, which include, 
in their view, nonfungible tokens (NFTs), stablecoins, tokenized real 
estate, and tokenized commodities. Another comment recommended 
narrowing the definition of digital asset to apply only to blockchain 
``native'' digital assets and exempting all NFTs and other tokenized 
versions of traditional asset classes, such as tokenized securities, 
and other digital assets that don't function as a medium of exchange, 
unit of account, or store of value. Another comment recommended that 
the definition of digital asset distinguish between digital 
representations of what the comment referred to as ``hard assets,'' 
such as gold, where the digital asset is merely a proxy for the 
underlying asset versus digital assets that are not backed by hard 
assets. Another comment recommended that the definition of digital 
asset not include tokenized assets, including financial instruments 
that have been tokenized. The final regulations do not adopt these 
comments. As discussed more fully in Parts I.A.1. and A.2. of this 
Summary of Comments and Explanation of Revisions, neither the statutory 
language nor the legislative history to the Infrastructure Act suggest 
Congress intended such a narrow interpretation of the term.
    The Infrastructure Act made changes to the third party information 
reporting rules under section 6045. Third party information reporting 
generally contributes to lowering the income tax gap, which is the 
difference between taxes legally owed and taxes actually paid. GAO, Tax 
Gap: Multiple Strategies Are Needed to Reduce Noncompliance, GAO-19-
558T at 6 (Washington, DC: May 9, 2019). It is anticipated that broker 
information reporting on digital asset transactions will lead to higher 
levels of taxpayer compliance because brokers will provide the 
information necessary for taxpayers to prepare their Federal income tax 
returns and reduce the number of inadvertent errors or intentional 
omissions or misstatements shown on those returns. Because digital 
assets can easily be held and transferred, including to offshore 
destinations, directly by a taxpayer rather than by an intermediary, 
digital asset transactions raise tax compliance concerns that are 
specific to digital assets in addition to the more general tax 
compliance concerns relevant to securities, commodities, and other 
assets that are reportable under section 6045 and to cash payments 
reportable under other reporting provisions. The Treasury Department 
and the IRS have consequently concluded that the definition of digital 
assets in section 6045(g)(3)(D) provides the appropriate scope for 
digital assets subject to broker reporting. To the extent sales of 
digital assets including NFTs, tokenized securities, and other digital 
assets that may not function as a medium of exchange, unit of account, 
or store of value, give rise to taxable gains and losses, these assets 
should be included in the definition of digital assets. See, however, 
Part I.D.3. of this Summary of Comments and Explanation of Revisions 
for a description of an optional reporting rule for many NFTs that 
would eliminate reporting on those NFTs when certain conditions are 
met, and Part I.A.4.a. of this Summary of Comments and Explanation of 
Revisions for a description of a special rule providing that assets 
that are both securities and digital assets are reportable as 
securities rather than as digital assets when specified conditions are 
met.
    Some comments asserted that the statutory definition of digital 
assets is or should be limited to assets that are financial 
instruments. These comments are discussed in Part I.A.2. of this 
Summary of Comments and Explanation of Revisions.
    Other comments raised a concern that the definition of digital 
assets is ambiguous and recommended adding examples that clarify the 
types of property that are and are not digital assets. For reasons 
discussed more fully in Parts I.A.1., A.2., and A.3. of this Summary of 
Comments and Explanation of Revisions, the final regulations include 
several additional examples that illustrate and further clarify certain 
types of digital assets that

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are included in the definition, such as qualifying stablecoins, 
specified nonfungible tokens (specified NFTs), and other fungible 
digital assets.
    One comment suggested that the term cryptographically secured 
distributed ledger be defined in the final regulations as a type of 
data storage and transmission file which uses cryptography to allow for 
a decentralized system of verifying transactions. This comment also 
stated that the definition should state that the stored information is 
an immutable database and includes an embedded system of operation, and 
that a blockchain is a type of distributed ledger. The final 
regulations do not adopt this recommendation because clarification of 
the term is not necessary and because the recommended changes are 
potentially unduly restrictive to the extent they operate to restrict 
future broker reporting obligations should advancements be made in how 
distributed ledgers are cryptographically secured.
    One comment suggested that the proposed definition of a digital 
asset is overly broad because it includes transactions recorded in the 
broker's books and records (commonly referred to as ``off-chain'' 
transactions) and not directly on a distributed ledger. Another comment 
specifically supported the decision to not limit the definition to only 
those digital representations for which each transaction is actually 
recorded or secured on a cryptographically secured distributed ledger. 
The Treasury Department and the IRS have determined that the definition 
of digital asset is not overly broad in this regard because eliminating 
digital assets that are traded in off-chain transactions from the 
definition would fail to provide information reporting on the 
significant amount of trading that occurs off-chain on the internal 
ledgers of custodial digital asset trading platforms. Moreover, since 
the mechanics of how an asset sale is recorded does not impact whether 
there has been a taxable disposition of that asset, those mechanics 
should not impact whether the underlying asset is or is not a digital 
asset.
    A comment suggested that the definition of a digital asset should 
eliminate the phrase ``or any similar technology'' because the scope of 
that phrase is unclear and could negatively impact future technology 
improvements, such as privacy-preserving technology, cryptography, 
distributed database systems, distributed network systems, or other 
evolving technology. Another comment requested that the definition of 
any similar technology be limited to instances in which the IRS 
identifies such future similar technologies in published guidance. The 
final regulations do not adopt this comment. Using the phrase ``any 
similar technology'' is consistent with the Infrastructure Act's use of 
the same term in its definition of digital assets in section 
6045(g)(3)(D). Further, including any similar technology along with 
cryptographically secured ledgers is necessary to ensure that brokers 
continue to report on transactions involving these assets without 
regard to advancements in or changes to the techniques, methods, and 
technology, on which these assets are based. The Treasury Department 
and the IRS are not currently aware of any existing technology that 
would fit within this ``or any similar technology'' standard, but if 
brokers or other interested parties identify new technological 
developments and are uncertain whether they fit within the definition, 
they can make the Treasury Department and the IRS aware of the new 
technology and request guidance at that time.
1. Stablecoins
    As explained in the preamble to the proposed regulations, the 
definition of digital assets was intended to apply to all types of 
digital assets, including so-called stablecoins that are designed to 
have a stable value relative to another asset or assets. The preamble 
to the proposed regulations noted that such stablecoins can take 
multiple forms, may be backed by several different types of assets that 
are not limited to currencies, may not be fully collateralized or 
supported fully by reserves by the underlying asset, do not necessarily 
have a constant value, are frequently used in connection with 
transactions involving other types of digital assets, and are held and 
transferred in the same manner as other digital assets. In addition to 
fiat currency, other assets to which so-called stablecoins can be 
pegged include commodities or other financial instruments (including 
other digital assets). No comments were received that specifically 
advocated for the exclusion of a so-called stablecoin that has a fixed 
exchange rate with (that is, is pegged to) a commodity, another 
financial instrument, or any other asset other than a specific 
convertible currency issued by a government or a central bank 
(including the U.S. dollar) (sometimes referred to in this preamble as 
fiat currency). The Treasury Department and the IRS have determined 
that it would be inappropriate to exclude stablecoins that are pegged 
to such assets from the definition of digital assets. Accordingly, this 
preamble uses the term stablecoin to refer only to the subset of so-
called stablecoins referred to in the proposed regulations that are 
pegged to a fiat currency.
    Numerous comments received specifically advocated for the exclusion 
from the definition of digital assets stablecoins that are pegged to a 
fiat currency. Numerous comments stated that failure to exclude 
stablecoins from the definition of digital assets would hinder the 
adoption of these stablecoins in the marketplace, deter their 
integration into commercial payment systems, and undermine 
Congressional efforts to establish a regulatory framework for 
stablecoins that can be used to make payments. Additional comments 
raised concerns about privacy, drew an analogy to the exemption in the 
existing regulations for reporting on shares of money market funds, or 
recommended that reporting on stablecoins be deferred until after the 
substantive tax treatment of stablecoins is clarified with guidance 
issued by the Treasury Department and the IRS or until a legislative 
framework is established by Congress. Several other comments 
recommended that reporting on stablecoins be required, noting that 
stablecoins can be volatile in value and regularly vary from a one-to-
one parity with the fiat currency they are pegged to, and therefore may 
give rise to gain or loss on disposition.
    After consideration of the comments, the final regulations do not 
exclude stablecoins from the definition of digital assets. Stablecoins 
unambiguously fall within the statutory definition of digital assets as 
they are digital representations of the value of fiat currency that are 
recorded on cryptographically secured distributed ledgers. Moreover, 
because stablecoins are integral to the digital asset ecosystem, 
excluding stablecoins from the definition of digital assets would 
eliminate a source of information about digital asset transactions that 
the IRS can use in order to ensure compliance with taxpayers' reporting 
obligations.
    The Treasury Department and the IRS are aware that legislation has 
been proposed that would regulate the issuance and terms of 
stablecoins. If legislation is enacted regulating stablecoins, the 
Treasury Department and the IRS intend to take that legislation into 
account in considering whether to revise the rules for reporting on 
stablecoins provided in these final regulations.
    Notwithstanding that the final regulations include stablecoins in 
the

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definition of digital assets, the Secretary has broad authority under 
section 6045 to determine the extent of reporting required by brokers 
on transactions involving digital assets. In response to the request 
for comments in the preamble to the proposed regulations on whether 
stablecoins, or other coins whose value is pegged to a specified asset, 
should be excluded from reporting under the final regulations, numerous 
comments largely focused on stablecoins, rather than coins that track a 
commodity price or the price of another digital asset. Many of these 
comments requested that sales of stablecoins be exempted from broker 
reporting in whole or in part because reporting on all transactions 
involving stablecoins would result in a very large number of reports on 
transactions involving little to no gain or loss, on the grounds that 
these reports would be burdensome for brokers to provide, potentially 
confusing to taxpayers and of minimal utility to the IRS. These 
comments asserted that most transactions involved little or no gain or 
loss because, in their view, stablecoins closely track the value of the 
fiat currency to which they are pegged. Some comments recommended that 
certain types of stablecoin transactions be reportable, including 
requiring reporting of dispositions of stablecoins for cash or where 
there is active trading in the stablecoin that is intended to give rise 
to gain (or loss).
    The Treasury Department and the IRS agree that transaction-by-
transaction reporting for stablecoins would result in a high volume of 
reports. Indeed, according to a report by Chainalysis on the 
``Geography of Cryptocurrency'' analyzing public blockchain 
transactions (commonly referred to as ``on-chain'' transactions), 
stablecoins are the most widely used type of digital asset, making up 
more than half of all on-chain transactions to or from centralized 
services between July 2022 and March 2023. Chainalysis, The 2023 
Geography of Cryptocurrency Report, p. 14 (October 2023). Given the 
popularity of stablecoins and the number of stablecoin sales that are 
unlikely to reflect significant gains or losses, the Treasury 
Department and the IRS have determined that it is appropriate to 
provide an alternative reporting method for certain stablecoin 
transactions to alleviate unnecessary and burdensome reporting. 
Accordingly, the final regulations have added a new optional 
alternative reporting method for sales of certain stablecoins to allow 
for aggregate reporting instead of transactional reporting, with a de 
minimis annual threshold below which no reporting is required. See Part 
I.D.2. of this Summary of Comments and Explanation of Revisions. 
Consistent with the proposed regulations, brokers that do not use this 
alternative reporting method must report sales of stablecoins under the 
same rules as for other digital assets. See Part I.D.2. of this Summary 
of Comments and Explanation of Revisions for the discussion of 
alternative reporting rules for certain stablecoins.
2. Nonfungible Tokens
    As with stablecoins, the definition of digital assets in the 
proposed regulations includes NFTs without regard to the nature of the 
underlying asset, if any, referenced by the NFT. Although some comments 
expressed agreement that the definition of digital asset in the statute 
is broad enough to include all NFTs, other comments raised concerns 
that the Secretary did not have the authority to include NFTs in broker 
reporting. That is, the comments argued that while NFTs have value, 
they do not constitute ``representations of value'' as required by the 
statutory definition in section 6045(g)(3)(D). Classifying an NFT as a 
``representation of value'' merely because it has value, these comments 
asserted, would fail to give effect to the word ``representation'' in 
the statute. As support for this view, one comment cited to Senator 
Portman's floor colloquy reference to the intended application of the 
reporting rule to ``cryptocurrency.'' 167 Cong. Rec. S6095-6 (daily ed. 
August 9, 2021). Ultimately, these comments recommended excluding sales 
of NFTs from the definition of digital assets. The final regulations do 
not adopt these comments. Although NFTs may reference assets with 
value, this does not prevent them from also ``representing value.'' 
Moreover, that interpretation would lead to a result that would 
contravene the statutory changes to the broker reporting rules by the 
Infrastructure Act. Excluding all NFTs from the definition of digital 
assets merely because NFTs may reference assets with value rather than 
``represent value'' would result in the exclusion of NFTs that 
reference traditional financial assets. These assets have been subject 
to reporting under section 6045 for nearly 40 years, and there is no 
reason to exclude them from reporting now based only on the 
circumstance of their trades through NFTs, rather than through other 
traditional means.
    Numerous comments asserted that the statutory reference to any 
``representation of value'' should limit the definition of digital 
assets to only those digital assets that reference financial 
instruments or otherwise could be used to deliver value (such as a 
method of payment). Numerous comments expressed that many NFTs, such 
as, digital art and collectibles, are unique digital assets that are 
bought and sold for personal enjoyment rather than financial gain and 
therefore should not be subject to reporting. Similarly, other comments 
raised the series-qualifier canon of statutory construction, which 
provides that when a statute contains a list of closely related, 
parallel, or overlapping terms followed by a modifier, that modifier 
should be applied to all the terms in the list. Therefore, according to 
the comments, because ``any digital asset'' is included in the section 
6045(g)(3)(B) list of assets defining specified security and because 
that list concludes with ``any other financial instrument,'' these 
comments argue that the definition of ``digital asset'' must be limited 
to assets that are, or are akin to, ``financial instruments.'' As 
additional support for this suggestion, one comment cited the rule of 
last antecedent, which is another canon of statutory construction and 
provides that a limiting clause or phrase should ordinarily be read as 
modifying only the noun or phrase that it immediately follows. That is, 
because the ``other financial instrument'' clause directly follows 
``any digital asset'' in the list, the definition of any digital asset 
must be limited to only those digital assets that constitute financial 
instruments.
    The final regulations do not adopt these comments. The plain 
language of the digital asset definition in section 6045(g)(3)(D) 
reflects only two specific limitations on the definition: ``[e]xcept as 
otherwise provided by the Secretary'' and ``recorded on a 
cryptographically secured distributed ledger or similar technology as 
specified by the Secretary.'' The legislative history to the 
Infrastructure Act does not support the conclusion that Congress 
intended the ``representation of value'' phrase to limit the definition 
of digital assets to only those digital assets that are financial 
instruments. To the contrary, a report by the Joint Committee on 
Taxation published in the Congressional Record prior to the enactment 
of the Infrastructure Act cited to and relied on the Notice 2014-21, 
2014-16 I.R.B. 938 (April 14, 2014) definition of virtual currency, 
which first used the phrase ``representation of value.'' 167 Cong. Rec. 
S5702, 5703 (daily ed. August 3, 2021) (Joint Committee on Taxation, 
Technical Explanation of Section 80603

[[Page 56484]]

of the Infrastructure Act). That virtual currency definition 
specifically limited the ``representation of value'' phrase to those 
assets that function ``as a medium of exchange, unit of account, and/or 
store of value.'' This limitation would not have been necessary had the 
``representation of value'' phrase been limited to assets that function 
as financial instruments. Moreover, Congress' use of the term ``digital 
asset'' instead of ``digital currency'' also supports the broader 
interpretation of the term.
    The final regulations also do not adopt the interpretation of the 
referenced canons of statutory construction presented by the comments 
because those canons should not be used to limit the definition of 
digital assets in a statute that includes an explicit and unambiguous 
definition of that term. Moreover, the referenced canons do not lead to 
the result asserted by the comments. The series-qualifier canon is not 
applicable here because not all the items in the list at section 
6045(g)(3)(B) are consistent with the ``financial instrument'' language 
following the list. For example, section 6045(g)(3)(B)(iii) references 
any commodity, which under Sec.  1.6045-1(a)(5) of the final 
regulations effective before the effective date of these final 
regulations \1\ and these final regulations, specifically includes 
physical assets, such as lead, palm oil, rapeseed, tea, and tin, which 
are not financial instruments. The term commodity also includes any 
type of personal property that is traded through regulated futures 
contracts approved by the U.S. Commodity Futures Trading Commission 
(CFTC), which include live cattle, natural gas, and wheat. See Sec.  
1.6045-1(a)(5) of the pre-2024 final regulations. (These final 
regulations also add to the definition of commodity personal property 
that is traded through regulated futures contracts certified to the 
CFTC.) These assets also are not financial instruments. Consequently, 
the term ``any other financial instrument'' in section 6045(g)(3)(B)(v) 
should not be read to limit the meaning of the items in the list that 
came before it. For similar reasons, the rule of last antecedent also 
does not limit the meaning of digital assets. Prior to the changes made 
to section 6045 by the Infrastructure Act, the financial instruments 
language followed the commodities clause. As such, when enacted the 
financial instruments phrase could not have been intended to limit the 
item in the list (commodity) that immediately preceded it. Accordingly, 
the Treasury Department and the IRS understand the inclusion of other 
financial instruments as potential specified securities as a grant of 
authority to expand the list of specified securities, not as a 
provision limiting the meaning of the other asset types listed as 
specified securities.
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    \1\ Numerous Treasury decisions have been published under Sec.  
1.6045-1. See T.D. 7873, 48 FR 10302 (Mar. 11, 1983); T.D. 7880, 48 
FR 12940 (Mar 28, 1983); T.D. 7932, 48 FR 57485 (Dec. 30, 1983); 
T.D. 7960, 49 FR 22281 (May 29, 1984); T.D. 8445, 57 FR 53031 (Nov. 
6, 1992); T.D. 8452, 57 FR 58983 (Dec. 14, 1992); T.D. 8683, 61 FR 
53058 (Oct. 10, 1996); T.D. 8734, 62 FR 53387 (Oct. 14, 1997); T.D. 
8772, 63 FR 35517 (Jun. 30, 1998); T.D. 8804, 63 FR 72183 (Dec. 31, 
1998); T.D. 8856, 64 FR 73408 (Dec. 30, 1999); T.D. 8881, 65 FR 
32152 (May 22, 2000), corrected 66 FR 18187 (April 6, 2001); T.D. 
8895, 65 FR 50405 (Aug. 18, 2000); T.D. 9010, 67 FR 48754 (Jul. 26, 
2002); T.D. 9241, 71 FR 4002 (Jan. 24, 2006); T.D. 9504, 75 FR 64072 
(Oct. 18, 2010); T.D. 9616, 78 FR 23116 (April 18, 2013); T.D. 9658, 
79 FR 12726 (Mar. 6, 2014); T.D. 9713, 80 FR 13233 (Mar. 13, 2015); 
T.D. 9750, 81 FR 8149 (Feb. 18, 2016), corrected 81 FR 24702 (Apr. 
27, 2016); T.D. 9774, 81 FR 44508 (Jul. 8, 2016); T.D. 9808, 82 FR 
2046 (Jan. 6, 2017), corrected 82 FR 29719 (Jun. 30, 2017); T.D. 
9984, 88 FR 87696 (Dec. 19, 2023). The regulations effective before 
the effective date of these final regulations will collectively be 
referred to as the pre-2024 final regulations.
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    One comment suggested that the final regulations should limit the 
definition of a digital asset to exclude NFTs not used as payment or 
investment instruments to align the section 6045 reporting rules with 
other rules and regulatory frameworks. One comment recommended limiting 
the definition to only digital assets that can be converted to U.S. 
dollars, another fiat currency, or an asset with market value. Several 
comments suggested that including all NFTs in the definition of digital 
assets would be inconsistent with the intended guidance announced in 
Notice 2023-27, Treatment of Certain Nonfungible Tokens as 
Collectibles, 2023-15 I.R.B. 634 (April 10, 2023), which indicated that 
the IRS intends to determine whether an NFT constitutes a collectible 
under section 408(m) of the Code by using a look-through analysis that 
looks to the NFT's associated right or asset. Other comments 
recommended that the final regulations limit the definition of digital 
assets to exclude NFTs not used as payment or investment instruments to 
align the section 6045 reporting rules with the reporting rules for 
digital assets by foreign governments, such as the Council directive 
(EU) 2023/2266 of 17 October amending Directive 2011/16/EU on 
administrative cooperation in the field of taxation, which is popularly 
known as DAC8. Yet other comments recommended that the final 
regulations conform to guidelines from the Financial Action Task Force 
(FATF), an inter-governmental body that sets international standards 
that aim to prevent money laundering and terrorism financing. FATF 
guidelines distinguish between those NFTs that are used ``as 
collectibles'' from those used ``as payment or investment 
instruments.'' Finally, one comment urged the Treasury Department and 
the IRS to follow the Financial Accounting Standards Board (FASB) 
standards, which completely exclude NFTs from their definition of 
digital assets due to their nonfungible nature. FASB, Accounting 
Standards Update, Intangibles--Goodwill and Other--Crypto Assets 
(Subtopic 350-60), No. 2023-08, December 2023.
    These final regulations do not adopt these comments because they 
would make the definition of digital assets unduly restrictive. The 
goal behind information reporting by brokers is to close or 
significantly reduce the income tax gap from unreported income and to 
provide information that assists taxpayers. Information reporting 
generally can achieve that objective when brokers report to the IRS and 
to their customers the information necessary for customers to report 
their income. The considerations relevant to a U.S. third party 
information reporting regime are not the same as the considerations 
that are relevant to the definition of collectibles under section 
408(m), which applies in order to determine assets that have adverse 
tax consequences if acquired by certain retirement accounts and that 
are subject to special tax rates. While non-tax policies relating to 
combating money laundering and terrorism financing or guidelines for 
generally accepted accounting standards may have some relevance, they 
are not determinative for Federal tax purposes under the Code. Finally, 
the Treasury Department and the IRS understand that DAC8 is intended to 
apply in the same manner as a closely related OECD standard, discussed 
in the next paragraph. Moreover, NFTs that are actively traded on 
trading platforms appear to be used for investment purposes in addition 
to any other purposes. Publicly available information reports that 
trading in some NFT collections has been in the billions of dollars 
over time and that 24-hour trading volume in NFTs in 2024 has ranged 
from $60-410 million. This trading activity suggests that at least some 
NFT collections have sufficient volume and liquidity to facilitate 
their use as investments rather than as traditional collectibles.
    Another comment suggested that the final regulations should limit 
the definition of digital assets to exclude NFTs to align the section 
6045 definition of digital assets with the definition of ``Relevant 
Crypto-Asset''

[[Page 56485]]

under the Crypto-Asset Reporting Framework (CARF), a framework for the 
automatic exchange of information between countries on crypto-assets 
developed by the Organisation for Economic Co-operation and Development 
(OECD) and to which the United States is a party. As discussed in Part 
I.G.2. of this Summary of Comments and Explanation of Revisions, once 
the United States implements the CARF, U.S. digital asset brokers will 
need to file information returns under both these final regulations 
with respect to their U.S. customers, and, under separate final 
regulations implementing the CARF reporting requirements, with respect 
to their non-U.S. customers that are resident in jurisdictions 
implementing the CARF. These final regulations generally attempt to 
align definitions with those used in the CARF to the extent possible. 
In this case, however, the final regulations do not adopt this comment 
because the CARF's definition of Relevant Crypto-Assets is already 
consistent with a definition of digital assets that includes NFTs. As 
noted in paragraph 12 of the CARF's Commentary on Section IV: Defined 
terms, although NFTs are often marketed as collectibles, this function 
does not prevent an NFT from being able to be used for payment or 
investment purposes. ``NFTs that are traded on a marketplace can be 
used for payment or investment purposes and are therefore to be 
considered Relevant Crypto-Assets.'' See Part I.G.1. of this Summary of 
Comments and Explanation of Revisions, for a discussion of the United 
States' implementation of the CARF.
    Notwithstanding that the final regulations include NFTs in the 
definition of digital assets under section 6045(g)(3)(D), the Treasury 
Department and the IRS have determined that, pursuant to discretion 
under section 6045(a), it is appropriate to provide an alternative 
reporting method for certain types of NFTs to alleviate burdensome 
reporting. As discussed in Part I.D.3. of this Summary of Comments and 
Explanation of Revisions, the final regulations have added a new 
optional alternative reporting method for sales of certain NFTs to 
allow for aggregate reporting instead of transactional reporting, with 
a de minimis annual threshold below which no reporting is required. The 
Treasury Department and the IRS anticipate that the de minimis annual 
threshold will eliminate reporting on many low-value NFT transactions 
that are less likely to be used for payment or investment purposes.
3. Closed Loop Assets
    The preamble to the proposed regulations stated that the definition 
of a digital asset was not intended to apply to the types of virtual 
assets that exist only in a closed system and cannot be sold or 
exchanged outside that system for fiat currency. The preamble also 
stated that the definition of digital assets was not intended to cover 
uses of distributed ledger technology for ordinary commercial purposes, 
such as tracking inventory or processing orders for purchase and sale 
transactions, that do not create transferable assets and are therefore 
not likely to give rise to sales as defined for purposes of the 
regulations. Several comments requested that the final regulations be 
revised to provide an exception for closed loop uses in the regulatory 
text and to add examples illustrating that these types of virtual 
assets are not included in the definition of a digital asset. Another 
comment recommended that the final regulations expressly limit the 
definition of digital assets to only those digital assets that function 
as currency as described in Notice 2014-21 or that have the capability 
of being purchased, sold, or exchanged. The Treasury Department and the 
IRS agree that the text of the final regulations should make clear that 
transactions involving digital assets in the above-described closed 
loop environments should not be subject to reporting. The final 
regulations do not limit the definition of a digital asset as requested 
to accommodate these comments, however, because it is not clear how the 
definition could narrowly carve out only these closed loop digital 
assets without also carving out other assets for which reporting is 
appropriate. Instead, to address these comments, the final regulations 
add transactions involving these closed loop digital assets to the list 
of excepted sales that are not subject to reporting under Sec.  1.6045-
1(c)(3)(ii). See Part I.C. of this Summary of Comments and Explanation 
of Revisions, for a discussion of the closed loop transactions added to 
the list of excepted sales at Sec.  1.6045-1(c)(3)(ii).
4. Coordination With Reporting Rules for Securities, Commodities, and 
Real Estate
    The preamble to the proposed regulations noted that the Treasury 
Department and the IRS are aware that many provisions of the Code 
incorporate references to the terms security or commodity, and that 
questions exist as to whether, and if so, when, a digital asset may be 
treated as a security or a commodity for purposes of those Code 
sections. Apart from the rules under sections 1001 and 1012 discussed 
in Part II. of this Summary of Comments and Explanation of Revisions, 
these final regulations are information reporting regulations, and are 
therefore not the appropriate vehicle for answering those questions. 
Accordingly, the treatment of an asset as reportable as a security, 
commodity, digital asset, or otherwise in these rules applies for 
purposes of sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722 of 
the Code, and for certain purposes of sections 1001 and 1012, and 
should not be construed to apply for any other purpose of the Code, 
including but not limited to determining whether a digital asset should 
be classified as a security, commodity, option, securities futures 
contract, regulated futures contract, or forward contract.
    One comment expressed concern that promulgation of final 
regulations requiring brokers to report on digital asset transactions 
could be cited by other government agencies to support treating digital 
assets as securities for purpose of the securities statutes, rules, and 
regulations. This comment requested that these regulations not take any 
position on whether digital assets are securities for these other 
purposes. The Treasury Department and the IRS agree with this comment. 
The potential characterization of digital assets as securities, 
commodities, or derivatives for purposes of any other legal regime, 
such as the Federal securities laws and the Commodity Exchange Act, is 
outside the scope of these final regulations.
a. Special Coordination Rules for Dual Classification Assets
    Because Sec.  1.6045-1(a)(9) of the pre-2024 final regulations 
(redesignated in the proposed and final regulations as Sec.  1.6045-
1(a)(9)(i)) require reporting with respect to sales for cash of 
securities as defined in Sec.  1.6045-1(a)(3) and certain commodities 
as defined in Sec.  1.6045-1(a)(5), the proposed regulations included 
coordination rules to provide certainty to brokers with respect to 
whether a particular transaction involving securities or certain 
commodities is reportable as a securities or commodities sale under 
proposed Sec.  1.6045-1(a)(9)(i) (sale of securities or commodities) or 
as a digital assets sale under proposed Sec.  1.6045-1(a)(9)(ii) (sale 
of digital assets) and to avoid duplicate reporting obligations. 
Specifically, for transactions involving the sale of a digital asset 
that also constitutes the sale of a commodity or security (other than 
options that

[[Page 56486]]

constitute contracts covered by section 1256(b) of the Code) (dual 
classification assets), the proposed regulations provided that the 
broker would report the sale only as a sale of a digital asset and not 
as a sale of a security or commodity.
    Numerous comments raised the concern that requiring brokers that 
have been historically reporting sales of securities and commodities on 
Form 1099-B, Proceeds from Broker and Barter Exchange Transactions to 
report these transactions as sales of digital assets on Form 1099-DA, 
Digital Asset Proceeds From Broker Transactions would force these 
brokers to overhaul their existing reporting systems and potentially 
cause confusion for taxpayers who are not even aware that their 
securities and commodities have been tokenized. To address this 
concern, some comments recommended that the digital asset definition be 
revised to exclude some or all securities and commodities. Other 
comments recommended revising the coordination rule so that the 
reporting rules for sales of securities and commodities apply to 
digital assets that are also securities or commodities. One comment 
suggested applying the reporting rules for sales of securities and 
commodities to any digital asset that represents a fund subject to the 
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. (1940 Act 
Fund), or another highly regulated product outside of 1940 Act Funds.
    The final regulations do not adopt the comments recommending that 
sales of dual classification assets generally be reported as sales of 
securities or commodities. One of the benefits of treating dual 
classification assets as digital assets is that it avoids forcing 
brokers to make determinations about whether the dual classification 
asset is properly classified as a security or a commodity under current 
law. For example, a rule that treats all dual classification assets as 
securities and commodities would require brokers to determine whether a 
digital asset that represents a governance token is properly classified 
as a security under final Sec.  1.6045-1(a)(3) to determine how to 
report sales of that digital asset. Moreover, such a rule would affect 
reporting on digital assets commonly referred to as cryptocurrencies 
that fit within the definition of a commodity under final Sec.  1.6045-
1(a)(5)(i) because the trading of regulated futures contracts in that 
digital asset has been certified to the CFTC. It would be inappropriate 
for brokers to report these assets as sales of commodities rather than 
as sales of digital assets because, as is discussed in Part I.F. of 
this Summary of Comments and Explanation of Revisions, it is important 
that brokers report basis for these sales.
    Other comments offered recommendations designed to limit reporting 
of dual classification assets under the rules governing sales of 
securities and commodities. For example, one comment recommended that 
the reporting rules for sales of securities and commodities apply to 
any digital asset representing readily ascertainable securities or 
commodities and not purely blockchain-based digital assets, such as 
cryptocurrencies or governance tokens, for which treatment as 
securities or commodities may be uncertain. Another comment recommended 
that the reporting rules for sales of securities and commodities apply 
to any digital asset that represents a non-digital asset security or 
commodity otherwise reportable on Form 1099-B under the reporting rules 
for sales of securities and commodities or is otherwise backed by 
collateral that represents such non-digital asset. One comment 
suggested applying the reporting rules for sales of securities and 
commodities to any digital asset, the blockchain ledger entry for which 
solely serves as a record of legal ownership of an underlying security 
or commodity that is not itself a digital asset. Another comment 
recommended applying the reporting rules for sales of securities and 
commodities to dual classification assets that are digitally native to 
a blockchain that is used simply to record ownership changes. 
Recognizing that identifying digital assets that represent securities 
and commodities that are not themselves digital assets could be 
burdensome, one comment recommended that when information is not 
available for brokers to make these determinations about dual 
classification assets, the broker should report the transaction as a 
sale of a digital asset. Another comment requested that the final 
regulations include a safe harbor rule providing that no penalties will 
be imposed on a broker who consistently and accurately reports the sale 
of dual classification assets under either the reporting rules for 
sales of securities and commodities (on Form 1099-B) or for sales of 
digital assets (on Form 1099-DA) based on the broker's reasonable 
determination that the chosen reporting method is correct because it 
may be administratively difficult for brokers to examine every dual 
classification asset to make a determination based on the nature of the 
asset.
    Numerous comments also focused on the circumstances that may give 
rise to securities and commodities being treated as digital assets. For 
example, one comment indicated that the proposed coordination rule 
would inadvertently capture transactions involving securities and 
commodities for which brokers use distributed ledger technology, shared 
ledgers, or similar technology merely to facilitate the processing, 
clearing, or settlement of orders between well-regulated brokers and 
other financial institutions. To address this concern, several comments 
recommended that the reporting rules for sales of securities and 
commodities apply only to digital assets that are more appropriately 
categorized within a traditional asset class (for example, as a 
security with an effective registration statement filed under the 
Securities Act of 1933) and that are issued, stored, or transferred 
through a distributed ledger that is a regulated clearing agency system 
in compliance with all applicable Federal and State securities laws. 
Another comment recommended addressing this problem by making the 
information required to be reported for digital asset sales (on Form 
1099-DA) not more burdensome than that for securities and commodities 
(on Form 1099-B). Another comment requested that, if brokers are 
required to report these dual classification assets on the Form 1099-
DA, the final regulations allow brokers to optionally make appropriate 
basis adjustments for dual classification assets that are securities. 
This comment also recommended revising the rules in Sec.  1.6045-
1(d)(2)(iv)(B) of the pre-2024 final regulations to permit (but not 
require) brokers to take into account information about a covered 
security other than what is furnished on a transfer statement or issuer 
statement and to provide penalty relief under certain circumstances to 
brokers that take such information into account. Finally, one comment 
recommended providing written clarity that even though wash sale 
adjustment rules do not apply to digital assets, they still apply to 
tokenized securities such as, for example, 1940 Act Funds.
    The Treasury Department and the IRS have concluded that it is 
generally not appropriate to permit optional approaches to reporting 
dual classification assets because the underlying reporting 
requirements for securities and commodities are significantly different 
from those for digital assets due, in large part, to industry 
differences and the timing of when the reporting rules were first 
implemented. Although the proposed requirement for brokers to report 
transaction identification numbers and digital asset addresses has been

[[Page 56487]]

removed in these final regulations (see Part I.D. of this Summary of 
Comments and Explanation of Revisions), there are several remaining 
differences in the basis reporting requirements for securities and 
commodities as compared to digital assets. For example, unlike brokers 
effecting sales of digital assets, brokers effecting sales of 
commodities are not required to report the customer's adjusted basis 
for those commodities because commodities are not included in the 
definition of covered securities. Additionally, brokers effecting sales 
of stock, other than stock for which the average basis method is 
available under Sec.  1.1012-1(e), must generally report the adjusted 
basis of these shares to the extent they were acquired for cash in an 
account on or after January 1, 2011, and generally must report the 
adjusted basis on shares of stock for which the average basis method is 
available to the extent those shares were acquired for cash in an 
account on or after January 1, 2012. These brokers of stock that are 
covered securities under final Sec.  1.6045-1(a)(15)(i)(A) or (B) must 
also send transfer statements to other brokers under section 6045A when 
their customers move that stock to another broker.
    In contrast, as discussed in Part I.F. of this Summary of Comments 
and Explanation of Revisions, under the final regulations, brokers 
effecting sales of digital assets that are covered securities under 
final Sec.  1.6045-1(a)(15)(i)(J) are required to report the adjusted 
basis of those digital assets only if they were acquired for cash, 
stored-value cards, different digital assets, or certain other property 
or services in the customer's account by such brokers providing 
custodial services for such digital assets on or after January 1, 2026. 
Additionally, these brokers are not currently required to send transfer 
statements to other brokers under section 6045A when their customers 
transfer digital assets that are specified securities to another 
broker. Indeed, the details of how section 6045A reporting will apply 
to brokers of digital assets will not be addressed until a future 
notice of proposed rulemaking. Accordingly, whether the sale of a dual 
classification asset is treated as a sale of a security or commodity 
under final Sec.  1.6045-1(a)(9)(i) or as a sale of a digital asset 
under final Sec.  1.6045-1(a)(9)(ii) has consequences beyond the 
particular form that the broker must use when filing returns with 
respect to those sales.
    Given these different basis reporting requirements and transfer 
statement obligations under section 6045A, the Treasury Department and 
the IRS have determined that, except in the case of certain exceptions 
described in the next several paragraphs, it is not appropriate to 
treat dual classification assets as subject only to the pre-2024 final 
regulations (that is, required to report the transactions under final 
Sec.  1.6045-1(d)(2)(i)(A) as sales described in final Sec.  1.6045-
1(a)(9)(i)) for securities and commodities if those assets can be 
traded on public blockchains and custodied by customers. Accordingly, 
final Sec.  1.6045-1(c)(8)(i) provides that brokers must generally 
treat sales of dual classification assets only as a sale of a digital 
asset under final Sec.  1.6045-1(a)(9)(ii) and only as a sale of a 
specified security that is a digital asset under final Sec.  1.6045-
1(a)(14)(v) or (vi). As such, the broker must apply the digital asset 
reporting rules for the information required to be reported for such 
sale and file the return on Form 1099-DA. Further, as discussed in Part 
IV. of this Summary of Comments and Explanation of Revisions, brokers 
are not required to send transfer statements under final Sec.  1.6045A-
1(a)(1)(vi) with respect to the transfer of these dual classification 
assets that are reportable as digital assets. Additionally, final Sec.  
1.6045-1(d)(2)(iv)(B) does not permit brokers to take into account any 
other information, including information received from a customer or 
third party, with respect to covered securities that are digital 
assets, although brokers may take customer-provided acquisition 
information into account for purposes of identifying which units are 
sold, disposed of, or transferred under final Sec.  1.6045-
1(d)(2)(ii)(A).
    However, to accommodate the comments relating to the application of 
the various basis adjustment rules, including the wash sale adjustment 
rules, and other important information applicable to dual 
classification assets that represent an interest in a traditional 
security, final Sec.  1.6045-1(c)(8)(i)(D) requires the broker to 
report certain additional information with respect to any dual 
classification asset that is a tokenized security. For this purpose, 
any dual classification asset that provides the holder with an interest 
in another asset that is a security under final Sec.  1.6045-1(a)(3), 
other than a security that is also a digital asset, is a tokenized 
security. This description is intended to apply when the digital asset 
represents an interest in a separate, traditional, financial asset that 
is reportable as a security. For example, a digital asset that 
represents an ownership interest in a traditional share of stock in a 
1940 Act Fund or another corporation would be a tokenized security. A 
dual classification asset that is an interest in a trust or partnership 
that holds assets that are securities under final Sec.  1.6045-1(a)(3), 
other than securities that are also digital assets, also would be a 
tokenized security.
    In addition, an asset the offer and sale of which was registered 
with the U.S. Securities and Exchange Commission (SEC) (other than an 
asset treated as a security for securities law purposes solely as an 
investment contract) is also treated as a tokenized security. This part 
of the description of tokenized securities is intended to refer to a 
digital asset that is also a security within the meaning of final Sec.  
1.6045-1(a)(3) but does not represent an interest in a separate 
financial asset. A bond that exists solely in tokenized form would be 
an example of such a tokenized security, if the bond was issued 
pursuant to a registration statement approved by the SEC. The reference 
to whether an asset's offer and sale was registered with the SEC, other 
than solely as an investment contract, is intended to limit the scope 
of the term tokenized security to digital forms of traditional 
financial assets, and not to capture assets native to the digital asset 
ecosystem. The reference to registration of an asset's offer and sale 
with the SEC is not intended to imply that such assets are necessarily 
securities for Federal income tax purposes or for purposes of final 
Sec.  1.6045-1(a)(3). Additionally, no inference is intended as to how 
the Federal securities laws apply to sales of digital assets within the 
meaning of final Sec.  1.6045-1(a)(19), as the interpretation or 
applicability of those laws are outside the scope of these final 
regulations.
    For the avoidance of doubt, final Sec.  1.6045-1(c)(8)(i)(D) 
provides that a qualifying stablecoin is not treated as a tokenized 
security for purposes of these special rules. For sales of tokenized 
securities, final Sec.  1.6045-1(c)(8)(i)(D) provides that the broker 
must report additional information required by final Sec.  1.6045-
1(d)(2)(i)(B)(6), generally relating to gross proceeds. Final Sec.  
1.6045-1(d)(2)(i)(B)(6) requires that the broker report the Committee 
on Uniform Security Identification Procedures (CUSIP) number of the 
security sold, any information related to options required under final 
Sec.  1.6045-1(m), any information related to debt instruments under 
final Sec.  1.6045-1(n), and any other information required by the form 
or instructions. In addition, final Sec.  1.6045-1(c)(8)(i)(D) provides 
that the broker must report additional information required by final 
Sec.  1.6045-1(d)(2)(i)(D)(4) (relating to reporting for basis and 
holding period) for sales of

[[Page 56488]]

tokenized securities, except that the broker is not required to report 
such information for a tokenized security that is an interest in 
another asset that is a security under final Sec.  1.6045-1(a)(3), 
other than a security that is also a digital asset, unless the 
tokenized security is also a specified security under final Sec.  
1.6045-1(a)(14)(i), (ii), (iii), or (iv). Accordingly, because a trust 
or partnership interest is not a specified security within the meaning 
of those paragraphs, a broker is not required to report basis 
information with respect to a tokenized security that is an interest in 
a trust or partnership that holds assets that are securities under 
final Sec.  1.6045-1(a)(3), other than securities that are also digital 
assets.
    Final Sec.  1.6045-1(d)(2)(i)(D)(4) provides specific rules for 
reporting basis and related information for tokenized securities. It 
cross-references the wash sale rules in final Sec.  1.6045-
1(d)(6)(iii)(A)(2) and (d)(7)(ii)(A)(2), which rules have also been 
revised to specifically apply to tokenized securities. These wash sale 
reporting rules apply only to assets treated as stock or securities 
within the meaning of section 1091 of the Code. They apply regardless 
of whether the taxpayer buys or sells a tokenized security. For 
example, if a taxpayer sells a tokenized security (or the underlying 
traditional stock or security) at a loss and buys the same tokenized 
security (or the underlying traditional stock or security) within the 
30-day period before or after the sale, and the other conditions to the 
wash sale reporting rules are satisfied, the broker would be required 
to take the wash sale reporting rules into account in reporting the 
loss and the basis of the newly acquired asset. Final Sec.  1.6045-
1(d)(2)(i)(D)(4) also cross-references the average basis rules in final 
Sec.  1.6045-1(d)(6)(v), which have been revised to apply to any stock 
that is also a tokenized security, and the rules related to options and 
debt instruments in final Sec.  1.6045-1(m) and (n). Accordingly, the 
information reportable for tokenized securities on Form 1099-DA should 
be similar to the information reportable for traditional securities on 
Form 1099-B, except that under final Sec.  1.6045A-1(a)(1)(vi), no 
transfer statement is required with respect to the transfer of 
tokenized securities, though penalty relief is provided if the broker 
voluntarily chooses to provide a transfer statement with respect to 
tokenized securities. Additionally, until the Treasury Department and 
the IRS determine which third party information is sufficiently 
reliable, final Sec.  1.6045-1(d)(2)(iv)(B) provides that brokers are 
not permitted to take into account information about covered securities 
that are digital assets other than what is furnished on a transfer 
statement or issuer statement, although brokers may take customer-
provided acquisition information into account for purposes of 
identifying which units are sold, disposed of, or transferred under 
final Sec.  1.6045-1(d)(2)(ii)(A). The Treasury Department and the IRS 
intend to provide additional guidance on how to report tokenized 
securities in the instructions to Form 1099-DA.
    Final Sec.  1.6045-1(d)(2)(i)(D)(3) requires that, for purposes of 
determining the basis and holding period information required in final 
Sec.  1.6045-1(d)(2)(i)(D)(1) and (2), the rules related to options in 
final Sec.  1.6045-1(m) apply, both with respect to the option and also 
with respect to any asset delivered in settlement of an option. 
Accordingly, an option that is itself a digital asset, on an asset that 
is also a digital asset, is subject to the same reporting rules as 
other options.
    Additionally, in response to the comments described above, the 
Treasury Department and the IRS have determined that the final 
regulations should include three exceptions to the rules requiring that 
dual classification assets be reported as digital assets, for the 
reasons described herein. Those exceptions apply to dual classification 
assets cleared or settled on a limited-access regulated network, to 
dual classification assets that are section 1256 contracts, and to dual 
classification assets that are shares in money market funds.
    First, the Treasury Department and the IRS agree that it is not 
appropriate to disrupt reporting on dual classification assets that are 
treated as digital assets solely because distributed ledger technology 
is used to facilitate the processing, clearing, or settlement of orders 
between regulated financial entities. Accordingly, in response to the 
comments submitted, final Sec.  1.6045-1(c)(8)(iii) adds a new 
exception to the coordination rule for any sale of a dual 
classification asset that is a digital asset solely because the sale of 
such asset is cleared or settled on a limited-access regulated network. 
Under this exception, such a sale will be treated as a sale described 
in final Sec.  1.6045-1(a)(9)(i) (reportable on the Form 1099-B) and 
not as a digital asset described in final Sec.  1.6045-1(a)(9)(ii) 
(reportable on the Form 1099-DA). Additionally, such a sale must be 
treated as a sale of a specified security under final Sec.  1.6045-
1(a)(14)(i), (ii), (iii), or (iv) to the extent applicable, and not as 
a sale of a specified security that is a digital asset under final 
Sec.  1.6045-1(a)(14)(v) or (vi). For all other purposes of this 
section including transfers, a dual classification asset that is a 
digital asset solely because it is cleared or settled on a limited-
access regulated network is not treated as a digital asset and is not 
reportable as a digital asset. Accordingly, depending on the type of 
the asset, the asset may be a covered security under final Sec.  
1.6045-1(a)(15)(i)(A) through (G) (if purchased in an account on or 
after January 1, 2011 through 2016, as applicable) rather than a 
digital asset covered security under final Sec.  1.6045-1(a)(15)(i)(H), 
(J) or (K) (if purchased in an account on or after January 1, 2026). 
Thus, brokers are required under section 6045A to provide transfer 
statements with respect to transfers of these dual classification 
assets, and the rules set forth in final Sec.  1.6045-1(d)(2)(iv)(A) 
and (B), regarding the broker's obligation to take into account the 
information reported on those statements and certain other customer 
provided information also apply.
    Final Sec.  1.6045-1(c)(8)(iii)(B) sets forth three different types 
of limited-access regulated network for which this rule applies. The 
first type of limited-access network is described as a 
cryptographically secured distributed ledger or network of 
interoperable distributed ledgers that provide clearance or settlement 
services and provide access only to a group of persons made up of 
registered dealers in securities or commodities, banks and similar 
financial institutions, common trust funds, or futures commission 
merchants. Final Sec.  1.6045-1(c)(8)(iii)(B)(1)(i). As used in this 
rule, an interoperable distributed ledger means a group of distributed 
ledgers that permit digital assets to travel from one permissioned 
distributed ledger (for example, at one securities broker) to another 
permissioned distributed ledger (at another securities broker). In such 
cases, while the clearance or settlement of the dual classification 
asset is on a network of permissioned distributed ledgers, it is 
anticipated that the asset will remain in a traditional securities or 
commodities account from the perspective of an investor in the asset 
and so can readily be reported as a security or commodity under 
existing rules.
    The second type of limited-access network is also described as a 
cryptographically secured distributed ledger or network of 
interoperable distributed ledgers that provide clearance or settlement 
services, but this type of limited-access network is distinguishable 
from the first type

[[Page 56489]]

because it is provided by an entity that has registered with the SEC as 
a clearing agency, or has received an exemption order from the SEC as a 
clearing agency, under section 17A of the Securities Exchange Act of 
1934. Additionally, the entity must provide access to the network 
exclusively to network participants, who are not required to be 
registered dealers in securities or commodities, banks and similar 
financial institutions, common trust funds, or futures commission 
merchants, although it is anticipated that participants typically will 
be securities brokers and other regulated financial institutions. Final 
Sec.  1.6045-1(c)(8)(iii)(B)(1)(ii). For example, dual classification 
assets cleared and settled through a central clearing agency that 
clears and settles high volumes of equity and debt transactions on a 
daily basis through automated systems for participants that are 
financial market participants may be reportable as securities under 
this exception if the clearance or settlement takes place on a 
cryptographically secured distributed ledger or network of 
interoperable distributed ledgers.
    Finally, the third type of limited-access regulated network is a 
cryptographically secured distributed ledger controlled by a single 
person that is a registered dealer in securities or commodities, a 
futures commission merchant, a bank or similar financial institution, a 
real estate investment trust, a common trust fund, or a 1940 Act Fund, 
that permits the ledger to be used solely by itself and its affiliates 
(and not to any customers or investors) to clear or settle sales of 
assets. Final Sec.  1.6045-1(c)(8)(iii)(B)(2). As with the other types 
of limited-access regulated network, it is anticipated that from an 
investor perspective the assets will remain in a traditional securities 
or commodities account.
    This exception in final Sec.  1.6045-1(c)(8)(iii) is limited to 
dual classification assets that are digital assets solely because the 
sale of such dual classification asset is cleared or settled on a 
limited-access regulated network. Accordingly, a digital asset commonly 
referred to as a cryptocurrency that fits within the definition of 
commodity under final Sec.  1.6045-1(a)(5)(i) because the trading of 
regulated futures contracts in that digital asset have been approved by 
or certified to the CFTC will not be eligible for this rule because the 
cryptocurrency meets the definition of a digital asset for reasons 
other than because it is cleared or settled on a limited-access 
regulated network. Given the requirement that the sole reason that the 
security or commodity is a digital asset is that transactions involving 
those assets are cleared or settled on a limited-access regulated 
network, it is anticipated that brokers will have sufficient 
information to be able to determine how to report the assets in 
question under these revised rules. Accordingly, the request for a safe 
harbor that would allow brokers to avoid penalties if they consistently 
and accurately report sales of dual classification assets under either 
final Sec.  1.6045-1(d)(2)(i)(A) (on Form 1099-B) or final Sec.  
1.6045-1(d)(2)(i)(B) and (D) as a digital asset (on Form 1099-DA) is 
not adopted as it is unnecessary.
    The second exception to the general dual classification asset 
coordination rule in final Sec.  1.6045-1(c)(8)(i) treating such assets 
as digital assets was included in the proposed regulations. Proposed 
Sec.  1.6045-1(c)(8)(iii) provided that digital asset options or other 
contracts that are also section 1256 contracts should be reported under 
the rules set forth in Sec.  1.6045-1(c)(5) of the pre-2024 final 
regulations for contracts that are section 1256 contracts and not under 
the proposed rules for digital assets. The final regulations retain 
this exception and redesignate it as final Sec.  1.6045-1(c)(8)(ii). 
Accordingly, under this rule, for the disposition of a contract that is 
a section 1256 contract, reporting is required under Sec.  1.6045-
1(c)(5) of the pre-2024 final regulations regardless of whether the 
contract disposed of is a non-digital asset contract or a digital asset 
contract or whether the contract was issued with respect to digital 
asset or non-digital asset underlying property. One comment raised a 
concern that the proposed rule did not make it clear that information 
reporting for a section 1256 contract subject to information reporting 
under section 6045 should be reported on a Form 1099-B regardless of 
whether the contract is or is not a digital asset. The final 
regulations respond to this concern by providing additional 
clarification to the text of Sec.  1.6045-1(c)(5)(i) of the pre-2024 
final regulations to make it clear that reporting for all section 1256 
contracts should be on Form 1099-B. Accordingly, information reporting 
for section 1256 contracts in digital asset form will be on Form 1099-B 
and not on Form 1099-DA.
    The third exception to the general dual classification asset 
coordination rule in final Sec.  1.6045-1(c)(8)(i) treating such assets 
as digital assets applies to interests in money market funds. Final 
Sec.  1.6045-1(c)(8)(iv) provides that brokers must treat sales of any 
dual classification asset that is a share in a regulated investment 
company that is permitted to hold itself out to investors as a money 
market fund under Rule 2a-7 under the Investment Company Act of 1940 
(17 CFR 270.2a-7) only as a sale under final Sec.  1.6045-1(a)(9)(i) 
and not as a digital asset sale under final Sec.  1.6045-1(a)(9)(ii). 
Accordingly, under Sec.  1.6045-1(c)(3)(vi) of the pre-2024 final 
regulations, no return of information is required for these shares. 
This exception is included in the final regulations because the reasons 
for not requiring reporting of money market shares in traditional form 
are also applicable for money market shares in digital asset form. 
Notably, in either case, the disposition of money market shares by non-
exempt recipients like individuals generally will give rise to no, or 
de minimis, gain or loss. Moreover, money market funds are a special 
type of regulated investment company that provide a highly regulated 
product widely used as a surrogate for cash.
    In response to a number of comments, the Treasury Department and 
the IRS considered whether an exception should apply more broadly to 
tokenized shares of other 1940 Act Funds. Based on publicly available 
information, the Treasury Department and the IRS are aware that some 
1940 Act Funds permit their shares to be bought and sold in secondary 
market transactions on a cryptographically secured distributed ledger 
on a direct peer-to-peer basis--that is, an investor may transfer the 
shares directly to another investor--and that those shares may be 
purchased in exchange for other digital assets. The Treasury Department 
and the IRS have determined that these transactions go beyond the scope 
of the pre-2024 final regulations, which are applicable to sales of 
securities for cash, and that such assets therefore should be reported 
as digital assets. However, as described in the discussion of tokenized 
securities above, the information reportable by brokers to investors 
with respect to such shares of 1940 Act Funds, including the 
availability of average basis reporting, generally should not change, 
although the information will be reported on Form 1099-DA rather than 
Form 1099-B.
    Finally, the proposed regulations would have included one 
additional exception to the general coordination rule that would have 
treated dual classification assets as digital assets. Specifically, 
proposed Sec.  1.6045-1(c)(8)(ii) provided that a digital asset that 
also constitutes reportable real estate would be treated as reportable 
real estate to ensure that real estate reporting persons would only 
report transactions involving these sales as sales that are subject to 
reporting under

[[Page 56490]]

Sec.  1.6045-4(a) of the pre-2024 final regulations and not as sales of 
digital assets. One comment noted that currently, there is no State law 
that permits legal title to real estate to be held via a digital asset 
token. Instead, this comment explained that to transfer real estate 
using digital assets, the digital asset token must hold an interest in 
a legal entity (typically either a limited liability company (LLC) or a 
partnership) that in turn owns the real estate. Thus, according to this 
comment, each token holder owns an ownership interest in an entity, not 
a claim of ownership to real estate. This comment also noted that, even 
if a legal entity was not required to be formed to hold title to real 
estate, these digital asset interests could potentially constitute an 
unincorporated association of real estate co-owners meeting the 
definition of a partnership under Sec.  301.7701-3(b)(1)(i). Either 
way, this comment asserted, reporting on the sale of these interests is 
not appropriate as a sale of real estate under Sec.  1.6045-4. No 
comments received suggested that blockchain deeds do exist. The 
Treasury Department and the IRS are not aware of any current or 
proposed State law that authorizes legal title to real estate to be 
held in a digital asset token. Therefore, to address this comment, the 
final regulations remove this coordination rule for digital assets that 
constitute reportable real estate. Accordingly, brokers should report 
on sales of these interests as sales of digital assets under Sec.  
1.6045-1(a)(9)(ii) (unless the sales are eligible for the special rule 
under Sec.  1.6045-1(c)(8)(iii) for securities and commodities cleared 
or settled on a limited-access regulated network) and not as sales of 
real estate under Sec.  1.6045-4. The Treasury Department and the IRS 
will continue to track developments in this area for potential future 
guidance.
b. Other Coordination Rule Issues
    The proposed regulations characterized assets as either digital 
assets or securities based on the nature of the rights held by the 
customer. Example 27 in proposed Sec.  1.6045-1(b)(27) demonstrated 
that rule as applied to a fund formed to invest in digital assets, in 
which the units of the fund were not recorded using cryptographically 
secured distributed ledger technology. The Example concluded that 
investments in the units of this fund are not digital assets because 
transactions involving these fund units are not secured using 
cryptography and are not digitally recorded on a ledger, such as a 
blockchain. One comment requested that the final regulations clarify 
that if a unit in a trust is not itself traded on a distributed ledger, 
the unit in the trust should not be treated as a digital asset merely 
because the assets held by the trust are digital assets. Generally, the 
holder of an interest in a trust described in Sec.  301.7701-4(c) (a 
fixed investment trust or FIT) is treated as directly holding its pro 
rata share of each asset held by the FIT. This comment raised the 
concern that this normal look through treatment could require a broker 
to report transactions in FIT units as digital assets on a Form 1099-DA 
even if the FIT units are not themselves digital assets. The final 
regulations amend the language of proposed Sec.  1.6045-1(b)(27) 
(redesignated in these final regulations as Example 20 in Sec.  1.6045-
1(b)(20)) to clarify that for purposes of section 6045, if a FIT unit 
is not itself tradable on a cryptographically secured distributed 
ledger, the broker is not required to look through to the FIT's assets 
and should report the sale of a FIT unit under Sec.  1.6045-
1(d)(2)(i)(A) on Form 1099-B. The Example also provides that this 
answer would be the same if the fund is organized as a C corporation or 
partnership.
    The comment also requested expansion of Sec.  1.6045-1(d)(9) of the 
pre-2024 final regulations, which eliminates the need for widely held 
fixed investment trusts (WHFITs) to provide duplicate reporting for 
sales of securities, so that the rule would also apply to WHFIT sales 
of digital assets. The Treasury Department and the IRS agree that this 
suggested change is appropriate and have revised the rule in final 
Sec.  1.6045-1(d)(9) accordingly. As a result, if a WHFIT sells a 
digital asset, and interests in the WHFIT are held through a securities 
broker, the WHFIT would report the sale information to the broker 
pursuant to Sec.  1.671-5 and the broker would in turn send a Form 
1099-DA (the appropriate Form 1099) to the IRS and a copy thereof to 
any trust interest holder that is not an exempt recipient.
    Under the proposed regulations, a notional principal contract (NPC) 
that is executed in digital asset form is a digital asset. See proposed 
Sec.  1.6045-1(a)(19). One comment noted that there is no broker 
reporting under the pre-2024 final regulations under section 6045 for 
an NPC that is not a digital asset. As a result, the comment 
recommended that an NPC that is a digital asset be excluded from 
reporting under section 6045. After consideration of this 
recommendation, the Treasury Department and the IRS concluded that 
certain payments related to NPCs in digital asset form should be 
reportable as digital asset transactions and therefore decline to adopt 
the recommendation in the final regulations. However, taking into 
account that payments on NPCs are generally not reportable under 
section 6045 under the pre-2024 final regulations, the Treasury 
Department and the IRS intend to continue to study the issues related 
to NPC payments. Therefore, Notice 2024-57, which is being issued 
contemporaneously with these final regulations that provides that 
brokers are not required to report on certain NPCs in digital form, and 
that the IRS will not impose penalties under section 6721 or section 
6722 for failure to file correct information returns or failure to 
furnish correct payee statements with respect to these transactions 
until further guidance is issued. See Part I.C.2. of this Summary of 
Comments and Explanation of Revisions for a further discussion of 
Notice 2024-57.
    One comment requested that the final regulations provide examples 
to address the proper partnership reporting obligations with respect to 
digital asset interests that constitute an unincorporated association 
meeting the definition of a partnership. The final regulations do not 
adopt this comment as it is outside the scope of these regulations. 
Another comment requested that the final regulations exempt sales of 
tokenized partnerships investing in real estate from reporting under 
section 6045 altogether to avoid duplicative reporting because these 
partnerships are already subject to reporting such sales under the 
partnership rules on Form 1065, U.S. Return of Partnership Income, 
Schedule K-1, and because accountants and tax advisors that file 
Schedules K-1 have more accurate information than brokers regarding the 
proceeds and basis information partners need for preparing their 
Federal income tax returns. The Treasury Department and the IRS have 
concluded that partnership interests that invest in real estate should 
not be treated any differently than partnership interests that invest 
in other assets. Accordingly, no exception from reporting is made for 
digital assets representing partnership interests that invest in real 
estate.
B. Definition of Brokers Required to Report
1. Custodial Digital Asset Brokers and Non-Custodial Digital Asset 
Brokers
a. Custodial Industry Participants
    Prior to the enactment of the Infrastructure Act, section 
6045(c)(1)

[[Page 56491]]

defined a broker to include a dealer, a barter exchange, and any other 
person who (for a consideration) regularly acts as a middleman with 
respect to property or services. The pre-2024 final regulations under 
section 6045 applied the ``middleman'' portion of this definition to 
treat as a broker effecting a sale a person that as part of the 
ordinary course of a trade or business acts as either (1) an agent with 
respect to a sale, if the nature of the agency is such that the agent 
ordinarily would know the gross proceeds of the sale, or (2) as a 
principal in the sale. See Sec.  1.6045-1(a)(1), and (a)(10)(i) and 
(ii) of the pre-2024 final regulations (redesignated in these final 
regs as final Sec.  1.6045-1(a)(1) and (a)(10)(i)(A) and (C), 
respectively). Under these rules, certain digital asset industry 
participants that take possession of a customer's digital assets, such 
as operators of custodial digital asset trading platforms and certain 
digital asset hosted wallet providers, as well as persons that interact 
as principals and counterparties to transactions with their customers, 
such as owners of digital asset kiosks and certain issuers of digital 
assets who regularly offer to redeem those digital assets, would also 
generally be considered brokers with respect to digital asset sales.
    These industry participants that act as principals and 
counterparties or as agents to effect digital asset transactions on 
behalf of their customers (custodial industry participants) are 
generally financial institutions, such as money services businesses 
(MSBs), under the Bank Secrecy Act (31 U.S.C. 5311 et seq.). Fin-2019-
G001, ``Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies,'' May 9, 2019 (2019 FinCEN 
Guidance). Anti-money laundering (AML) obligations apply to financial 
institutions, such as MSBs as defined by the Financial Crimes 
Enforcement Network (FinCEN), futures commission merchants and 
introducing brokers obligated to register with the CFTC, and broker-
dealers and mutual funds obligated to register with the SEC. ``Leaders 
of CFTC, FinCEN, and SEC Issue Joint Statement on Activities Involving 
Digital Assets,'' October 11, 2019. For example, MSBs are required 
under regulations issued by the Financial Crimes Enforcement Network 
(FinCEN) of the Treasury Department to develop, implement, and maintain 
an effective AML program that is reasonably designed to prevent the MSB 
from being used to facilitate the financing of terrorist activities and 
money laundering. See 31 CFR part 1022.210(a). AML programs for MSBs 
generally include, among other things, policies, procedures, and 
internal controls reasonably designed to assure compliance with 
FinCEN's regulations, as well as a requirement to verify customer-
related information. MSBs are also required to register with, and make 
certain reports to FinCEN, and maintain certain records about 
transmittals of funds. See 31 CFR part 1022; 2019 FinCEN Guidance. 
Accordingly, operators of custodial digital asset trading platforms, 
digital asset hosted wallet providers, and digital asset kiosks have 
information about their customers and, in many cases, have already 
reported digital assets sales by these customers under either section 
6045 or 6050W. Consistent with the statutory and regulatory definitions 
of broker that existed prior to the Infrastructure Act as well as 
amended section 6045, the final regulations apply to operators of 
custodial digital asset trading platforms, digital asset hosted wallet 
providers, and digital asset kiosks.
    Numerous comments agreed that custodial digital asset trading 
platforms were appropriately treated as brokers under the proposed 
regulations, and several comments agreed that digital asset hosted 
wallet providers should also be treated as brokers. One comment 
requested that the final regulations exclude from the definition of a 
broker digital asset hosted wallet providers that do not have direct 
access to the information necessary to know the nature of the 
transactions processed or the identities of the parties to the 
transaction. The Treasury Department and the IRS do not agree that a 
specific exclusion from the definition of broker for digital asset 
hosted wallet providers is necessary or appropriate. The pre-2024 final 
regulations defined broker generally to mean any person that, in the 
ordinary course of a trade or business during the calendar year, stands 
ready to effect sales to be made by others. The definition of effect 
under the pre-2024 final regulations treats agents as effecting sales 
only if the nature of the agency is such that the agent ordinarily 
would know the gross proceeds of the sale. Accordingly, a digital asset 
hosted wallet provider that acts as an agent for its customer would be 
subject to reporting under section 6045 with respect to its customer's 
sale of digital assets only to the extent that the digital asset hosted 
wallet provider ordinarily would know the gross proceeds from that 
sale.
    Another comment requested that the regulations make clear that 
acting as a broker with respect to one customer does not mean that the 
person has a reporting obligation with respect to all customers. This 
requested guidance relates to Sec.  1.6045-1(c)(2) of the pre-2024 
final regulations, which was not amended. This provision makes it clear 
that a broker is only required to make a return of information for 
sales that the broker effects for a customer (provided the broker 
effects that sale in the ordinary course of a trade or business to 
effect sales made by others). Accordingly, the final regulations do not 
adopt this comment because the change it requests is unnecessary. 
Another comment requested that the regulations be clarified to state 
that the determination of whether a person is a broker is determined on 
an annual basis and being a broker in one year does not mean that the 
person is a broker in another year. This requested guidance relates to 
a portion of Sec.  1.6045-1(a)(1) from the pre-2024 final regulations 
that was not proposed to be amended and would apply broadly to all 
brokers under sections 6045 and 6045A, not just those who effectuate 
sales of digital assets. Accordingly, the final regulations do not 
adopt this comment because it is outside the scope of these 
regulations.
b. Non-Custodial Industry Participants
    Unlike custodial industry participants, which generally act as 
principals or as agents to effect digital asset transactions on behalf 
of their customers, industry participants that do not take possession 
of a customer's digital assets (non-custodial industry participants), 
\2\ such as operators of non-custodial digital asset trading platforms 
(sometimes referred to as decentralized exchanges or DeFi) and unhosted 
digital asset wallet providers, normally do not act as custodial agents 
or principals in effecting their customers' transactions. Instead, 
these non-custodial industry participants offer other services, such as 
providing interface services enabling their customers to interact with 
trading protocols. To resolve any uncertainty over whether these non-
custodial digital asset service providers are brokers, section 80603(a) 
of the Infrastructure Act amended the definition of broker under 
section 6045 to add ``any person who, for consideration, is responsible 
for regularly providing any service effectuating transfers of digital 
assets on

[[Page 56492]]

behalf of another person'' (the new digital asset middleman rule). 167 
Cong. Rec. S5702, 5703. To implement this new digital asset middleman 
rule, the proposed regulations provided that, subject to certain 
exclusions, any person that provides facilitative services that 
effectuate sales of digital assets by customers is a broker, provided 
the nature of the person's service arrangement with customers is such 
that the person ordinarily would know or be in a position to know the 
identity of the party that makes the sale and the nature of the 
transaction potentially giving rise to gross proceeds. Proposed Sec.  
1.6045-1(a)(21)(iii)(A) provided that a facilitative service includes 
the provision of a service that directly or indirectly effectuates a 
sale of digital assets, such as providing a party in the sale with 
access to an automatically executing contract or protocol, providing 
access to digital asset trading platforms, providing an automated 
market maker system, providing order matching services, providing 
market making functions, providing services to discover the most 
competitive buy and sell prices, or providing escrow or escrow-like 
services to ensure both parties to an exchange act in accordance with 
their obligations. The proposed regulations also carved out certain 
services from this definition, such as certain distributed ledger 
validation services--whether through proof-of-work, proof-of-stake, or 
any other similar consensus mechanism--without providing other 
functions or services, as well as certain sales of hardware, and 
certain licensing of software, where the sole function is to permit 
persons to control private keys which are used for accessing digital 
assets on a distributed ledger. To ensure that existing brokers of 
property already subject to broker reporting would be considered to 
effect sales of digital assets when they accept, or otherwise process, 
certain digital asset payments and to ensure that digital asset brokers 
would be considered to effect sales of digital assets received as 
payment for digital asset transaction costs, proposed Sec.  1.6045-
1(a)(21)(iii)(B) provided that a facilitative service also includes the 
services performed by such brokers in accepting or processing those 
digital asset payments.
---------------------------------------------------------------------------

    \2\ Some digital asset trading platforms that do not claim to 
offer custodial services may be able to exercise effective control 
over a user's digital assets. See Treasury Department, Illicit 
Finance Risk Assessment of Decentralized Finance (April 2023), 
https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf. No inference is intended as to the meaning or 
significance of custody under any other legal regime, including the 
Bank Secrecy Act and its implementing regulations, which are outside 
the scope of these regulations.
---------------------------------------------------------------------------

    The Treasury Department and the IRS received numerous comments 
directed at these new digital asset middleman rules. One comment 
recommended the adoption of an IRS-approved central entity service 
provider to the digital asset marketplace that could gather customer 
tax identification information and receive, aggregate, and reconcile 
information from various custodial and non-custodial industry 
participants. Another comment recommended allowing the use of an 
optional tax attestation token to facilitate tax compliance by non-
custodial industry participants. Many other comments recommended that 
non-custodial industry participants not be treated as brokers. Comments 
also expressed concerns that the proposed definitions of a facilitative 
service in proposed Sec.  1.6045-1(a)(21)(iii)(A) and position to know 
in proposed Sec.  1.6045-1(a)(21)(ii) are overbroad and would, 
consequently, result in duplicative reporting of the same transactions. 
Numerous comments said the broad definition of a broker would stifle 
American innovation and drive the digital asset industry to move 
offshore. Additionally, many of the comments indicated that certain 
non-custodial industry participants have not collected customer 
information under AML programs, and therefore do not have systems in 
place to comply with the proposed reporting by the applicability date 
for transactions on or after January 1, 2025.
    The Treasury Department and the IRS do not agree that non-custodial 
industry participants should not be treated as brokers. Prior to the 
Infrastructure Act, section 6045(c)(1) defined the term broker to 
include a dealer, a barter exchange, and any other person who (for a 
consideration) regularly acts as a middleman with respect to property 
or services. Section 80603(a) of the Infrastructure Act clarified the 
definition of broker under section 6045 to include any person who, for 
consideration, is responsible for regularly providing any service 
effectuating transfers of digital assets on behalf of another person. 
According to a report by the Joint Committee on Taxation published in 
the Congressional Record prior to the enactment of the Infrastructure 
Act, the change clarified prior law ``to resolve uncertainty over 
whether certain market participants are brokers.'' 167 Cong. Rec. 
S5702, 5703. However, the Treasury Department and the IRS would benefit 
from additional consideration of issues involving non-custodial 
industry participants. The Treasury Department and the IRS have 
determined that the issuance of these final regulations requiring 
custodial brokers and brokers acting as principals to report digital 
asset transactions should not be delayed until additional consideration 
of issues involving non-custodial industry participants is completed 
because custodial brokers and brokers acting as principals carry out a 
substantial majority of digital asset transactions. Clarifying 
information reporting for the substantial majority of digital asset 
transactions, consistent with the applicability dates set forth in the 
proposed regulations, will benefit both taxpayers, who can use the 
reported information to prepare their Federal income tax returns, and 
the IRS, which can focus its enforcement resources on taxpayers who are 
more likely to have underreported their income from digital asset 
transactions and custodial brokers and brokers acting as principals who 
may not be meeting their reporting obligations. Accordingly, the 
proposed new digital asset middleman rules that apply to non-custodial 
industry participants are not being finalized with these final 
regulations. The Treasury Department and the IRS continue to study this 
area and, after full consideration of all comments received, intend to 
expeditiously issue separate final regulations describing information 
reporting rules for non-custodial industry participants. Until this 
further regulatory guidance is issued, the final regulations reserve on 
the definition of position to know in final Sec.  1.6045-1(a)(21)(ii) 
and a portion of the facilitative service definition in final Sec.  
1.6045-1(a)(21)(iii)(A). Additionally, because comments were received 
addressing the breadth of the specific exclusions provided for certain 
validation services, certain sales of hardware, and certain licensing 
of software, the final regulations also reserve on these exclusions. 
The Treasury Department and the IRS recognize that persons that are 
solely engaged in the business of providing validation services without 
providing other functions or services, or persons that are solely 
engaged in the business of selling certain hardware, or licensing 
certain software, for which the sole function is to permit persons to 
control private keys which are used for accessing digital assets on a 
distributed ledger, are not digital asset brokers. Accordingly, 
notwithstanding reserving on the underlying rule to provide time to 
study the comments received, the final regulations retain the examples 
in final Sec.  1.6045-1(b)(2)(ix) and (x), which conclude that persons 
conducting these actions do not constitute brokers.
    The final regulations do not, however, reserve on the portion of 
the facilitative services definition in final Sec.  1.6045-
1(a)(21)(iii)(B), which was included to ensure that sales of digital 
assets conducted by certain persons other than non-custodial industry 
participants are treated as effected by a broker under

[[Page 56493]]

final Sec.  1.6045-1(a)(10). For example, proposed Sec.  1.6045-
1(a)(21)(iii)(B), which provided that a facilitative service includes 
the acceptance of digital assets by a broker in consideration for 
property reportable under proposed Sec.  1.6045-1(a)(9)(i) and for 
broker services, was retained and redesignated as final Sec.  1.6045-
1(a)(21)(iii)(B)(1) and (3), respectively. Persons that conduct these 
actions have complete knowledge about the underlying transaction 
because they are typically acting as the counterparty. Thus, knowledge 
is not identified as a specific element of the definition of 
facilitative services for these persons to be treated as conducting 
facilitative services. Proposed Sec.  1.6045-1(a)(21)(iii)(B) also 
provided that a facilitative service includes any service provided by a 
real estate reporting person with respect to a real estate transaction 
in which digital assets are paid by the buyer in full or partial 
consideration for the real estate. This rule has been retained with 
some modifications to the knowledge requirement which must be met 
before a real estate reporting person will be treated as conducting 
facilitative services. See Part I.B.4. of this Summary of Comments and 
Explanation of Revisions, for a discussion of the modified rule, now in 
final Sec.  1.6045-1(a)(21)(iii)(B)(2), with respect to treating real 
estate reporting persons as performing facilitative services and, 
thereby, as digital asset middlemen under the final regulations. 
Additionally, to ensure that a digital asset kiosk that does not act as 
an agent or dealer in a digital asset transaction will nonetheless be 
considered a digital asset middleman capable of effecting sales of 
digital assets under final Sec.  1.6045-1(a)(10)(i)(D), final Sec.  
1.6045-1(a)(21)(iii)(B)(5) provides that the acceptance of digital 
assets in return for cash, stored-value cards, or different digital 
assets by a physical electronic terminal or kiosk is a facilitative 
service. Like persons that accept digital assets in consideration for 
property reportable under proposed Sec.  1.6045-1(a)(9)(i) and for 
broker services, knowledge is not identified as a specific element of 
the definition of facilitative services for these kiosks to be treated 
as conducting facilitative services because these kiosks are typically 
acting as the counterparty in the digital asset sale transaction. 
Finally, as discussed in Part I.B.2. of this Summary of Comments and 
Explanation of Revisions, final Sec.  1.6045-1(a)(21)(iii)(B)(4) treats 
certain PDAPs that receive digital asset payments from one party 
(buyer) and pay those digital assets, cash, or different digital assets 
to a second party as performing facilitative services and, thereby, as 
digital asset middlemen under the final regulations.
    Taken together, these final regulations apply only to digital asset 
industry participants that take possession of the digital assets being 
sold by their customers, such as operators of custodial digital asset 
trading platforms, certain digital asset hosted wallet providers, 
certain PDAPs, and digital asset kiosks, as well as to certain real 
estate reporting persons that are already subject to the broker 
reporting rules. As a result, this preamble does not set forth nor 
discuss comments received relating to the application of the proposed 
regulations to non-custodial industry participants (other than persons 
that operate digital asset kiosks and process payments without taking 
custody thereof). The Treasury Department and the IRS will continue to 
consider comments received addressing non-custodial arrangements and 
plan to expeditiously publish separate final regulations addressing 
information reporting rules for non-custodial digital asset service 
providers after issuance of these final regulations.
2. Processors of Digital Asset Payments
    PDAPs enable persons (buyers) to make payments to second parties 
(typically merchants) using digital assets. In some cases, the buyer 
pays digital assets to the PDAP, and the PDAP in turn pays those 
digital assets, U.S. dollars, or different digital assets to the 
merchant. In other cases, the PDAP may not take custody of the digital 
assets, but instead may instruct or otherwise give assistance to the 
buyer to transfer the digital assets directly to the merchant. The PDAP 
may also have a relationship with the merchant specifically obligating 
the PDAP to process payments on behalf of the merchant.
a. The Proposed Regulations
    The proposed regulations used the term digital asset payment 
processors instead of PDAPs. To avoid confusion associated with the use 
of the acronym for digital asset payment processors, which may have a 
different meaning within the digital asset industry, and for ease in 
reading this preamble, this preamble solely uses the term PDAP, even 
when referencing the proposed regulations and comments made with 
respect to the proposed regulations.
    The proposed regulations treated PDAPs as brokers that effect sales 
of digital assets as agents for the buyer. Proposed Sec.  1.6045-
1(a)(22)(i)(A) defined a PDAP as a person who in the ordinary course of 
its business regularly stands ready to effect digital asset sales by 
facilitating payments from one party to a second party by receiving 
digital assets from the first party and exchanging them into different 
digital assets or cash paid to the second party, such as a merchant. In 
addition, recognizing that some payment recipients might be willing to 
receive payments facilitated by an intermediary in digital assets 
rather than cash in a circumstance in which the PDAP temporarily fixes 
the exchange rate on the digital asset payment that is transferred 
directly from a customer to that payment recipient, proposed Sec.  
1.6045-1(a)(22)(ii) treated the transfer of digital assets by a 
customer directly to a second person (such as a vendor of goods or 
services) pursuant to a processor agreement that provides for the 
temporary fixing of the exchange rate to be applied to the digital 
assets received by the second person as if the digital assets were 
transferred by the customer to the PDAP in exchange for different 
digital assets or cash paid to the second person.
    The proposed regulations also included in the definition of a PDAP 
certain payment settlement entities and certain entities that make 
payments to payment settlement entities that are potentially subject to 
reporting under section 6050W. Specifically, proposed Sec.  1.6045-
1(a)(22)(i)(B) provided that a PDAP includes a third party settlement 
organization (as defined in Sec.  1.6050W-1(c)(2)) that makes (or 
submits instructions to make) payments using one or more digital assets 
in settlement of reportable payment transactions as described in Sec.  
1.6050W-1(a)(2). Additionally, proposed Sec.  1.6045-1(a)(22)(i)(C) 
provided that the definition of a PDAP includes a payment card issuer 
that makes (or submits the instruction to make) payments in one or more 
digital assets to a merchant acquiring entity, as defined under Sec.  
1.6050W-1(b)(2), in a transaction that is associated with a reportable 
payment transaction under Sec.  1.6050W-1(a)(2) that is effected by the 
merchant acquiring bank.
    Proposed Sec.  1.6045-1(a)(9)(ii)(D) provided that a sale includes 
all these types of payments processed by PDAPs. Finally, proposed Sec.  
1.6045-1(a)(2)(ii)(A) provided that the customer in a PDAP transaction 
includes the person who transfers the digital assets or directs the 
transfer of the digital assets to the PDAP to make payment to the 
second person.

[[Page 56494]]

b. Definition of PDAP, PDAP Customer, and PDAP Sales
    Several comments stated that some PDAPs contract only with 
merchants to process and settle digital asset payments on the behalf of 
those merchants. That is, despite the buyer benefitting from the 
merchant's relationship with the PDAP, the buyer is not the customer of 
the PDAP in these transactions. Consequently, these comments warned, 
PDAPs are unable to leverage any customer relationship to collect 
personal identification information and other tax documentation--
including Form W-9, Request for Taxpayer Identification Number and 
Certification, or Form W-8BEN, Certificate of Foreign Status of 
Beneficial Owner for United States Tax Withholding and Reporting 
(Individuals)--from buyers. Another comment asserted that treating 
PDAPs as brokers conflicts with or expands the current FinCEN 
regulatory AML program requirements for regulated entities to perform 
due diligence on their customers. Several comments noted that this lack 
of customer relationship would exacerbate the privacy concerns of the 
buyers if PDAPs working for the merchant were required to collect tax 
documentation from buyers. Moreover, these comments raised the concern 
that collecting this documentation from buyers is even more challenging 
for one-time small retail purchases because buyers would be unwilling 
to comply with tax documentation requests at the point of sale. Other 
comments disagreed with these comments and stated that there is a 
business relationship between PDAPs and buyers that would make 
reporting appropriate. Indeed, one comment asserted that PDAPs are 
technically money transmitters under FinCEN regulations and, as such, 
are already subject to the AML program obligations, described in Part 
I.B.1. of this Summary of Comments and Explanation of Revisions, with 
respect to the person making payments. See 31 CFR part 1010.100(ff)(5). 
Other comments recommended that the definition of broker be aligned 
with the concepts outlined in FATF to, in their view, clarify that a 
broker must be a legal person who exercises some measure of control or 
dominion over digital assets on behalf of another person.
    In response to these comments, the Treasury Department and the IRS 
have concluded that the circumstances under which a person processing 
digital asset payments for others should be required to report 
information on those payments to the IRS under section 6045 should be 
narrowed pending additional consideration of the issues and comments 
received concerning non-custodial arrangements discussed in Part 
I.B.1.b. of this Summary of Comments and Explanation of Revisions. 
Under the final regulations, a PDAP is required to report digital asset 
payments by a buyer only if the processor already may obtain customer 
identification information from the buyer in order to comply with AML 
obligations. In such cases, the processor has the requisite 
relationship with the buyer to collect additional tax documentation to 
comply with information reporting requirements. Accordingly, final 
Sec.  1.6045-1(a)(2)(ii)(A) modifies the proposed definition of 
customer as it applies to PDAPs to limit the circumstances under which 
a buyer would be considered the customer of a PDAP. Specifically, under 
this revised definition, the buyer will be treated as a customer of the 
PDAP only to the extent that the PDAP has an agreement or other 
arrangement with the buyer for the provision of digital asset payment 
services and that agreement or other arrangement provides that the PDAP 
may verify such person's identity or otherwise comply with AML program 
requirements, such as those under 31 CFR part 1010, applicable to that 
PDAP or any other AML program requirements. For this purpose, an 
agreement or arrangement with the PDAP includes any alternative payment 
services arrangement such as a computer or mobile application program 
under which, as part of the PDAP's customary onboarding procedures, the 
buyer is treated as having agreed to the PDAP's general terms and 
conditions. The PDAP may also be required to report information on the 
payment to the merchant on whose behalf the PDAP is acting.
    Several comments raised the concern that, to the extent there is no 
contractual relationship between the PDAP and the buyer, the buyer is 
not the PDAP's customer, and that the proposed regulations, therefore, 
exceed the Secretary's authority under section 6045(a), which requires 
persons doing business as a broker to ``make a return . . . showing the 
name and address of each customer [of the broker], with such details 
regarding gross proceeds.'' These comments recommended that the final 
regulations provide that a PDAP that does not have a contractual 
relationship with a buyer is not a broker with respect to that buyer. 
Another comment suggested the regulations should not apply to PDAPs at 
all without a clear congressional mandate. The Treasury Department and 
the IRS do not agree that section 6045 requires specific statutory 
language with respect to each type of broker that already fits within 
the definition of broker under section 6045(c)(1). Section 6045(c)(2) 
defines the term customer as ``any person for whom the broker has 
transacted any business.'' This definition does not require that the 
specific transaction at issue be conducted by the broker for the 
customer. Accordingly, if a PDAP transacts some business with the 
buyer--such as would be the case if the buyer sets up a payment account 
with the PDAP--then there is statutory authority to require that the 
PDAP report on the buyer's payments, even though the activities 
performed by that PDAP were performed pursuant to a separate 
contractual agreement with a merchant.
    One comment expressed confusion with the definition of PDAP in the 
proposed regulations. Specifically, this comment requested 
clarification as to why the definition listed a third party settlement 
organization separately in proposed Sec.  1.6045-1(a)(22)(i)(B) rather 
than merely as a subset of the description provided in proposed Sec.  
1.6045-1(a)(22)(i)(A), in which the person regularly facilitates 
payments from one party to a second party by receiving digital assets 
from the first payment and exchanging those digital assets into cash or 
different digital assets paid the second party. Another comment 
expressed confusion over why the processor agreement rules in proposed 
Sec.  1.6045-1(a)(22)(ii) and (iii) include a provision treating the 
payment of digital assets to a second party pursuant to a processor 
agreement that fixes the exchange rate (processor agreement 
arrangement) as a sale effected by the PDAP. This comment also 
recommended deleting the processor agreement arrangement paragraphs 
from the definition of a PDAP and moving them to the definition of 
gross proceeds.
    The definition of a PDAP in the proposed regulations included 
descriptions of ways that a person could facilitate a payment from one 
party to a second party. Many of these descriptions involved 
circumstances in which the buyer transfers the digital asset payment to 
the PDAP, followed by the PDAP transferring payment to a second party. 
Several of the descriptions involved circumstances in which the PDAP 
does not take possession of the payment, but instead instructs the 
buyer to make a direct transfer of the digital asset payment to the 
second party, or otherwise, pursuant to a processor agreement, 
temporarily fixes the

[[Page 56495]]

exchange rate to be applied to the digital assets received by the 
second party.
    The Treasury Department and the IRS understand that many of the 
transactions described in the proposed regulations in which the PDAP 
does not take possession of the payment are undertaken today by non-
custodial industry participants. In light of the decision discussed in 
Part I.B.1. of this Summary of Comments and Explanation of Revisions to 
further study the application of the broker reporting rules to non-
custodial industry participants, the Treasury Department and the IRS 
have determined that the definition of PDAP and the definition of a 
sale effected by a PDAP (PDAP sales) in these final regulations should 
apply only to transactions in which PDAPs take possession of the 
digital asset payment. Additionally, given the complexity of the multi-
part definition of PDAP in the proposed regulations and in response to 
the public comments, the Treasury Department and the IRS have 
determined that all types of payment transactions that were included in 
the various subparagraphs of the definition should be combined into a 
single simplified definition. This single definition includes the 
requirement that a person must receive the digital assets in order to 
be a PDAP and also covers all transactions--and not just those 
transactions described in proposed Sec.  1.6045-1(a)(22)(i)(B) and 
(C)--in which the PDAP receives a digital asset and transfers that same 
digital asset to the second party.
    Accordingly, final Sec.  1.6045-1(a)(22) defines a PDAP as a person 
who in the ordinary course of a trade or business stands ready to 
effect sales of digital assets by regularly facilitating payments from 
one party to a second party by receiving digital assets from the first 
party and paying those digital assets, cash, or different digital 
assets to the second party. Correspondingly, final Sec.  1.6045-
1(a)(9)(ii)(D) revises and simplifies the proposed regulation's 
definition of a sale processed by a PDAP to include the payment by a 
party of a digital asset to a PDAP in return for the payment of that 
digital asset, cash, or a different digital asset to a second party. 
Accordingly, if a buyer uses a stablecoin or other digital asset to 
make payment to a PDAP that then transfers the stablecoin, another 
digital asset, or cash to the merchant, the transaction is a PDAP sale. 
Additionally, as discussed in Part I.D.4. of this Summary of Comments 
and Explanation of Revisions, the final regulations provide that any 
PDAP sale that is also a sale under one of the other definitions of 
sale under final Sec.  1.6045-1(a)(9)(ii)(A) through (C) (non-PDAP 
sale) that is subject to reporting due to the broker effecting the sale 
as a broker other than as a PDAP must be treated as a non-PDAP sale. 
Thus, for example, an exchange of digital assets that a custodial 
broker executes between customers will not be treated as a PDAP sale, 
but instead will be treated as a sale of digital assets in exchange for 
different digital assets under final Sec.  1.6045-1(a)(9)(ii)(A)(2).
    One comment recommended that the regulations be clarified so as not 
to treat the PDAP as a broker to the extent it does not have sufficient 
information about the transaction to know it is a sale. Another comment 
stated that PDAPs do, in fact, maintain detailed records of all 
transactions for both merchants and buyers. The final regulations adopt 
this comment by adding services performed by a PDAP to the definition 
of facilitative service provided the PDAP has actual knowledge or 
ordinarily would know the nature of the transaction and the gross 
proceeds therefrom to ensure that payments made using digital assets 
are treated as sales effected by a broker. Final Sec.  1.6045-
1(a)(21)(iii)(B)(4). Accordingly, in a circumstance in which the PDAP 
processes a payment on behalf of a merchant and that payment comes from 
a buyer with an account at the PDAP, the PDAP would ordinarily have the 
information necessary to know that the transaction constitutes a sale 
and would know the gross proceeds. As such, that PDAP will be treated 
under the final regulations as effecting the sale transaction under 
Sec.  1.6045-1(a)(10)(i)(D) for the buyer-customer as a digital asset 
middleman under Sec.  1.6045-1(a)(21). In contrast, in a circumstance 
in which the PDAP does not process the payment on behalf of the 
merchant, the PDAP would ordinarily not have actual knowledge or other 
information that would allow the processor to ordinarily know the 
nature of the transaction. Accordingly, assuming nothing else about the 
transaction provides the PDAP with either actual knowledge or 
information that would allow the processor to ordinarily know the 
nature of the transaction, the payment processor would not be treated 
as providing a facilitative service that effects a sale transaction 
under these regulations.
    One comment stated that PDAPs do not have the infrastructure to 
collect and store customer identification information or to report 
transactions involving buyers who do not have accounts with the PDAP. 
Another comment expressed concern about asking individuals to provide 
personal identifying information to PDAPs, which could occur in the 
middle of a busy store. Another comment requested guidance on how PDAPs 
should collect sensitive taxpayer information. Several comments 
expressed concern about the increased risk these rules would create 
with respect to the personal identifying information collected by PDAPs 
because that information could be held by multiple brokers. Several 
other comments stated that extending information reporting to PDAPs 
would create surveillance concerns because it could allow the IRS to 
collect data on merchandise or services purchased or provided.
    The Treasury Department and the IRS understand that PDAPs that 
comply with FinCEN and other regulatory requirements are required to 
collect and in some cases report customer identification information, 
and have concluded that such PDAPs will likewise be able to implement 
the systems necessary to, or contract with service providers who can, 
protect sensitive information of their customers. It is appropriate to 
have PDAPs collect, store, and report customer identification 
information for Federal tax purposes because reporting on digital asset 
payment transactions is important to closing the income tax gap 
attributable to digital asset transactions. Indeed, reporting is 
particularly helpful to buyers in these payment transactions because 
they may not understand that the use of digital assets to make payments 
is a transaction that may generate a taxable gain or loss. Finally, the 
final regulations do not require the reporting of any information 
regarding the specific services or products purchased by buyers in 
payment transactions. Accordingly, the IRS could not use this 
information reporting to track or monitor the types of goods and 
services a taxpayer purchases using digital assets.
c. Other PDAP Issues
    Comments also raised various other policy and practical objections 
to including PDAPs in the definition of broker. Specifically, comments 
suggested that requiring PDAPs to collect tax documentation information 
for all purchases may halt the development of digital assets as an 
efficient and secure payment system or may drive customers to not use 
PDAPs to make their payments, potentially exposing them to more fraud 
by unscrupulous merchants. Other comments complained that these rules 
would punish buyers who choose to pay with digital assets and confuse 
buyers

[[Page 56496]]

paying with stablecoins, who expect transactions to be no different 
than cash transactions. Several comments asserted that the benefits of 
having PDAPs report on digital asset payments made by buyers was not 
worth the cost because most tax software programs are able to track and 
report accurately the gains and losses realized in connection with 
these payment transactions. These comments asserted that for taxpayers 
already taking steps to comply with their Federal income tax 
obligations, an information reporting regime that provides only gross 
proceeds information with respect to these transactions would not 
produce particularly useful information. Even for other taxpayers, 
another comment suggested that reporting by PDAPs provided only limited 
utility because determining a gain or loss on each purchase would still 
involve a separate search for cost basis information.
    The final regulations do not adopt these comments. Information 
reporting facilitates the preparation of Federal income tax returns 
(and reduces the number of inadvertent errors or intentional 
misstatements shown on those returns) by taxpayers who engage in 
digital asset transactions. Information reporting is particularly 
important in the case of payment transactions involving the disposition 
of digital assets, which many taxpayers do not realize must be reported 
on their Federal income tax returns. Clear information reporting rules 
also helps the IRS to identify taxpayers who have engaged in these 
transactions, and thereby help to reduce the overall income tax gap. 
Moreover, regarding the impact of these regulations on the development 
of digital assets as an efficient and secure payment system, the final 
regulations will assist digital asset owners who are currently forced 
to closely monitor and maintain records of all their digital asset 
transactions to correctly report their tax liability at the end of the 
year because they will receive the necessary information from the 
processor of the transactions. Eliminating these high entry costs may 
allow more potential digital asset owners with little experience 
accounting for dispositions of digital assets in payment transactions 
to enter the market.
    Several comments recommended against having PDAPs report on buyers 
disposing of digital assets because these PDAPs already report on 
merchants who receive these payments under section 6050W to the extent 
the payments are for goods or services. These comments raised concerns 
that this duplicative reporting for the same transaction would harm the 
IRS, create an undue burden for brokers, and cause confusion for buyers 
making payments. The final regulations do not adopt these comments 
because the reporting is not duplicative. The reporting under section 
6050W reports on payments made to the merchant. That reporting is not 
provided to the buyers making those payments, and therefore does not 
address the gross proceeds that the buyer must report on the buyer's 
Federal income tax returns.
    Another comment suggested that the treatment of digital asset 
payments should be analogous to that of cash payments. That is, since 
PDAPs are not required to report on buyers making cash payments, they 
should not be required to report on buyers making payments with digital 
assets. The final regulations do not adopt this comment because a buyer 
making a cash payment does not have a taxable transaction while a buyer 
making a payment with digital assets is engaging in a sale or exchange 
that requires the buyer to report any gain or loss from the disposition 
on its Federal income tax return.
    Other comments raised the concern that reporting by PDAPs would 
result in duplicative reporting to the buyer because the buyer's wallet 
provider or another digital asset trading platform may report these 
transactions. See Part I.B.5. of this Summary of Comments and 
Explanation of Revisions for a discussion of how the multiple broker 
rules provided in these final regulations would apply to PDAPs.
    Another comment recommended only subjecting PDAPs to broker 
reporting if they exchange digital assets into fiat currency. The final 
regulations do not adopt this comment because digital assets are a 
unique form of property which can be used to make payments. 
Accordingly, given that digital assets are becoming a more popular form 
of payment, it is important that taxpayers making payments with digital 
assets be provided the information they need to report these 
transactions on their Federal income tax returns.
    Notwithstanding that the final regulations require PDAPs to report 
on PDAP sales, as discussed in Part I.D.2. of this Summary of Comments 
and Explanation of Revisions, the final regulations provide a $10,000 
de minimis threshold for qualifying stablecoins below which PDAPs will 
not have to report PDAP sales using qualifying stablecoins. 
Additionally, the Treasury Department and the IRS have determined that, 
pursuant to discretion under section 6045(a), it is appropriate to 
provide additional reporting relief for certain low-value PDAP sales 
using digital assets other than qualifying stablecoins that are less 
likely to give rise to significant gains or losses. As discussed in 
Part I.D.4. of this Summary of Comments and Explanation of Revisions, 
the final regulations have added a de minimis annual threshold for PDAP 
sales below which no reporting is required.
3. Issuers of Digital Assets
    Proposed Sec.  1.6045-1(a)(1) modified the definition of broker to 
include persons that regularly offer to redeem digital assets that were 
created or issued by that person, such as in an initial coin offering 
or redemptions by an issuer of a so-called stablecoin. One comment 
focused on stablecoin issuers and recommended against treating such 
issuers as brokers because it is unclear how they would be in a 
position to know the gain or loss of their customers. Issuers of 
digital assets that regularly offer to redeem those digital assets will 
know the nature of the sale and the gross proceeds from the sale when 
they redeem those digital assets. Accordingly, it is appropriate to 
treat these issuers as brokers required to report the gross proceeds of 
the redemption just as obligors that regularly issue and retire their 
own debt obligations are treated as brokers and corporations that 
regularly redeem their own stock also are treated as brokers under 
Sec.  1.6045-1(a)(1) of the pre-2024 final regulations. Moreover, since 
these issuers do not provide custodial services for their customers 
redeeming the issued digital assets, they are not required to report on 
the customer's adjusted basis under final Sec.  1.6045-1(d)(2)(i)(D). 
As such whether they are able to know their customer's gain or loss is 
not relevant to whether they should be treated as brokers under these 
regulations.
4. Real Estate Reporting Persons
    The proposed regulations provided that a real estate reporting 
person is a broker with respect to digital assets used as consideration 
in a real estate transaction if the reporting person would generally be 
required to make an information return with respect to that transaction 
under proposed Sec.  1.6045-4(a). To ensure that real estate reporting 
persons report on real estate buyers making payment in such 
transactions with digital assets, the proposed regulations also 
included these real estate buyers in the definition of customer and 
included the services performed with respect to these transactions by 
real estate reporting persons in the definition of facilitative

[[Page 56497]]

services relevant to the definition of a digital asset middleman.
    One comment raised the concern that in some real estate 
transactions, direct (peer to peer) payments of digital assets from 
buyers to sellers may not be reflected in the contract for sale. In 
such transactions, the real estate reporting person would not 
ordinarily know that the buyers used digital assets to make payment. 
The Treasury Department and the IRS have concluded that it is not 
appropriate at this time to require real estate reporting persons who 
do not know or would not ordinarily know that digital assets were used 
by the real estate buyer to make payment to report on such payments. 
Accordingly, the definition of facilitative service in final Sec.  
1.6045-1(a)(21)(iii)(B)(2) has been revised to limit the services 
provided by real estate reporting persons that constitute facilitative 
services to those services for which the real estate reporting person 
has actual knowledge or ordinarily would know that digital assets were 
used by the real estate buyer to make payment directly to the real 
estate seller. For this purpose, a real estate reporting person is 
considered to have actual knowledge that digital assets were used by 
the real estate buyer to make payment if the terms of the real estate 
contract provide for payment using digital assets. Thus, for example, 
if the contract for sale states that the buyer will make payment using 
digital assets, either fixed as to number of units or fixed as to the 
value, the real estate reporting person would be treated as having 
actual knowledge that digital assets were used to make payment in the 
transaction notwithstanding that such person might have to query the 
buyer and seller regarding the name and number of units used to make 
payment. Additionally, a separate communication to the real estate 
reporting person, for example, to ensure that the value of the digital 
asset payment is reflected in any commissions or taxes due at closing, 
would constitute actual knowledge by the real estate reporting person 
that digital assets were used by the real estate buyer to make payment 
directly to the real estate seller.
    One comment recommended that to relieve burden on the real estate 
reporting person, the form on which the real estate seller's gross 
proceeds are reported (Form 1099-S, Proceeds From Real Estate 
Transactions) be revised with a check box to indicate that digital 
assets were paid in the transaction and with a new box for the buyer's 
name, address, and tax identification number (TIN). These revisions 
would allow the real estate reporting person to file one Form 1099-S 
instead of one Form 1099-DA (with respect to the real estate buyer) and 
one Form 1099-S (with respect to the real estate seller). The final 
regulations do not make this suggested change because it would be 
inappropriate to include both parties to the transaction on the same 
information return. The broker reporting regulations require copies of 
Form 1099-S to be furnished to the taxpayer, and it would be 
inappropriate to require disclosure of either party's TIN to the other. 
For a discussion of how the multiple broker rule would apply to a real 
estate transaction involving a real estate reporting person and a PDAP, 
see Part I.B.5. of this Summary of Comments and Explanation of 
Revisions.
    Notwithstanding these decisions regarding the appropriateness of 
reporting under these regulations by real estate reporting persons, as 
discussed in Part VII. Of this Summary of Comments and Explanation of 
Revisions, the applicability date for reporting has been delayed and 
backup withholding relief has been provided for real estate reporting 
persons.
5. Exempt Recipients and the Multiple Broker Rule
a. Sales Effected for Exempt Recipients
    The proposed regulations left unchanged the exceptions to reporting 
provided under Sec.  1.6045-1(c)(3)(i) of the pre-2024 final 
regulations for exempt recipients, such as certain corporations, 
financial institutions, tax exempt organizations, or governments or 
political subdivisions thereof. Thus, the proposed regulations did not 
create a reporting exemption for sales of digital assets effected on 
behalf of a customer that is a digital asset broker. Several comments 
recommended that custodial digital asset brokers be added to the list 
of exempt recipients under the final regulations because the comments 
asserted that these brokers are subject to rigorous oversight by 
numerous Federal and State regulators. In response to the request that 
custodial digital asset brokers be added to the list of exempt 
recipients, final Sec.  1.6045-1(c)(3)(i)(B)(12) adds digital asset 
brokers to the list of exempt recipients for sales of digital assets, 
but limits such application to only U.S. digital asset brokers because 
brokers that are not U.S. digital asset brokers (non-U.S. digital asset 
brokers) are not currently subject to reporting on digital assets under 
these final regulations. See Part I.G. of this Summary of Comments and 
Explanation of Revisions for the definition of a U.S. digital asset 
broker and a discussion of the Treasury Department's and the IRS's 
plans to implement the CARF. Additionally, the list also does not 
include U.S. digital asset brokers that are registered investment 
advisers that are not otherwise on the list of exempt recipients (Sec.  
1.6045-1(c)(3)(i)(B)(1) through (11) of the pre-2024 final regulations) 
because registered investment advisers were not previously included in 
the list of exempt recipients. For this purpose, a registered 
investment adviser means a registered investment adviser registered 
under the Investment Advisers Act of 1940, 15 U.S.C. 80b-1, et seq., or 
as a registered investment adviser with a state securities regulator. 
See Part I.B.5.b. of this Summary of Comments and Explanation of 
Revisions for the documentation that a broker effecting a sale on 
behalf of a U.S. digital asset broker (other than a registered 
investment adviser) must obtain pursuant to final Sec.  1.6045-
1(c)(3)(i)(C)(3) to treat such customer as an exempt recipient under 
final Sec.  1.6045-1(c)(3)(i)(B)(12).
b. The Multiple Broker Rule
    The proposed regulations also did not extend the multiple broker 
rule under Sec.  1.6045-1(c)(3)(iii) of the pre-2024 final regulations 
to digital asset brokers. Comments overwhelmingly requested that the 
final regulations implement a multiple broker rule applicable to 
digital asset brokers to avoid burdensome and confusing duplicative 
reporting. Several comments recommended that the rule in Sec.  1.6045-
1(c)(3)(iii) of the pre-2024 final regulations, which provides that the 
broker that submits instructions to another broker, such as a digital 
asset trading platform, should have the obligation to report the 
transaction to the IRS, not the broker that receives the instructions 
and executes the transaction, because the brokers that submit 
instructions are in a position to provide reporting information to 
those clients with whom they maintain a direct relationship, while the 
latter are not. Another comment recommended requiring only the digital 
asset broker that has the final ability to consummate the sale to 
report the transaction to the IRS unless that broker has no ability to 
backup withhold. Another comment recommended allowing digital asset 
brokers to enter into contracts for information reporting to establish 
who is responsible for reporting the transaction to the IRS. Finally, 
several comments recommended that, when two digital asset brokers would 
otherwise have a reporting obligation with respect to a sale 
transaction, that only the digital asset broker crediting

[[Page 56498]]

the gross proceeds to the customer's wallet address or account have the 
obligation to report the transaction to the IRS because this is the 
broker that has the best ability to backup withhold.
    As discussed in Part VI. Of this Summary of Comments and 
Explanation of Revisions, backup withholding on these transactions is a 
necessary and essential tool to ensure that important information for 
tax enforcement is reported to the IRS. Because the broker crediting 
the gross proceeds to the customer's wallet address or account is in 
the best position to backup withhold on these transactions if the 
customer does not provide the broker with the necessary tax 
documentation, final Sec.  1.6045-1(c)(3)(iii)(B) adopts a multiple 
broker rule for digital asset brokers that would require the broker 
crediting the gross proceeds to the customer's wallet address or 
account to report the transaction to the IRS when more than one digital 
asset broker would otherwise have a reporting obligation with respect 
to a sale transaction. The relief for the broker that is not the broker 
crediting the gross proceeds to the customer's wallet address or 
account, however, is conditioned on that broker obtaining proper 
documentation from the other broker as discussed in the next paragraph. 
Additionally, the final regulations do not adopt the suggested rule 
that would allow a broker to shift the responsibility to report to 
another broker based on an agreement between the brokers because the 
broker having the obligation to report in that case may not have the 
ability to backup withhold. A broker, of course, is not prohibited from 
contracting with another broker or with another third party to file the 
required returns on its behalf.
    Numerous comments provided recommendations in response to the 
request in the proposed regulations for suggestions to ensure that a 
digital asset broker would know with certainty that the other digital 
asset broker involved in a transaction is also a broker with a 
reporting obligation under these rules. One comment raised a concern 
with a rule requiring the broker obligated to report to provide notice 
to the other broker that it will make a return of information for each 
sale because that requirement would be overly burdensome. Another 
comment recommended that the broker obtain from the obligated broker a 
Form W-9 that has been modified to add an exempt payee code for digital 
asset brokers and a unique broker identification number. Another 
comment recommended that, absent actual knowledge to the contrary, a 
broker should be able to rely on a reasonable determination based on 
another broker's name or other publicly available information it has 
about the other broker (sometimes referred to as the eye-ball test) 
that the other broker is a U.S. digital asset broker. To avoid any gaps 
in reporting, another comment recommended against allowing brokers to 
treat other brokers as U.S. digital asset brokers based on actual 
knowledge or the existing presumption rules. Finally, another comment 
recommended that the IRS establish a registration system and searchable 
database for digital asset brokers like that used for foreign financial 
institutions under the provisions commonly known as the Foreign Account 
Tax Compliance Act (FATCA) of the Hiring Incentives to Restore 
Employment Act of 2010, Public Law 111-147, 124 Stat. 71 (March 18, 
2010).
    Because of the risk that the multiple broker rule could result in 
no reporting, the final regulations do not adopt the so-called eye-ball 
test or the existing presumption rules for determining if another 
broker is a U.S. digital asset broker. The final regulations also do 
not adopt an IRS registration system for U.S. digital asset brokers 
because the IRS is still considering the benefits and burdens of a 
registration system for both the IRS and brokers. Instead, the final 
regulations adopt a rule that to be exempt from reporting under the 
multiple broker rule, a broker must obtain from another broker a Form 
W-9 certifying that the other broker is a U.S. digital asset broker 
(other than a registered investment adviser that is not otherwise on 
the list of exempt recipients (Sec.  1.6045-1(c)(3)(i)(B)(1) through 
(11) of the pre-2024 final regulations). Because the current Form W-9 
does not have this certification, the notice referred to in Part VII. 
Of this Summary of Comments and Explanation of Revisions will permit 
brokers to rely upon a written statement that is signed by another 
broker under penalties of perjury that the other broker is a U.S. 
digital asset broker until sometime after the Form W-9 is revised to 
accommodate this certification. It is contemplated that the 
instructions to the revised Form W-9 will give brokers who have 
obtained private written certifications a reasonable transition period 
before needing to obtain a revised Form W-9 from the other broker.
    One comment requested clarification regarding which broker--the 
real estate reporting person or the PDAP--is responsible for filing a 
return with respect to the real estate buyer in a transaction in which 
the real estate buyer transfers digital assets to a PDAP that in turn 
transfers cash to the real estate seller. The multiple broker rule 
included in final Sec.  1.6045-1(c)(3)(iii)(B) would apply in this case 
if the real estate reporting person is aware that the PDAP was involved 
to make the payment on behalf of the real estate buyer and obtains from 
the PDAP the certification described above that the PDAP is a U.S. 
digital asset broker. If the transaction is undertaken in any other 
way, it is unclear that the real estate reporting person would know the 
identity of the PDAP or whether that PDAP was required to report on the 
transaction. Accordingly, the real estate reporting person would be 
required to report on the transaction without regard to whether the 
PDAP also is required to report. It is anticipated that taxpayers will 
only rarely receive two statements regarding the same real estate 
transaction; however, when they do, taxpayers will be able to inform 
the IRS should the IRS inquire that the two statements reflect only one 
transaction.
    Another comment requested guidance on how the information reporting 
rules would work with respect to a digital asset hosted wallet provider 
that contracts with another business to perform the hosted wallet 
services for the broker's customers on the broker's behalf. In response 
to the comment, the final regulations clarify that a broker should be 
treated as providing hosted wallet services even if it hires an agent 
to perform some or all of those services on behalf of the broker and 
without regard to whether that hosted wallet service provider is also 
in privity with the customer. Additionally, to ensure this 
interpretation is incorporated in the final regulations, the final 
regulations revise the definition of covered security in final Sec.  
1.6045-1(a)(15)(i)(J) to reference brokers that provide custodial 
services for digital assets, rather than hosted wallet services for 
digital assets, to clarify that services provided by the brokers' 
agents will be ascribed to the broker without regard to the specific 
custodial method utilized. To the extent a hosted wallet provider acts 
as an agent of the broker and is in privity with the customer, the 
multiple broker rules described herein should avoid duplicative 
reporting.
    Finally, as discussed in Part I.B.1. of this Summary of Comments 
and Explanation of Revisions, the Treasury Department and the IRS are 
continuing to study the question of how a multiple broker rule would 
apply to the non-custodial digital asset industry.

[[Page 56499]]

C. Definition of Sales Subject to Reporting
1. In General
    The proposed regulations modified the definition of a sale subject 
to reporting to include the disposition of a digital asset in exchange 
for cash, one or more stored-value cards, or a different digital asset. 
In addition, the proposed regulations included in the definition of 
sale the disposition of a digital asset by a customer in exchange for 
property (including securities and real property) of a type that is 
subject to reporting under section 6045 or in consideration for the 
services of a broker. Finally, the proposed regulations provided that a 
sale includes certain digital asset payments by a customer that are 
processed by a PDAP.
    Several comments recommended that the definition of sale not 
include exchanges of digital assets for different digital assets or 
certain other property because such reporting would be impractical for 
brokers, confusing for taxpayers, and not consistent with the reporting 
rules for non-digital assets. Another comment recommended limiting 
reporting to off-ramp transactions, which signify the taxpayer's exit 
from an investment in digital assets. In contrast, another comment 
supported the requirement for information reporting on exchanges of 
digital assets for different digital assets because taxpayers must 
report all taxable gain or loss transactions of this type that occur 
within their taxable year.
    The final regulations do not adopt the comments to limit the 
definition of sale to cash transactions. Digital assets are unique 
among the types of assets that are subject to reporting under section 
6045 because they are commonly exchanged for different digital assets 
in trading transactions, for example an exchange of bitcoin for ether. 
Some digital assets can readily function as a payment method and, as 
such, can also be exchanged for other property in payment transactions. 
As explained in Notice 2014-21, and clarified in Revenue Ruling 2023-
14, 2023-33 I.R.B. 484 (August 14, 2023), the sale or exchange of a 
digital asset that is property has tax consequence that may result in a 
tax liability. Thus, when a taxpayer disposes of a digital asset to 
make payment in another transaction, the taxpayer has engaged in two 
taxable transactions: the first being the disposition of the digital 
asset and the second being the payment associated with the payment 
transaction. In contrast, when a taxpayer disposes of cash to make 
payment, the taxpayer has, at most, only one taxable transaction. 
Accordingly, these regulations require reporting on sales and certain 
exchanges of digital assets because substantive Federal tax principles 
do not treat the use of digital assets to make payments in the same way 
as the use of cash to make payments.
    Unlike digital assets, traditional financial assets subject to 
broker reporting are generally disposed of for cash. That is why the 
definition of sale in Sec.  1.6045-1(a)(9)(i) only requires reporting 
for cash transactions. In contrast, the barter exchange rules in Sec.  
1.6045-1(e) do require reporting on property-for-property exchanges 
because the barter industry, by definition, applies to property-for-
property exchanges and not only cash transactions. Accordingly, the 
modified definition of sale for digital assets exchanged for other 
property reflects the differences in the underlying transactions as 
compared to traditional financial assets, not the disparate treatment 
of similarly situated transactions based solely on technological 
differences. Moreover, the purpose behind information reporting is to 
make taxpayers aware of their taxable transactions so they can report 
them accurately on their Federal income tax returns and to make those 
transactions more transparent to the IRS to reduce the income tax gap.
    Another comment raised a concern that including exchanges of 
digital assets for property and services exceeded the authority 
provided to the Secretary by the Infrastructure Act. The Treasury 
Department and the IRS do not agree with this comment. The term 
``sale'' is not used in section 6045(a), which provides broadly that 
the Secretary may publish regulations requiring returns by brokers with 
details regarding gross proceeds and other information the Secretary 
may require by forms or regulations. Nothing in section 6045 limits 
``gross proceeds'' to the results of a sale rather than an exchange and 
the term sale was first defined in the regulations under section 6045 
long before the enactment of the Infrastructure Act. Moreover, the 
Infrastructure Act modified the definition of broker to include certain 
persons who provide services effectuating transfers of digital assets, 
which are part of any exchange of digital assets. Accordingly, the 
changes made by the Infrastructure Act do not provide any limitations 
on how the Secretary can define the term when applied to the digital 
asset industry. Another comment suggested that treating the exchange of 
digital assets for other digital assets or services as a taxable event 
is impractical and harmful to taxpayers, and that digital assets should 
be subject to tax only when taxpayers sell those assets for cash. See 
Part II.A. of this Summary of Comments and Explanation of Revisions for 
discussion of that issue.
2. Definition of Dispositions
    Several comments raised questions about whether the definition of 
sale, which includes any disposition of a digital asset in exchange for 
a different digital asset, applies to certain dispositions that may or 
may not be taxable. For this reason, several comments recommended that 
the final regulations not require reporting on certain transactions 
until substantive guidance is issued on the tax treatment of those 
transactions. One comment specifically mentioned reporting should not 
be applied to transactions involving what it referred to as the 
``wrapping'' or ``unwrapping'' of tokens for the purpose of obtaining a 
token that is otherwise like the disposed-of token in order to use the 
received token on a particular blockchain. In contrast, another comment 
suggested that the final regulations should require reporting wrapping 
and unwrapping transactions. One comment suggested that exchanges of 
digital assets involving ``liquidity pool'' tokens should also be 
subject to reporting under the final regulations. Another comment 
suggested that the final regulations provide guidance on whether 
reporting is required on exchanges of digital assets for liquidity pool 
or ``staking pool'' tokens because these transactions typically 
represent contributions of tokens when the contributor's economic 
position has not changed. This comment also suggested, if these 
contributions are excluded from reporting, that the Treasury Department 
and the IRS study how information reporting rules apply when the 
contributors are ``rewarded'' for these ``contributions'' or when they 
receive other digital assets in exchange for the disposition of these 
pooling tokens. Another comment recommended, instead, that the final 
regulations explicitly address the information reporting requirements 
associated with staking rewards and hard forks and recommended that 
they should be treated like taxable stock dividends for reporting 
purposes. Another comment recommended that the final regulations 
address whether digital asset loans and short sales of digital assets 
will be subject to reporting. The comment expressed the view that the 
substantive tax treatment of such loans is unresolved, and further 
suggested that the initial exchange of a digital asset for

[[Page 56500]]

an obligation to return the same or identical digital asset and the 
provision of cash, stablecoin, or other digital asset collateral in the 
future may well constitute a disposition and, in the absence of a 
statutory provision like section 1058 of the Code, may be taxable.
    The Treasury Department and the IRS have determined that certain 
digital asset transactions require further study to determine how to 
facilitate appropriate reporting pursuant to these final regulations 
under section 6045. Accordingly, in response to these comments, Notice 
2024-57 is being issued with these final regulations that will provide 
that until a determination is made as to how the transactions 
identified in the notice should be reported, brokers are not required 
to report on these identified transactions, and the IRS will not impose 
penalties for failure to file correct information returns or failure to 
furnish correct payee statements with respect to these identified 
transactions.
    One comment recommended that an exchange of digital assets for 
governance tokens or any other exchange for tokens that could be 
treated as a contribution to an actively managed partnership or 
association also be excluded from reporting under section 6045 until 
the substantive Federal tax consequences of these contributions are 
addressed in guidance. The final regulations do not adopt this 
recommendation. Whether exchanges of digital assets for other digital 
assets could be treated as a contribution to a partnership or 
association is outside the scope of these regulations. Additionally, 
because the potential for duplicate reporting also exists for non-
digital asset partnership interests, Treasury Department and the IRS 
have concluded that different rules should not apply to sales of 
digital asset partnership interests. Finally, the more general question 
of whether reporting on partnership interests (in digital asset form or 
otherwise) under section 6045 is appropriate in light of the potential 
for duplicate reporting is outside the scope of this regulations 
project.
    The preamble to the proposed regulations requested comments 
regarding whether the broker reporting regulations should apply to 
include initial coin offerings, simple agreements for future tokens, 
and similar contracts, but did not propose such reporting. One comment 
recommended that initial coin offerings, simple agreements for future 
tokens, and similar contracts should be covered by broker reporting 
under the final regulations while another comment asserted that this 
reporting would not be feasible. Upon consideration of the comments, 
the Treasury Department and the IRS have determined that the issues 
raised by these comments require further study. Accordingly, the final 
regulations do not adopt the comment's recommendations. However, the 
Treasury Department and the IRS may consider publishing additional 
guidance that could require broker reporting for such transactions.
3. Exceptions for Certain Closed Loop Transactions
    As discussed in Part I.A.3. of this Summary of Comments and 
Explanation of Revisions with respect to closed loop digital assets, 
the Treasury Department and the IRS do not intend the information 
reporting rules under section 6045 to apply to the types of virtual 
assets that exist only in a closed system and cannot be sold or 
exchanged outside that system for fiat currency. Rather than carve 
these assets out from the definition of a digital asset, however, the 
final regulations add these closed loop transactions to the list of 
excepted sales that are not subject to reporting under final Sec.  
1.6045-1(c)(3)(ii). Inclusion on the list of excepted sales is not 
intended to create an inference that the transaction is a sale of a 
digital asset under current law. Instead, inclusion on the list merely 
means that the Treasury Department and the IRS have determined that 
information reporting on these transactions is not appropriate at this 
time.
    One comment recommended that the definition of digital assets be 
limited to exclude from reporting transactions involving dispositions 
of NFTs used by loyalty programs. The comment explained that these 
loyalty programs do not permit customers to transfer their digital 
asset tokens by sale or gift outside of the program's closed (that is, 
permissioned) distributed ledger. The final regulations add these 
loyalty program transactions to the list of excepted sales for which 
reporting is not required. This exception is limited, however, to those 
programs that do not permit customers to transfer, exchange, or 
otherwise use, the tokens outside of the program's closed distributed 
ledger network because tokens that have a market outside the program's 
closed network raise Federal tax issues similar to those with other 
digital assets that are subject to reporting.
    Another comment recommended that video game tokens that owners have 
only a limited ability to sell outside the video game environment be 
excluded from the definition of digital assets because sales of these 
tokens represent a low risk of meaningful Federal tax non-compliance. 
The final regulations do not treat sales of video game tokens that can 
be sold outside the video game's closed environment as excepted sales. 
Instead, as with the loyalty program tokens, the final regulations 
limit the excepted sale treatment to only those dispositions of video 
game tokens that are not capable of being transferred, exchanged, or 
otherwise used, outside the closed distributed ledger environment.
    Several comments requested that the final regulations exclude from 
reporting transactions involving digital representations of assets that 
may be transferred only within a fixed network of banks using 
permissioned distributed ledgers to communicate payment instructions or 
other back-office functions. According to these comments, bank networks 
use digital assets as part of a messaging service. The comments noted 
that these digital assets have no intrinsic value, function merely as a 
tool for recordkeeping, and are not freely transferable for cash or 
other digital assets outside the system. To address these transactions, 
one comment recommended that the definition of digital asset be limited 
to only those digital assets that are issued and traded on 
permissionless (that is, open to the public) distributed ledgers. Other 
comments requested that the exception apply to permissioned 
interoperable distributed ledgers, that is, digital assets that can 
travel from one permissioned distributed ledger (for example, at one 
bank) to another permissioned distributed ledger (at another bank).
    The Treasury Department and the IRS are concerned that a broadly 
applicable restriction on the definition of digital assets could 
inadvertently create an exception for other digital assets that could 
be involved in transactions that give rise to taxable gain or loss. 
Accordingly, to address these comments, the final regulations add 
certain transactions within a single cryptographically secured 
distributed ledger, or network of interoperable distributed ledgers, to 
the list of excepted sales for which reporting is not required. 
Specifically, final Sec.  1.6045-1(c)(3)(ii)(G) provides that an 
excepted sale includes 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, which in each case 
does not give rise to sales of other digital assets within a 
cryptographically secured distributed ledger (or network of 
interoperable distributed ledgers) if access to the distributed ledgers 
(or network of interoperable distributed

[[Page 56501]]

ledgers) is restricted to only users of such information and if the 
digital assets disposed of are not capable of being transferred, 
exchanged, or otherwise used, outside such distributed ledger or 
network. No inference is intended that such transactions would 
otherwise be treated as sales of digital assets. This exception, 
however, does not apply to sales of digital assets that are also sales 
of securities or commodities that are cleared or settled on a limited-
access regulated network subject to the coordination rule in final 
Sec.  1.6045-1(c)(8)(iii). See Part I.A.4.a. of this Summary of 
Comments and Explanation of Revisions for an explanation of the special 
coordination rule applicable to securities or commodities that are 
cleared or settled on a limited-access regulated network.
    The final regulations also include a general exception for closed-
loop transactions in order to address other such transactions not 
specifically brought to the attention of the Treasury Department and 
the IRS. Because the Treasury Department and the IRS do not have the 
information available to evaluate those transactions, this exception 
applies only to a limited class of digital assets. The digital assets 
must be offered by a seller of goods or provider of services to its 
customers and exchangeable or redeemable only by those customers for 
goods or services provided by such seller or provider, and not by 
others in a network. In addition, the digital asset may not be capable 
of being transferred, exchanged, or otherwise used outside the 
cryptographically secured distributed ledger network of the seller or 
provider and also may not be sold or exchanged for cash, stored-value 
cards, or stablecoins at a market rate inside the seller or provider's 
distributed ledger network.
    The treatment of closed-loop transactions as excepted sales 
discussed here is not intended to be broadly applicable to any digital 
asset sold within a permissioned distributed ledger network because 
such a broad exception could generate incentives for the creation of 
distributed ledger networks that are nominally permissioned but are, in 
fact, open to the public. If similar digital assets that cannot be sold 
or exchanged outside of a controlled, permissioned ledger and that do 
not raise new tax compliance concerns are brought to the attention of 
the Treasury Department and the IRS, transactions involving those 
digital assets may also be designated as excepted sales under final 
Sec.  1.6045-1(c)(3)(ii)(A).
4. Other Exceptions
    One comment requested that utility tokens that are limited to a 
particular timeframe or event be treated like closed system tokens. The 
final regulations do not adopt this suggestion because not enough 
information was provided for the Treasury Department and the IRS to 
determine whether these tokens are capable of being transferred, 
exchanged, or otherwise used, outside of the closed distributed ledger 
environment. Another comment requested that digital assets used for 
test purposes be excluded from the definition of digital assets. 
According to this comment, test blockchain networks allow users to 
receive digital assets for free or for a nominal fee as part of the 
creation and testing of software. These networks have sunset dates 
beyond which the digital assets created cannot be used. The final 
regulations do not adopt this comment because not enough information 
was provided to know if these networks are closed distributed ledger 
environments or if the tokens are capable of being transferred, 
exchanged, or otherwise used, prior to the network's sunset date.
    One comment requested that the final regulations be revised to 
prevent the application of cascading transaction fees in a sale of 
digital assets for different digital assets when the broker withholds 
the received digital assets to pay for such fees. For example, a 
customer exchanges one unit of digital asset AB for 100 units of 
digital asset CD (first transaction), and to pay for the customer's 
digital asset transaction fees, the broker withholds 10 percent (or 10 
units) of digital asset CD. The comment recommended that the sale of 
the 10 units of CD in the second transaction be allocated to the 
original transaction and not be separately reported. The Treasury 
Department and the IRS have determined that a limited exception from 
the definition of sale should apply to cascading digital asset 
transaction fees. Specifically, final Sec.  1.6045-1(c)(3)(ii)(C) 
excepts a sale of digital asset units withheld by the broker from 
digital assets received by the customer in any underlying digital asset 
sale to pay for the customer's digital asset transaction costs. The 
special specific identification rule in final Sec. Sec.  1.6045-
1(d)(2)(ii)(B)(3) and 1.1012-1(j)(3)(iii) ensures that the sale of the 
withheld units does not give rise to gain or loss. See Part VI.B. of 
this Summary of Comments and Explanation of Revisions for a discussion 
of the application of this excepted sales rule when the sale of such 
withheld units gives rise to an obligation by the broker under section 
3406 to deduct and withhold a tax.
D. Information To Be Reported for Digital Asset Sales
1. In General
    The proposed regulations required that for each digital asset sale 
for which a broker is required to file an information return, the 
broker report, among other things, the date and time of such sale set 
forth in hours, minutes, and seconds using Coordinated Universal Time 
(UTC). The proposed regulations requested comments regarding whether 
UTC time was appropriate and whether a 12-hour clock or a 24-hour clock 
should be used for this reporting. Some comments agreed with reporting 
the time of sale based on UTC time; however, other comments suggested 
using the customer's local time zone as configured on the platform or 
in the wallet. Other comments suggested that it is not technologically 
or operationally feasible to use the time zone of the customer's 
domicile. Another comment raised the concern that reporting in 
different time zones from the broker's time zone would make the broker 
and the IRS unable to reconcile backup withholding, timely tax 
deposits, and other annual filings. Still other comments requested 
broker flexibility in reporting the time of sale, provided the broker 
reported the time of the customer's purchases and sales consistently. 
Several other comments raised the concern that reporting on the time of 
transaction was excessively burdensome due to the number of tax lots 
that the broker's customers could potentially acquire and sell in a 
single day. Another comment suggested that the information reported 
with respect to the time of the transaction should be the same as the 
information reported on the Form 1099-B for traditional asset sales 
unless there is a compelling reason to do otherwise. Additionally, 
several comments suggested that the burden of developing or modifying 
systems to report the time of sale was not warranted because the time 
of sale within a date (that is reported) does not generally impact 
customer holding periods if the broker treats the time zone of 
purchases and sales consistently.
    The final regulations adopt the recommendation to remove the 
requirement to report the time of the transaction. The Treasury 
Department and the IRS are concerned about the burdensome nature of the 
time reporting requirement and the administrability of reconciling 
different times for customer transactions and backup withholding 
deposits. Additionally, the issues raised by the time of sale with 
respect to digital asset year-end transactions are

[[Page 56502]]

generally the same as for traditional asset sales. It is expected that 
brokers will determine the date of purchase and date of sale of a 
customer's digital assets based on a consistent time zone so that 
holding periods are reported consistently, and that brokers will 
provide customers with the information necessary for customers to 
report their year-end sale transactions accurately.
    The proposed regulations also required that, for each digital asset 
sale for which a broker is required to file an information return and 
for which the broker effected the sale on the distributed ledger, the 
broker report the transaction identification (transaction ID or 
transaction hash) associated with the digital asset sale and the 
digital asset address (or digital asset addresses if multiple) from 
which the digital asset was transferred in connection with the sale. 
Additionally, for transactions involving sales of digital assets that 
were previously transferred into the customer's hosted wallet with the 
broker (transferred-in digital asset), the proposed regulations 
required the broker to report the date and time of such transferred-in 
transaction, the transaction ID of such transfer-in transaction, the 
digital asset address (or digital asset addresses if multiple) from 
which the transferred-in digital asset was transferred, and the number 
of units transferred in by the customer as part of that transfer-in 
transaction. Numerous comments raised privacy and surveillance concerns 
associated with the requirement to report transaction ID and digital 
asset address information. These comments noted that a person or entity 
who knows the digital asset address of another gains access not only to 
that other user's purchases and exchanges on a blockchain network, but 
also the entire transaction history associated with that user's digital 
asset address. One comment expressed concern that reporting transaction 
ID and digital asset addresses would link the transaction history of 
the reported digital asset addresses to the taxpayer, thus exposing the 
financial and spending habits of that taxpayer. Other comments 
expressed that reporting this information also creates a risk that the 
information could be intercepted by criminals who could then attempt to 
extort or otherwise gain access to the private keys of identified 
persons with digital asset wealth. In short, many comments expressed 
strongly stated views that requiring this information creates privacy, 
safety, and national security concerns and could imperil U.S. citizens.
    Other comments suggested that the information reporting rules 
should balance the IRS's need for transparency with the taxpayer's 
interest in privacy. Thus, reporting of transaction IDs and digital 
asset addresses should not be required because the information exceeds 
the information that the IRS needs to confirm the value of reported 
gross proceeds and cost basis information. Further, another comment 
asserted that the IRS does not need transaction ID and digital asset 
address information because the IRS already has powerful tools to audit 
taxpayers and collect this information on audit. Other comments raised 
concerns with the burden of this requirement for custodial brokers. 
Citing the estimate of the start-up costs required to put systems in 
place to comply with the proposed regulations' broker reporting 
requirements, another comment raised the concern that many industry 
participants are smaller businesses with limited funding and resources 
that cannot afford to build infrastructure to securely store this 
information. Another comment raised the concern that reporting of 
transaction ID and digital asset address information would make the 
Form 1099-DA difficult for taxpayers to read. Another comment noted 
that this information is not helpful to taxpayers, who should already 
know this information. Other comments suggested that the reporting 
standard for digital assets should not be any more burdensome than it 
is for securities, and that any additional data fields for digital 
assets would force traditional brokers that also effect sales of 
digital assets to modify their systems. Another comment suggested that 
the final regulations should not require the reporting of transaction 
ID and digital asset address information in order to align the 
information reported under section 6045 with the information required 
under the CARF, a draft of which would have required the reporting of 
digital asset addresses but ultimately did not include such a 
requirement.
    Some comments offered alternative solutions for providing the IRS 
with the visibility that this information would provide. For example, 
one comment suggested that because of the large number of digital asset 
transactions, brokers should only report the digital asset addresses 
(not transaction IDs) associated with transactions. Another comment 
recommended the use of impersonal tax ID numbers that would not reveal 
the customer's full identity to address privacy concerns. Another 
comment suggested it would be less burdensome to require reporting of 
account IDs rather than digital asset addresses. Another comment 
suggested that the reporting of this information be optional or 
otherwise limited to transactions that involve a high risk of tax 
evasion or non-compliance or that otherwise exceed a large threshold. 
Another comment recommended the use of standardized tax lot 
identification like the securities industry. Another comment 
recommended instructing brokers to retain this information for later 
examination. Another comment recommended that brokers not report this 
information but, instead, be required to retain this information to 
align with the CARF reporting requirements.
    The Treasury Department and the IRS considered these comments. 
Although transaction ID and digital asset address information would 
provide uniquely helpful visibility into a taxpayer's transaction 
history, which the IRS could use to verify taxpayer compliance with 
past tax reporting obligations, the final regulations remove the 
obligation to report transaction ID and digital asset address 
information. The Treasury Department and the IRS have concluded, 
however, that this information will be important for IRS enforcement 
efforts, particularly in the event a taxpayer refuses to provide it 
during an examination. Accordingly, final Sec.  1.6045-1(d)(11) 
provides a rule that requires brokers to collect this information with 
respect to the sale of a digital asset and retain it for seven years 
from the due date for the related information return filing. This 
collection and retention requirement, however, would not apply to 
digital assets that are not subject to reporting due to the special 
reporting methods discussed in Parts I.D.2. through I.D.4. of this 
Summary of Comments and Explanation of Revisions. The seven-year period 
was chosen because the due date for electronically filed information 
under section 6045 is March 31 of the calendar year following the year 
of the sale transaction. Because most taxpayers' statute of limitations 
for substantial omissions from gross income will expire six years from 
the April 15 filing date for their Federal income tax return, a six-
year retention period from the March 31 filing date would end before 
the statute of the limitations expires. Therefore, the final 
regulations designated a seven-year period for brokers to retain this 
information to ensure the IRS will have access to all the records it 
needs during the time that the taxpayer's statute of limitations is 
open. The IRS intends to monitor the information reported on digital 
assets and the extent to which taxpayers

[[Page 56503]]

comply with providing this information when requested by IRS personnel 
as part of an audit or other enforcement or compliance efforts. If 
abuses are detected that hamper the IRS's ability to enforce the Code, 
the Treasury Department and the IRS may reconsider this decision to 
require brokers to maintain this information in lieu of reporting it to 
the IRS.
    Another comment raised the concern that custodial brokers may not 
have transaction ID and digital asset address information associated 
with digital assets that were transferred-in to the broker before the 
applicability date of these regulations. This comment recommended that 
the reporting requirement be made effective only for assets that were 
transferred-in to the custodial broker on or after January 1, 2023, to 
align with the enactment of the Infrastructure Act. The Treasury 
Department and the IRS understand that brokers may not have transaction 
ID and digital asset address information associated with digital assets 
that were transferred-in to the broker before the applicability date of 
these regulations. The Treasury Department and the IRS, however, 
decline to adopt an applicability date rule with respect to the 
collection and retention of this information because some brokers may 
receive the information on transferred-in assets and to the extent they 
do, that information should be produced when requested under the IRS's 
summons authority. Accordingly, brokers should maintain transaction ID 
and digital asset address information associated with digital assets 
that were transferred-in to the broker before the applicability date of 
this regulation to the extent that information was retained in the 
ordinary course of business.
    The proposed regulations also required that for each digital asset 
sale for which a broker is required to file an information return, that 
the broker report whether the consideration received in that sale was 
cash, different digital assets, other property, or services. Numerous 
comments raised the concern that reporting the specific consideration 
received is too intrusive and causes security concerns. The final 
regulations do not make any changes in response to these comments 
because the language in the proposed (and final) regulations does not 
require brokers to report the specific goods or services purchased by 
the customer, but instead requires the broker to report on the category 
type that the consideration falls into. For example, if digital asset A 
is used to make a payment using the services of a PDAP for a motor 
vehicle, the regulations require the PDAP to report that the 
consideration received was for property (as opposed to cash, different 
digital assets, broker services, or other property). The purpose of 
this rule is to allow the IRS to be able to distinguish between sales 
involving categories of consideration because sales for cash do not 
raise the same valuation concerns as sales for different digital 
assets, other property, or services. In cases in which digital assets 
are exchanged for different digital assets, however, the Form 1099-DA 
may request brokers to report that specific digital asset received in 
return because of the enhanced valuation concerns that arise in these 
transactions. Another comment suggested that providing the gross 
proceeds amount in a non-cash transaction would not be helpful or 
relevant. The final regulations do not adopt this comment because gross 
proceeds reporting on non-cash transactions is, in fact, helpful and 
relevant to customers who must include gains and losses from these 
transactions on their Federal income tax returns.
    The proposed regulations would have required the broker to report 
the name of the digital asset sold. One comment noted that there is no 
universal convention or standard naming convention for digital assets. 
As a result, many digital assets share the same name or even the same 
ticker symbol. This comment recommended that the final regulations 
allow brokers the flexibility to provide enough information to 
reasonably identify the digital asset at issue. This comment also 
recommended that brokers be given the ability to provide the name of 
the trading platform where the transaction was executed to ensure that 
the name of the digital asset is clearly communicated. The final 
regulations do not adopt this comment because it is more appropriate to 
address these issues on the Form 1099-DA and its instructions.
    The proposed regulations also required that, for each digital asset 
sale for which a broker is required to file an information return, the 
broker report the gross proceeds amount in U.S. dollars regardless of 
whether the consideration received in that sale was cash, different 
digital assets, other property, or services. One comment recommended 
that brokers not be required to report gross proceeds in U.S. dollars 
for transactions involving the disposition of digital assets in 
exchange for different digital assets, but instead be required to 
report only the name of the digital asset received and the number of 
units received in that transaction. Although this suggestion would 
relieve the broker from having to determine the fair market value of 
the received digital assets in that transaction, the final regulations 
do not adopt this suggestion because the U.S. dollar value of the 
received digital assets is information that taxpayers need to compute 
their tax gains or losses and the IRS needs to ensure that taxpayers 
report their transactions correctly on their Federal income tax 
returns.
    The proposed regulations required brokers to report sales of 
digital assets on a transactional (per-sale) basis. One comment 
recommended that the final regulations alleviate burden on brokers and 
instead provide for aggregate reporting, with a separate Form 1099-DA 
filed for each type of digital asset. The final regulations do not 
adopt this recommendation. Transactional reporting on sales of digital 
assets is generally necessary so that the amount received in a digital 
asset sale can be compared with the basis of those digital assets to 
determine gain or loss. Transactional reporting is most helpful to 
taxpayers who must report these transactions on their Federal income 
tax returns and to the IRS to ensure taxpayers report these 
transactions on their Federal income tax returns.
    Several comments recommended that final regulations include a de 
minimis threshold for digital asset transactions that would exempt from 
reporting minor sale transactions--and in particular payment 
transactions--falling below that threshold. One comment suggested that 
such a de minimis threshold could help to prevent taxpayers from moving 
their digital assets to self-custodied locations that may be outside 
the scope of broker reporting. One comment recommended that brokers not 
be required to obtain tax documentation from customers (and therefore 
not report on those customers' tax identification numbers) for 
taxpayers with annual transactions below a de minimis threshold. A few 
comments recommended that separate de minimis thresholds or reduced 
reporting requirements be applied to brokers with lower transaction 
volumes during a start-up or transitional period. Some comments 
recommended aggregate annual thresholds for this purpose, for example 
based on the customer's aggregate gross proceeds or aggregate net gain 
for the year from these transactions, whereas other comments 
recommended per-transaction thresholds based either on gross proceeds 
or net gain generated from each transaction. One comment suggested that 
whatever threshold is applied, that it only be used for PDAPs.
    Except as discussed in Parts I.B.2., I.D.2., and I.D.3. of this 
Summary of Comments and Explanation of Revisions (involving payment 
sale transactions and certain transactions involving

[[Page 56504]]

qualifying stablecoins and specified NFTs), the final regulations do 
not adopt an additional de minimis threshold for digital asset sales 
for several reasons. First, any per-transaction threshold for the types 
of digital assets not subject to the de minimis thresholds discussed in 
Parts I.B.2., I.D.2., and I.D.3. of this Summary of Comments and 
Explanation of Revisions would not be easy for brokers to administer 
because these thresholds are more easily subject to manipulation and 
structuring abuse by taxpayers, and brokers are unlikely to have the 
information necessary to prevent these abuses by taxpayers, for example 
by applying an aggregation or anti-structuring rule. Second, the de 
minimis threshold for qualifying stablecoins will already give brokers 
the ability to avoid reporting on dispositions of $10,000 in qualifying 
stablecoins, which are the types of digital assets that are least 
likely to give rise to significant gains or losses, and the de minimis 
threshold for payment sale transactions will give PDAPs the ability to 
avoid reporting on dispositions of other types of digital assets that 
do not exceed $600. Third, extending any additional annual threshold to 
sales of these other types of digital assets that are more likely to 
give rise to tax gains and losses will leave taxpayers without the 
information they need to compute those gains and losses and will leave 
the IRS without the information it needs to ensure that taxpayers 
report all transactions required to be reported on their Federal income 
tax returns. Fourth, information reporting without taxpayer TINs is 
generally of limited utility to the IRS for verifying taxpayer 
compliance with their reporting obligations. Finally, a separate de 
minimis threshold or reduced reporting requirements for small brokers 
would be relatively easy for brokers to manipulate and would leave the 
customers of such brokers without essential information.
2. Optional Reporting Rules for Certain Qualifying Stablecoins
a. Description of the Reporting Method
    As discussed in Part I.A.1. of this Summary of Comments and 
Explanation of Revisions, the Treasury Department and the IRS have 
determined that it is appropriate to permit brokers to report certain 
stablecoin sales under an optional alternative reporting method to 
alleviate burdensome reporting for these transactions. This reporting 
method was developed after careful consideration of the comments 
submitted recommending a tailored exemption from reporting for certain 
stablecoin sales. These recommendations took different forms, including 
requests for exemptions for certain types of stablecoins and 
recommendations against granting an exemption for other types of 
stablecoins. One comment suggested that reporting relief would not be 
appropriate for dispositions of stablecoins for cash or property other 
than different digital assets. These so-called ``off-ramp 
transactions'' convert the owner's overall digital asset investment 
into a non-digital asset investment and, the comment stated, could 
provide taxpayers and the IRS with the opportunity to reconcile and 
verify the blockchain history of such stablecoins to ensure that 
previous digital asset transactions were reported. The Treasury 
Department and the IRS agree that reporting is appropriate and 
important for off-ramp transactions involving stablecoins because the 
IRS would be able to use this information to gain visibility into 
previously unreported digital asset transactions.
    Several comments recommended requiring reporting on stablecoin 
sales when the reporting reflects explicit trading activity around 
fluctuations involving the stablecoin. Because stablecoins do not 
always precisely reflect the value of the fiat currencies to which they 
are pegged, trading activity associated with fluctuations in 
stablecoins are more likely to generate taxable gains and losses. The 
Treasury Department and the IRS have concluded that traders seeking to 
profit from stablecoin fluctuations are likely to sell these 
stablecoins for cash (in an off-ramp transaction) or for other 
stablecoins that have not deviated from their designated fiat currency 
pegs. Accordingly, the Treasury Department and the IRS have concluded 
that reporting on sales of stablecoins for different stablecoins is 
also appropriate to assist in tax administration.
    In discussing other types of transactions, several comments noted 
that a disposition of a stablecoin for other digital assets often 
reflects mere momentary ownership of the stablecoin in transactions 
that use the stablecoin as a bridge asset in an exchange of one digital 
asset for a second digital asset. These comments also noted that, to 
the extent that a disposition of a stablecoin for a different digital 
asset does give rise to gain or loss, that gain or loss will ultimately 
be reflected (albeit on a net basis) when the received digital asset is 
later sold or exchanged. The Treasury Department and the IRS agree 
that, in contrast to sales of stablecoins for cash or other 
stablecoins, reports on sales of stablecoins for different digital 
assets (other than stablecoins) are less important for tax 
administration. Accordingly, the Treasury Department and the IRS have 
concluded that it is appropriate to allow brokers not to report sales 
of certain stablecoins for different digital assets that are not also 
stablecoins.
    Some comments recommended exempting sales of stablecoins from cost 
basis reporting given their belief in the low likelihood that these 
sales would result in gain or loss. Other comments recommended that the 
final regulations permit combined or aggregate reporting for stablecoin 
sales to lessen the reporting burden for brokers and the burden of 
receiving returns on the IRS. The Treasury Department and the IRS agree 
that basis reporting for all types of stablecoin sales may not justify 
the burden of tracking and reporting those sales. Although taxpayers 
that trade around stablecoin fluctuations would benefit from cost basis 
reporting, the Treasury Department and the IRS have concluded that 
these traders are more likely to be more sophisticated traders that are 
able to keep basis records on their own. The Treasury Department and 
the IRS have also concluded that allowing for reporting of stablecoins 
sales on an aggregate basis would strike an appropriate balance between 
the taxpayer's and IRS's need for information and the broker's interest 
in a reduced reporting burden.
    In addition to an overall aggregate reporting approach, numerous 
comments also recommended that the final regulations include a de 
minimis threshold for these stablecoin sales that would exempt 
reporting on a taxpayer's stablecoin sales to the extent that 
taxpayer's total gross proceeds from all stablecoin sales for the year 
did not exceed a specified threshold. Several comments suggested de 
minimis thresholds based on the taxpayer's aggregate net gain from 
stablecoin sales for the year. Other comments recommended the use of 
per-transaction de minimis thresholds, based either on the gain or loss 
in the transaction or the gross proceeds from the transaction.
    The Treasury Department and the IRS considered these comments to 
decide whether to further reduce the overall burden on brokers and the 
IRS. The final regulations do not adopt a per-transaction de minimis 
threshold because any per-transaction threshold for stablecoins would 
be relatively easy for customers to abuse by structuring their 
transactions. Although anti-structuring rules based on the intent of 
the taxpayer have been used in other information reporting regimes, 
such as section 6050I of the Code, similar rules

[[Page 56505]]

would be unadministrable here. Under section 6050I, the person who 
receives payment is the person who files the information returns and 
will know when a payor is making multiple payments as part of the same 
transaction. For purposes of section 6045 digital asset transaction 
reporting, however, brokers may not have the information necessary to 
determine the motives behind their customer's decisions to engage in 
numerous smaller stablecoin transactions instead of fewer larger 
transactions involving these stablecoins. Moreover, even for 
transactions exceeding a de minimis threshold, per-transaction 
reporting still has the potential to result in a very large number of 
information returns, with a correspondingly large burden on brokers and 
the IRS. The final regulations also do not adopt an aggregate de 
minimis threshold based on gains or losses because many brokers will 
not have the acquisition information necessary to determine basis, 
which would be necessary in order to be able to take advantage of such 
a de minimis rule, thus making the threshold less effective at reducing 
the number of information returns required to be filed. Instead, the 
final regulations adopt an aggregate gross proceeds threshold as 
striking an appropriate balance between a threshold that will provide 
the greatest burden relief for brokers and still provide the IRS with 
the information needed for efficient tax enforcement. Additionally, to 
avoid manipulation and structuring techniques that could be used to 
abuse this threshold, the final regulations require that the overall 
threshold be applied as a single threshold applicable to a single 
customer's sales of all stablecoins regardless of how many accounts or 
wallets that customer may have with the broker.
    Numerous comments recommended various de minimis thresholds ranging 
from $10 to $50,000. In determining the dollar amount that should be 
used for this de minimis threshold, the Treasury Department and the IRS 
considered that the gross proceeds reported for these stablecoin 
transactions are unlikely to reflect ordinary income or substantial net 
gain. The Treasury Department and the IRS have concluded that a larger 
de minimis threshold would eliminate most of the reporting on customers 
with small stablecoin holdings and likely small amounts of gain or loss 
without allowing more significant sales of fiat-based stablecoins to 
evade both information and income tax reporting. Accordingly, the 
Treasury Department and the IRS have determined that a $10,000 
threshold is the most appropriate because that threshold aligns with 
the reporting threshold under section 6050I, which Congress has adopted 
as the threshold for requiring certain payments of cash and cash-like 
instruments to be reported.
    In sum, the final regulations adopt an optional $10,000 overall 
annual de minimis threshold for certain qualifying stablecoin sales and 
permit sales over this amount to be reported on an aggregate basis 
rather than on a transactional basis. Specifically, in lieu of 
requiring brokers to report gross proceeds and basis on stablecoin 
sales under the transactional reporting rules of Sec.  1.6045-
1(d)(2)(i)(B) and (C), the final regulations at Sec.  1.6045-
1(d)(10)(i) permit brokers to report designated sales of certain 
stablecoins (termed qualifying stablecoins) under an alternative 
reporting method described at Sec.  1.6045-1(d)(10)(i)(A) and (B). A 
designated sale of a qualifying stablecoin is defined in final Sec.  
1.6045-1(d)(10)(i)(C) to mean any sale as defined in final Sec.  
1.6045-1(a)(9)(ii)(A) through (D) of a qualifying stablecoin other than 
a sale of a qualifying stablecoin in exchange for different digital 
assets that are not qualifying stablecoins. In addition, a designated 
sale of a qualifying stablecoin includes any sale of a qualifying 
stablecoin that provides for the delivery of a qualifying stablecoin 
pursuant to the settlement of any executory contract that would be 
treated as a designated sale of the qualifying digital asset under the 
previous sentence if the contract had not been executory. Final Sec.  
1.6045-1(d)(10)(i)(C) also defines the term non-designated sale of a 
qualifying stablecoin as any sale of a qualifying stablecoin other than 
a designated sale of a qualifying stablecoin. A broker reporting under 
this optional method is not required to report sales of qualifying 
stablecoins that are non-designated sales of qualifying stablecoins 
under either this optional method or the transactional reporting rules. 
Accordingly, for example, if a customer uses a qualifying stablecoin to 
buy another digital asset that is not a qualifying stablecoin, no 
reporting would be required if the broker is using the optional 
reporting method for qualifying stablecoins.
    Additionally, if a customer's aggregate gross proceeds (after 
reduction for the allocable digital asset transaction costs) from all 
designated sales of qualifying stablecoins do not exceed $10,000 for 
the year, a broker using the optional reporting method would not be 
required to report those sales. The Treasury Department and the IRS 
anticipate that the combination of allowing no reporting of non-
designated sales of qualifying stablecoins and the $10,000 annual 
threshold for all designated sales of qualifying stablecoins will have 
the effect of eliminating reporting on qualifying stablecoin 
transactions for many customers.
    If a customer's aggregate gross proceeds (after reduction for the 
allocable digital asset transaction costs) from all designated sales of 
qualifying stablecoins exceed $10,000 for the year, the broker must 
report on a separate information return for each qualifying stablecoin 
for which there are designated sales. Final Sec.  1.6045-
1(d)(10)(i)(B). If the aggregate gross proceeds exceed the $10,000 
threshold, reporting is required with respect to each qualifying 
stablecoin for which there are designated sales even if the aggregate 
gross proceeds for that qualifying stablecoin is less than $10,000. 
This rule is illustrated in final Sec.  1.6045-1(d)(10)(i)(D)(2) 
(Example 2). A broker reporting under this method must report on a 
separate Form 1099-DA or any successor form in the manner required by 
the form or instructions the following information with respect to 
designated sales of each type of qualifying stablecoin:

    (1) The name, address, and taxpayer identification number of the 
customer;
    (2) The name of the qualifying stablecoin sold;
    (3) The aggregate gross proceeds for the year from designated 
sales of the qualifying stablecoin (after reduction for the 
allocable digital asset transaction costs);
    (4) The total number of units of the qualifying stablecoin sold 
in designated sales of the qualifying stablecoin;
    (5) The total number of designated sale transactions of the 
qualifying stablecoin; and
    (6) Any other information required by the form or instructions.

    Brokers that want to use this reporting method in place of 
transactional reporting are not required to submit any form or 
otherwise make an election to be eligible to report in this manner. 
Additionally, brokers may report sales of qualifying stablecoins under 
this optional reporting method for some or all customers, though the 
method chosen for a particular customer must be applied for the entire 
year for that customer's sales. A broker may change its reporting 
method for a customer from year to year. Because the obligation to file 
returns under the transactional method in final Sec.  1.6045-
1(d)(2)(i)(B) is discharged only when a broker files information 
returns under the optional reporting method under Sec.  1.6045-
1(d)(10)(i), brokers that fail to report a customer's sales under 
either method will be subject to penalties under section 6721 for 
failure to file

[[Page 56506]]

information returns under the transactional method. See Part VI.B. of 
this Summary of Comments and Explanation of Revisions for a discussion 
of how the backup withholding rules will apply to payments falling 
below this de minimis threshold and to the gross proceeds of non-
designated sales of qualifying stablecoins.
    In the case of a joint account, final Sec.  1.6045-1(d)(10)(v) 
provides a rule for the broker to determine which joint account holder 
will be the customer for purposes of determining whether the customer's 
combined gross proceeds for all accounts owned exceed the $10,000 de 
minimis threshold. This joint account rule follows the general rules 
for determining which joint account holder's name and TIN should be 
reported by the broker on the information return (but for the 
application of the relevant threshold). Like the general rules, the 
joint account holder's name and TIN that must be reported by the broker 
is determined after the application of the backup withholding rules 
under Sec.  31.3406(h)-2(a). For example, under these rules, if two or 
more individuals own a joint account, the account holder that is 
treated as the customer is generally the first named individual on the 
account. See Form W-9 at p.5. If, however, the first named individual 
does not supply a certified TIN to the broker (or supplies a Form W-
8BEN establishing exempt foreign status) and if another individual 
joint account holder supplies a certified TIN, then the broker must 
treat that other individual as the customer for this purpose. See Sec.  
31.3406(h)-2(a)(3). Alternatively, if the first named individual joint 
account holder supplies a Form W-8BEN establishing exempt foreign 
status and the other individual joint account holder does not supply a 
certified TIN (or a Form W-8BEN) to the broker, then the broker must 
treat that other individual as the customer for this purpose because 
that is the individual that caused the broker to begin the backup 
withholding that will be shown on the information return.
b. Qualifying Stablecoin
    In describing which stablecoins they thought should be afforded 
reporting relief, comments recommended many different definitions, and 
those definitions generally included several types of requirements. 
Because the recommended definitions encompass multiple kinds of digital 
assets, for ease of description here we will use the term ``purported 
stablecoin'' as a stand-in for the type of asset the comments wanted to 
exempt from some or all reporting. First, many comments recommended 
that the purported stablecoin must have been designed or structured to 
track the value of a fiat currency for use as a means of making 
payment. Other comments recommended looking to whether the purported 
stablecoin is marketed as pegged to the fiat currency or whether the 
stablecoin is denominated on a 1:1 basis by reference to the fiat 
currency. Second, the comments proposed that the purported stablecoin 
must, in fact, function as a means of exchange and be generally 
accepted as payment by third parties. Third, the comments generally 
recommended that the purported stablecoin have some type of built-in 
mechanism designed to keep the value of the purported stablecoin in 
line with the value of the tracked fiat currency, or at least within 
designated narrow bands of variation from value of the fiat currency. 
Further, these comments recommended that this stabilization mechanism 
must actually work in practice to keep the trading value of the 
purported stablecoin within those designated narrow bands.
    Proposals for how this stabilization mechanism requirement could be 
met varied. For example, several comments recommended a requirement 
that the issuer guarantee redemption at par or otherwise be represented 
by a separate claim on the issuer denominated in fiat currency. Another 
comment recommended that the issuer meet collateralization (or reserve) 
requirements and provide annual third party attestation reports 
regarding reserve assets. Another comment proposed that these reserves 
be held in segregated, bankruptcy-remote reserve accounts for the 
benefit of holders. Another comment proposed that these reserves be 
held in short-term, liquid assets denominated in the same fiat 
currency. Other comments suggested requiring that the purported 
stablecoin be issued on receipt of funds for the purpose of making 
payment transactions. Several other comments proposed requiring that 
the purported stablecoin be regulated by a Federal, State, or local 
government. One comment suggested prohibiting any stabilization 
mechanism that is based on an algorithm that achieves price stability 
by managing the supply and demand of the stablecoin against a secondary 
token that is not price-pegged. Several comments recommended requiring 
that the purported stablecoin not deviate significantly from the fiat 
currency to which it is pegged. For example, the comments recommended 
that the value of the stablecoin not be permitted to fall outside a 
specified range (with suggestions ranging from 1 percent to 10 percent) 
for a meaningful duration over specified periods (such as for more than 
24 hours within any consecutive 10-day period or for any period during 
a 180-day period during the previous calendar year).
    Because the purpose of the optional reporting method is to minimize 
reporting on very high volumes of transactions involving little to no 
gain or loss, and because the optional reporting regime will ensure at 
least some visibility into transactions that in the aggregate exceed 
the $10,000 threshold, the Treasury Department and the IRS have 
determined that the definition of fiat currency-based stablecoins 
should be relatively broad to provide the most reduction of burden on 
brokers and the IRS. Thus, because the optional reporting method for 
stablecoins will provide for aggregate reporting of all proceeds from 
sales for cash or other stablecoins exceeding the de minimis threshold, 
it is not necessary to limit the definition of qualifying stablecoins 
to those with specific stabilization mechanisms such as fiat currency 
reserve requirements, as long as the stablecoin, in fact, retains its 
peg to the fiat currency.
    Accordingly, based on these considerations, the final regulations 
describe qualifying stablecoins as any digital asset that meets three 
conditions set forth in final Sec.  1.6045-1(d)(10)(ii)(A) through (C) 
for the entire calendar year. First the digital asset must be designed 
to track on a one-to-one basis a single convertible currency issued by 
a government or a central bank (including the U.S. dollar). Final Sec.  
1.6045-1(d)(10)(ii)(A).
    Second, final Sec.  1.6045-1(d)(10)(ii)(B) requires that the 
digital asset use one of two stabilization mechanisms set forth in 
final Sec.  1.6045-1(d)(10)(ii)(B)(1) and (2), which are based on the 
recommendations made by the comments. The first stabilization mechanism 
provided in final Sec.  1.6045-1(d)(10)(ii)(B)(1) sets forth a results-
focused test. Under this stabilization mechanism, the stabilization 
requirement is met if the stabilization mechanism causes the unit value 
of the digital asset not to fluctuate from the unit value of the 
convertible currency it was designed to track by more than 3 percent 
over any consecutive 10-day period during the calendar year. Final 
Sec.  1.6045-1(d)(10)(ii)(B)(1) also provides that UTC should be used 
in determining when each day within this 10-day period begins and ends. 
UTC time was chosen so that the same digital asset

[[Page 56507]]

will satisfy or not satisfy this test for all brokers regardless of the 
time zone in which such broker keeps its books and records. 
Additionally, this stabilization mechanism provides design flexibility 
to stablecoin issuers because it does not turn on how a digital asset 
maintains a stable value relative to a fiat currency, so long as it 
does. The second stabilization mechanism provided in final Sec.  
1.6045-1(d)(10)(ii)(B)(2), in contrast, sets forth a design-focused 
test that provides more certainty to brokers at the time of a 
transaction. Under this stabilization mechanism, the stabilization 
requirement is met if regulatory requirements apply to the issuer of 
the digital asset requiring the issuer to redeem the digital asset at 
any time on a one-to-one basis for the same convertible currency that 
the stablecoin was designed to track. Because a qualifying stablecoin 
that satisfies this second stabilization mechanism includes key 
requirements set forth in the specified electronic money product 
definition under section IV.A.4. of the CARF, it is anticipated that 
this definition will be considered when regulations are drafted to 
implement the CARF. See Part I.G.2. of this Summary of Comments and 
Explanation of Revisions (discussing U.S. implementation of the CARF).
    Third, under final Sec.  1.6045-1(d)(10)(ii)(C), to be a qualifying 
stablecoin, the digital asset must generally be accepted as payment by 
persons other than the issuer. This acceptance requirement would be met 
if the digital asset is accepted by the broker as payment for other 
digital assets or is accepted by a second party. An example of this is 
acceptance by a merchant pursuant to a sale effected by a PDAP.
    To avoid confusion for brokers, customers, and the IRS, the 
Treasury Department and the IRS have concluded that the determination 
of whether a digital asset is a qualifying stablecoin or not must be 
consistent throughout the entire year. Accordingly, the definition of a 
qualifying stablecoin requires that the digital asset meet the three 
conditions for the entire calendar year. For example, if a digital 
asset loses its peg and no longer satisfies the stabilization mechanism 
set forth in final Sec.  1.6045-1(d)(10)(ii)(B)(1), it will not be 
treated as a qualifying stablecoin for the entire year unless the 
digital asset satisfies the stabilization mechanism set forth in final 
Sec.  1.6045-1(d)(10)(ii)(B)(2). See Part VI.B. of this Summary of 
Comments and Explanation of Revisions for a discussion of the backup 
withholding exception for sales of digital assets that would have been 
non-designated sales of a qualifying stablecoin up to and including the 
date that digital asset loses its peg and no longer satisfies the 
stabilization mechanism set forth in final Sec.  1.6045-
1(d)(10)(ii)(B)(1).
    The Treasury Department and the IRS recognize that brokers will not 
know at the beginning of a calendar year whether a digital asset that 
would be a qualifying stablecoin solely under the results-focused test 
will be a qualifying stablecoin for that year, and therefore will need 
to be prepared to report and backup withhold on sales of that asset. 
However, it is anticipated that the results-focused test will rarely 
result in a digital asset losing qualifying stablecoin status unless 
there is a significant and possibly permanent loss of parity between 
the stablecoin and the convertible currency to which it is pegged. 
Other alternatives suggested by comments, such as a retrospective test 
that is based on whether a digital asset failed a results-based test 
during a period in the past, for example the 180 days prior to a sale, 
could result in different treatment of the same digital asset depending 
on when a sale of the digital asset took place during a calendar year, 
which would be confusing for both brokers and customers. Basing 
qualification on the results for a prior year would alleviate that 
concern, but could result in treating a digital asset as a qualifying 
stablecoin for a year in which it was not stable, and as not a 
qualifying stablecoin for a later year in which it is stable, which 
would not achieve the purposes of the optional reporting method for 
qualifying stablecoins. Accordingly, the Treasury Department and the 
IRS have concluded that a test that treats a digital asset as a 
qualifying stablecoin, or not, for an entire calendar year is the most 
administrable way to achieve those purposes.
3. Optional Reporting Rules for Certain Specified Nonfungible Tokens
a. Description of the Reporting Method
    Notwithstanding the conclusion discussed in Part I.A.2. of this 
Summary of Comments and Explanation of Revisions that the definition of 
digital assets includes NFTs, the Treasury Department and the IRS 
considered the many comments received suggesting a modified reporting 
approach under section 6045 for all or a subset of NFTs. One comment 
recommended against requiring reporting for NFTs for which the owner 
does not have the expectation that the NFT will return gain. The final 
regulations do not adopt this comment because it would be overly 
burdensome for brokers to determine each customer's investment 
expectation. Other comments recommended against any reporting on NFT 
transactions by brokers under section 6045 because reporting under 
section 6050W (on Form 1099-K, Payment Card and Third Party Network 
Transactions) is more appropriate for NFT sellers. Indeed, these 
comments noted, brokers that meet the definition of third party 
settlement organizations under section 6050W(b)(3) are already filing 
Forms 1099-K on their customers' sales of NFTs. The final regulations 
do not adopt these comments because the Treasury Department and the IRS 
have concluded that the reporting rules should apply uniformly to NFT 
marketplaces, and not all digital asset brokers meet the definition of 
a third party settlement organization under section 6050W(b)(3).
    Several comments raised valuation considerations, particularly in 
NFT-for-NFT exchanges or NFT sales in conjunction with physical goods 
or events, as a reason to exempt all NFTs from reporting. The final 
regulations do not adopt these comments because taxpayers engaging in 
these transactions still need to report the transactions on their 
Federal income tax returns. Additionally, the final regulations already 
permit brokers that cannot determine the value of property customers 
receive in a transaction with reasonable accuracy to report that the 
gross proceeds have an undeterminable value. Final Sec.  1.6045-
1(d)(5)(ii)(A).
    Other comments recommended against requiring reporting for all NFT 
transactions because NFTs, unlike other digital assets, are easier for 
taxpayers to track on the relevant blockchain. As a result, these 
comments suggested, taxpayers do not need to be reminded of their NFT 
sales and can more easily determine their bases in these assets by 
referencing the public blockchain. The final regulations do not adopt 
this comment because to be helpful for closing the income tax gap, 
information reporting must not only provide the information necessary 
for taxpayers to compute their tax gains, it must also provide the IRS 
with that information to ensure that taxpayers report all transactions 
required to be reported on their Federal income tax returns.
    Several comments asserted that the cost of reporting on non-
financial NFTs outweighs the tax administration benefits to taxpayers 
and the IRS because these assets generally do not have substantial 
value, and as such transactions in these assets do not contribute 
meaningfully to the income tax gap. For example, several comments

[[Page 56508]]

cited to publicly available statistics showing that many NFT 
transactions involve small dollar amounts. According to one comment, 
the average price of an NFT transaction was only $150 for the third 
quarter of 2022, and the median NFT transaction value was only $37.69 
over the six-month period ending October 1, 2023.\3\ Additionally, the 
comment stated that the value of approximately 45 percent of all NFT 
transactions was less than $25, and 82 percent of all NFT transaction 
were valued at less than $500, when compared to total exchange volume 
on the largest centralized and decentralized exchanges.\4\ Given the 
cost of transactional reporting and the relatively small value of the 
transactions, several comments suggested that aggregate reporting, in a 
regime analogous to that under section 6050W for reporting on payment 
card and third party network transactions, would lessen the burden of 
broker reporting on non-financial NFTs without a meaningful curtailment 
of the overall goal of reducing the income tax gap. Other comments 
recommended against NFT basis reporting under this aggregate reporting 
proposal because, unlike cryptocurrency and other fungible tokens, past 
purchase prices for NFTs are trackable on the blockchain through the 
NFT's unique token identification. Another comment recommended against 
transactional reporting for creators of non-financial NFTs (primary 
sales)--as opposed to resellers of non-financial NFTs (secondary 
sales)--because transactional reporting for creators would needlessly 
result in large numbers of separate reports. Additionally, this comment 
recommended that primary sales of non-financial NFTs should be reported 
under section 6050W instead of under section 6045 because returns under 
section 6045 would incorrectly report gross proceeds income instead of 
ordinary income.
---------------------------------------------------------------------------

    \3\ The comment cited a report from NonFungible.com, which 
stated that all data included was sourced from the blockchain via 
its own dedicated blockchain nodes. The report includes a table 
showing the average price for an NFT in the third quarter of 2022 
was $154. This was a drop in value from an average price of $643 
from the second quarter of 2022. The data sets underlying these 
estimates consist of public blockchain data regarding NFT volume, 
centralized exchange volume, and decentralized exchange volume. See 
Dune Analytics, https://dune.com/browse/dashboards (last visited 
October 30, 2023); Dune Analytics, https://github.com/duneanalytics/spellbook/tree/main (last visited October 30, 2023); The Block, 
https://www.theblock.co/data/crypto-markets/spot/cryptocurrency-exchange-volume-monthly (last visited Oct. 30, 2023).
    \4\ This comment cited an article that used data reported in an 
article published on Medium's website, ``Most artists are not making 
money off NFTs and here are some graphs to prove it'' from April 19, 
2021. This article stated it was based on blockchain and other 
marketplace data for the week of March 14 through March 21, 2021. 
During that timeframe, according to the article, 33.6 percent of 
primary sales of NFTs were $100 or less; 20 percent of primary sales 
were $100 to $200, and 7.7 percent of primary sales were $200 to 
$300. While not an exact match to the information provided by the 
comment, the sales data in this article are comparable.
---------------------------------------------------------------------------

    Transactional reporting under section 6045 is generally necessary 
to allow taxpayers and the IRS to compare the gross proceeds taxpayers 
received in sales of certain property with the cost basis of that 
property. Because the cited statistics show that a substantial portion 
of non-financial NFT transactions are small dollar transactions for 
which taxpayers can more easily track their own cost basis, the 
Treasury Department and the IRS agree that the cost of transactional 
reporting for low-value non-financial NFTs may outweigh the benefits to 
taxpayers and the IRS. Accordingly, the final regulations have added a 
new optional alternative reporting method for sales of certain NFTs to 
allow for aggregate reporting instead of transactional reporting, with 
a de minimis annual threshold below which no reporting is required. 
Brokers that do not wish to build a separate system for NFTs eligible 
for aggregate reporting can report all NFT transactions under the 
transactional system. Additionally, brokers do not need to submit any 
form or otherwise make an election to report under this method and are 
not required to report under this optional method consistently from 
customer to customer or from year to year; however, the method chosen 
for a particular customer must be applied for the entire year for that 
customer's sales. Finally, to address the comment regarding the 
distinction between primary sales of NFTs that give rise to ordinary 
income and secondary sales of NFTs that give rise to gross proceeds, 
brokers choosing to report sales of NFTs under this optional method 
must report, to the extent ordinarily known, the portion of the total 
gross proceeds reported attributable to primary sales (that is, the 
first sale of the particular NFT).
    Given the statistics cited showing the relatively small average and 
median values for non-financial NFT transactions, numerous comments 
said these small purchases should not need to be reported and several 
comments recommended the application of a de minimis threshold below 
which reporting would not be required at all to alleviate reporting on 
an overwhelming majority of NFT sales. Some comments recommended the 
use of a per-transaction threshold with proposed thresholds ranging 
from $50 to $50,000, while other comments recommended an aggregate 
gross proceeds threshold, similar to the $600 threshold applicable 
under section 6050W(e), as most appropriate. Because some of these NFT 
sales are currently reportable under section 6050W, the Treasury 
Department and the IRS have concluded that it would be most appropriate 
to follow the same $600 reporting threshold applicable under that 
provision. Accordingly, the final regulations adopt an annual $600 de 
minimis threshold for each customer below which brokers reporting under 
the optional aggregate method are not required to report gross proceeds 
from these NFTs transactions. If the customer's total gross proceeds 
(after reduction for any allocable digital asset transaction costs) 
from sales of specified NFTs exceed $600 for the year, a broker may 
report those sales on an aggregate basis in lieu of reporting those 
sales under the transactional reporting rules. A broker reporting under 
this method must report on a Form 1099-DA (or any successor form) in 
the manner required by the form or instructions the following 
information with respect to the customer's sales of specified NFTs:

    (1) The name, address, and taxpayer identification number of the 
customer;
    (2) The aggregate gross proceeds for the year from all sales of 
specified NFTs (after reduction for the allocable digital asset 
transaction costs);
    (3) The total number of specified NFTs sold; and
    (4) Any other information required by the form or instructions.

    Additionally, a broker reporting under this method must report the 
aggregate gross proceeds that are attributable to the first sale by the 
creator or minter of the specified NFT to the extent the broker would 
ordinarily know that the transaction is the first sale of the specified 
NFT token by the creator or minter. It is anticipated that a broker 
would ordinarily know that the transaction is the first sale of the 
specified NFT by the creator or minter if the broker provided services 
to the creator or minter that enabled the creator to create (or minter 
to mint) the specified NFT. It is also anticipated that, to the extent 
a broker inquires whether the customer's sale of the specified NFT will 
be a first sale, that the broker would ordinarily know this information 
based on the customer's response. Brokers are not required to seek out 
such information from third party sources, such as a public blockchain 
or through blockchain analytics.
    The IRS intends to monitor NFTs reported under this optional 
aggregate

[[Page 56509]]

reporting method to determine whether this reporting hampers its tax 
enforcement efforts. If abuses are detected, the IRS will reconsider 
these special reporting rules for NFTs. For a discussion of how the 
backup withholding rules apply to payments falling below this de 
minimis threshold, see Part VI.B. of this Summary of Comments and 
Explanation of Revisions. See Part I.D.2.a. of this Summary of Comments 
and Explanation of Revisions for a discussion of how the de minimis 
threshold is applied to joint account holders.
b. Specified nonfungible token
    In determining the specific subset of NFTs that should be eligible 
for this optional aggregate reporting method, the final regulations 
considered the comments received in favor of eliminating reporting on 
sales of certain types of NFTs. For example, one comment suggested the 
final regulations apply a ``use test'' to distinguish between NFTs that 
are used for investment purposes and those that are used for enjoyment 
purposes. The final regulations do not adopt this comment to define the 
subset of NFTs that are eligible for aggregate reporting because 
determining how a customer uses an NFTs would not be administratively 
feasible for most brokers. Another comment recommended that reporting 
should be required for those NFTs which (on a look through basis) 
reference assets that were previously subject to reporting under Sec.  
1.6045-1 or otherwise could be used to deliver value, such as a method 
of payment. The Treasury Department and the IRS generally agree with 
the distinction made in this comment because brokers already must 
determine if an effected sale is that of a security, commodity, etc. 
under the definitions provided under the section 6045 regulations. 
Accordingly, making the determination that an asset referenced by an 
NFT fits within those same definitions--or otherwise references a 
digital asset other than an NFT--is administrable and should not create 
significantly more burden for brokers. Because both types of NFT can 
result in taxable income, however, the Treasury Department and the IRS 
disagree with the comment's conclusion that only NFTs that reference 
assets previously subject to broker reporting or otherwise could be 
used to deliver value should be subject to the final regulations. 
Instead, it is appropriate to require transactional reporting on sales 
of NFTs that reference previously reportable assets or otherwise could 
be used to deliver value and allow for aggregate reporting on sales of 
other NFTs.
    Accordingly, the final regulations under Sec.  1.6045-1(d)(10)(iii) 
permit optional aggregate reporting for specified NFTs that look to the 
character of the underlying assets, if any, referenced by the NFT. 
Under these rules, to constitute a specified NFT, the digital asset 
must be of the type that is indivisible (that is, the digital asset 
cannot be subdivided into smaller units without losing its intrinsic 
value or function) and must be unique as determined by the inclusion in 
the digital asset itself of a unique digital identifier, other than a 
digital asset address, that distinguishes that digital asset from all 
other digital assets. Final Sec.  1.6045-1(d)(10)(iv)(A) and (B). This 
means that the unique digital identifier is inherently part of the 
token itself and not merely referenced by the digital asset. Taken 
together, these requirements would exclude all fungible digital assets 
from the definition of specified NFTs, including the smallest units of 
such digital assets. The Treasury Department and the IRS considered 
whether the smallest units of fungible digital assets should be 
included in the definition of specified NFTs to the extent specialized 
off-chain software catalogs and indexes such units. The final 
regulations do not include such units in the definition of specified 
NFTs because, even if it was appropriate to include these assets in the 
definition of specified NFTs based on the application of off-chain 
software, the specialized off-chain software that catalogs and indexes 
such units, in fact, indexes every such unit regardless of whether the 
particular unit is trading separately or as part of a larger 
denomination of such digital asset. As a result, including these 
indexed digital assets in the definition would arguably result in 
larger denominations of a fungible digital asset being treated as 
combinations of multiple specified NFTs and thus subject to the 
optional aggregate reporting rule. Moreover, a definitional distinction 
that would ask brokers to look to the indexed units to determine if the 
indexed unit has any value separate from the fungible asset value would 
be difficult for brokers to administer.
    In addition to satisfying these two criteria associated with the 
nonfungibility of the digital asset itself, to be a specified NFT, the 
digital asset must not directly (or indirectly through one or more 
other digital assets that also satisfy the threshold nonfungibility 
tests) provide the holder with an interest in certain excluded 
property. Excluded property generally includes assets that were 
previously subject to reporting under Sec.  1.6045-1 of the pre-2024 
final regulations or any digital asset that does not satisfy either of 
the two criteria. Specifically, excluded property is defined as any 
security as defined in final Sec.  1.6045-1(a)(3), commodity as defined 
in final Sec.  1.6045-1(a)(5), regulated futures contract as defined in 
final Sec.  1.6045-1(a)(6), or forward contract as defined in final 
Sec.  1.6045-1(a)(7). Finally, excluded property includes any digital 
asset that does not satisfy the two threshold nonfungibility tests, 
such as a qualifying stablecoin or other non-NFT digital assets.
    In contrast, a digital asset that satisfies the two criteria and 
references or provides an interest in a work of art, sports 
memorabilia, music, video, film, fashion design, or any other property 
or services (non-excluded property) other than excluded property is a 
specified NFT that is eligible for the optional aggregate reporting 
rule under the final regulations. An NFT that constitutes a security or 
commodity or other excluded property is an interest in excluded 
property for this purpose. Additionally, by excluding any NFT that 
provides the holder with any interest in excluded property from the 
definition of specified NFTs, an NFT that provides an interest in both 
excluded property and non-excluded property will not be included in the 
definition of specified NFT. This result lets brokers avoid having to 
undertake burdensome valuations with respect to NFTs that reference 
more than one type of property.
    While several comments indicated that it would be administratively 
feasible for brokers to review each NFT to determine the nature of the 
underlying assets, one comment requested the adoption of a presumption 
test that would treat an NFT as an interest in financial assets unless 
the broker categorizes it otherwise. The Treasury Department and the 
IRS have concluded that a presumption rule for distinguishing between 
NFTs that is based on whether a broker chooses to categorize the 
underlying assets could potentially lead to abuse. Brokers that find it 
too difficult to determine the nature of assets referenced by NFTs can 
choose not to use the optional aggregate reporting method for NFTs. 
Accordingly, the final regulations do not adopt this presumption rule.
4. Reporting Rules for PDAP Sales
    As discussed in Part I.B.2. of this Summary of Comments and 
Explanation of Revisions, the Treasury Department and the IRS have

[[Page 56510]]

determined that it is appropriate to permit some reporting relief for 
small PDAP sale transactions. Several comments offered alternatives to 
reporting on payment transaction sales to reduce the reporting burden 
of PDAPs. For example, several comments suggested exempting PDAPs from 
the requirement to report cost basis because PDAPs have no visibility 
into the customer's cost basis. The final regulations do not make any 
changes to address this comment because neither the proposed 
regulations nor the final regulations require PDAPs to report cost 
basis precisely because it is the understanding of the Treasury 
Department and the IRS that these brokers may not currently have any 
way to know the customer's cost basis.
    Numerous comments recommended against any reporting of payments 
processed by PDAPs on purchases of common, lower-cost items such as a 
cup of coffee or ordinary consumer goods. Other comments recommended 
that the final regulations adopt a de minimis threshold for these 
purchases to reduce the overall reporting burden for these brokers. 
Another comment asserted that the changes made by the Infrastructure 
Act to section 6050I (requiring trades or businesses to report the 
receipt of more than $10,000 in cash including digital assets) shows 
that Congress did not intend for section 6045 to capture lower-value 
digital asset purchase transactions. Another comment suggested that the 
potential revenue loss involving most purchases is extremely low and 
that using digital assets to make everyday purchases is not a realistic 
means of tax avoidance. This comment noted that the digital assets that 
are used to purchase daily items are stablecoins that do not ordinarily 
fluctuate in value. Another comment suggested a per transaction de 
minimis threshold for reporting on payments equal to the $10,000 
threshold in section 6050I or the $50,000 threshold in the CARF. 
Another comment suggested that the de minimis threshold should match 
the annual threshold under section 6050W, though this comment also 
noted that this $600 threshold amount was too low. Another comment 
recommended a per-transaction threshold for purchases over $500 
(adjusted for inflation), but also recommended, if this de minimis rule 
is adopted, that taxpayers be reminded in the instructions to Forms 
1040 and 1099-DA that they still must report the gains and losses from 
these unreported payment transactions.
    As discussed in Parts I.A.1. and I.D.2. of this Summary of Comments 
and Explanation of Revisions, the final regulations adopt an optional 
$10,000 overall annual de minimis threshold for qualifying stablecoin 
sales and permit sales over this amount to be reported on an aggregate 
basis rather than on a transactional basis. This $10,000 annual 
threshold applies to PDAPs who choose to report qualifying stablecoin 
transactions under this optional method. Accordingly, given the comment 
that digital asset purchase transactions often are made using 
stablecoins, many purchases made using the services of PDAPs will not 
be reported due to the application of that de minimis threshold for 
payment transactions. This sizable overall annual threshold for 
payments made using qualifying stablecoins is appropriate because 
taxpayers are unlikely to have significant (if any) unreported gains or 
losses from these payment transactions that fall below the $10,000 
threshold. In contrast, as suggested by one comment, allowing for a de 
minimis threshold for digital assets other than qualifying stablecoins 
that are more likely to give rise to significant gains and losses 
likely would not be helpful to taxpayers who use them. This is because 
they would have to separately account for their payment transactions 
below the threshold to accurately report their gains and losses from 
these transactions for which they would not receive an information 
return. Moreover, because many PDAP transactions involve transactions 
in which the digital assets are first exchanged for cash before that 
cash is transmitted to the merchant, a high threshold for these 
transactions could create an incentive for taxpayers to dispose of 
their highly appreciated digital assets by way of payments just to 
avoid tax reporting. Notwithstanding these concerns, if a given 
taxpayer engages in relatively low-value payment transactions involving 
digital assets other than qualifying stablecoins, reporting to the IRS 
may not be as important in overcoming the overall income tax gap as the 
burden it would impose on PDAPs.
    Accordingly, after balancing these competing concerns, the Treasury 
Department and the IRS have concluded that an annual de minimis 
threshold of $600 would be appropriate for PDAP sales under final Sec.  
1.6045-1(a)(9)(ii)(D) because that threshold is similar to the 
threshold under sections 6041, 6041A, and 6050W(e) of the Code, thereby 
reflecting the balance between accurate tax reporting and information 
reporting requirements imposed on brokers that Congress thought 
appropriate. Additionally, this overall threshold for PDAP sales should 
be more administrable because PDAPs would not have to adopt processes 
to monitor structuring activities used by customers to evade reporting. 
See, e.g., Sec.  1.6050I-1(c)(1)(ii)(B)(2) (treating an instrument as 
cash where the recipient knows that it is being used to avoid 
reporting). Under this threshold, PDAPs would not have to report PDAP 
sales of digital assets with respect to a customer if those sales did 
not exceed $600 for the year. If a customer's PDAP sales exceed $600 
for the year, all of that customer's sales would be reportable under 
the general transactional reporting rules, because customers need that 
reporting to identify taxable dispositions of digital assets. 
Additionally, to avoid having to apply multiple de minimis thresholds 
to the same digital assets, the de minimis threshold for PDAP sales 
only applies to digital assets other than qualifying stablecoins or 
specified NFTs. Thus, for example, if a customer has PDAP sales of 
$9,000 using qualifying stablecoins and PDAP sales of $500 using 
digital assets other than qualifying stablecoins (or specified NFTs) 
for a particular year, the PDAP should apply the $600 threshold for the 
second set of PDAP sales to eliminate the reporting obligation on the 
PDAP sales of $500. Under these facts, the PDAP would not be required 
to report any of the customer's digital asset transactions for the 
year.
    In the case of a joint account, final Sec.  1.6045-1(d)(2)(i)(C) 
provides a rule (by cross-reference to final Sec.  1.6045-1(d)(10)(v)) 
for the broker to determine which joint account holder will be the 
customer for purposes of determining whether the customer's combined 
gross proceeds for all accounts owned exceed the $600 de minimis 
threshold. See Part I.D.3.a. of this Summary of Comments and 
Explanation of Revisions for a discussion of how the de minimis 
threshold is applied to joint account holders.
    Finally, because a sale under final Sec.  1.6045-1(a)(9)(ii)(A) 
through (C) that is effected by brokers holding custody of the 
customer's digital assets or acting as the counterparty to the sale 
could also be structured to meet the definition of a PDAP sale effected 
by that broker, final Sec.  1.6045-1(a)(9)(ii)(D) provides that any 
PDAP sale that is also a sale under one of the other definitions of 
sale under final Sec.  1.6045-1(a)(9)(ii)(A) through (C) (non-PDAP 
sale) that would be subject to reporting due to the broker effecting 
the sale as a broker other than as a PDAP must be treated as a non-PDAP 
sale. Thus, if a customer instructs a custodial broker to exchange 
digital asset A for digital asset B, and that broker executes the 
transaction by

[[Page 56511]]

transferring payment (digital asset A) to a second person that is also 
a customer of that broker, the sale will be treated as a sale under 
Sec.  1.6045-1(a)(9)(ii)(A)(2), not as a PDAP sale and not eligible for 
the $600 de minimis threshold. Similarly, if a PDAP, acting as an agent 
to a buyer of merchandise, receives digital assets from that buyer 
along with instructions to exchange those digital assets for cash to be 
paid to a merchant, the sale will be treated as a sale under Sec.  
1.6045-1(a)(9)(ii)(A)(1) and not as a PDAP sale. If, in this last 
example, the PDAP exchanges the digital assets received from the buyer 
for cash as an agent to the merchant and not the buyer, then the sale 
will be treated as a PDAP sale because the sale under Sec.  1.6045-
1(a)(9)(ii)(A)(1) would not be subject to reporting by the broker, but 
for the broker being a PDAP.
E. Determining Gross Proceeds and Adjusted Basis
    In defining gross proceeds and initial basis in a sale transaction, 
the proposed information reporting regulations generally followed the 
substantive tax rules under proposed Sec.  1.1001-7(b) for computing 
the amount realized from transactions involving the sale or other 
disposition of digital assets and the substantive rules under proposed 
Sec.  1.1012-1(h) for computing the basis of digital assets received in 
transactions involving the purchase or other acquisition of digital 
assets. In addition, the proposed information reporting regulations 
generally followed the substantive tax rules proposed in Sec. Sec.  
1.1001-7(b) and 1.1012-1(h)(3) for determining the fair market value of 
property or services received or transferred by the customer in an 
exchange transaction involving digital assets.
1. Valuation Issues
    Under longstanding legal principles, the value of property 
exchanged for other property received ordinarily should be equal in 
value. Under these principles, in an exchange of property, both the 
amount realized on the property transferred and the basis of the 
property received in an exchange, ordinarily are determined by 
reference to the fair market value of the property received. See, e.g., 
United States v. Davis, 370 U.S. 65 (1962); Philadelphia Park Amusement 
Co. v. United States, 126 F. Supp. 184 (Ct. Cl. 1954); Rev. Rul. 55-
757, 1955-2 C.B. 557.
    The proposed rules under proposed Sec.  1.6045-1 generally followed 
these substantive rules for determining fair market value of property 
or services received by the customer in an exchange transaction 
involving digital assets. Specifically, proposed Sec.  1.6045-
1(d)(5)(ii)(A) provided that in determining gross proceeds, the fair 
market value should be measured as of the date and time the transaction 
was effected. Additionally, except in the case of services giving rise 
to digital asset transaction costs, to determine the fair market value 
of services or property (including different digital assets or real 
property) paid to the customer in exchange for digital assets, proposed 
Sec.  1.6045-1(d)(5)(ii)(A) provided that the broker must use a 
reasonable valuation method that looks to contemporaneous evidence of 
value of the services, stored-value cards, or other property. In 
contrast, because the value of digital assets used to pay for digital 
asset transaction costs is likely to be significantly easier to 
determine than any other measure of the value of services giving rise 
to those costs, the proposed regulations provided that brokers must 
look to the fair market value of the digital assets used to pay for 
digital asset transaction costs in determining the fair market value of 
services (including the services of any broker or validator involved in 
executing or validating the transfer) giving rise to those costs.
    In the case of one digital asset exchanged for a different digital 
asset, proposed Sec.  1.6045-1(d)(5)(ii)(A) provided that the broker 
may rely on valuations performed by a digital asset data aggregator 
using a reasonable valuation method. For this purpose, the proposed 
regulations provided that a reasonable valuation method looks to the 
exchange rate and the U.S. dollar valuations generally applied by the 
broker effecting the exchange as well as other brokers, taking into 
account the pricing, trading volumes, market capitalization, and other 
relevant factors in conducting the valuation. Proposed Sec.  1.6045-
1(d)(5)(ii)(C) also provided that a valuation method is not a 
reasonable method if the method over-weighs prices from exchangers that 
have low trading volumes, if the method under-weighs exchange prices 
that lie near the median price value, or if it inappropriately weighs 
factors associated with a price that would make that price an 
unreliable indicator of value. Additionally, proposed Sec.  1.6045-
1(d)(5)(ii)(B) provided that the broker must look to the fair market 
value of the services or property received if there is a disparity 
between the value of the services or property received and the value of 
the digital asset transferred in a digital asset exchange transaction. 
However, if the broker reasonably determines that the value of services 
or property received cannot be valued with reasonable accuracy, 
proposed Sec.  1.6045-1(d)(5)(ii)(B) provided that the fair market 
value of the received services or property must be determined by 
reference to the fair market value of the transferred digital asset. 
Finally, proposed Sec.  1.6045-1(d)(5)(ii)(B) provided that the broker 
must report an undeterminable value for gross proceeds from the 
transferred digital asset if the broker reasonably determines that 
neither the digital asset nor the services or other property exchanged 
for the digital asset can be valued with reasonable accuracy.
    The Treasury Department and the IRS solicited comments on: (1) 
whether the fair market value of services giving rise to digital asset 
transaction costs (including the services of any broker or validator 
involved in executing or validating the transfer) should be determined 
by looking to the fair market value of the digital assets used to pay 
for the transaction costs, and (2) whether there are circumstances 
under which an alternative valuation rule would be more appropriate.
    The responses to these inquiries varied. One comment agreed that 
using the fair market value of the digital assets used as payment would 
be the most feasible and easily attainable means of valuing such 
services. A few comments stated the proposed approach would be 
problematic, because: (1) market prices of digital assets are highly 
volatile, not always reflecting the actual economic value of the 
services rendered, and (2) the reliance on the fair market value of the 
digital assets, instead of the services rendered, would be inconsistent 
with longstanding legal principles, resulting in significant compliance 
costs and recordkeeping burdens. Instead, the comments recommended that 
the Treasury Department and the IRS develop and re-propose alternative 
valuation metrics. Another comment recommended that the fair market 
value of the services giving rise to digital asset transaction costs 
should be based on the contracted price agreed to by the parties. 
Another comment stated that these questions rested on an improper 
assumption that transaction fees should be or can be calculated at a 
market value. This comment recommended that the final rules provide 
taxpayers and brokers with the option of determining the value of such 
services using the acquisition cost of the digital assets used as 
payment. One comment advised that many digital assets do not have 
easily ascertainable fair market values, particularly when involving 
services,

[[Page 56512]]

other digital assets, or non-standard forms of consideration.
    The final regulations do not adopt the recommendations for 
alternative valuation approaches. As noted, except in the case of 
services giving rise to digital asset transaction costs, the proposed 
regulations required that brokers look to the value of services or 
property received by the customer in exchange for transferred digital 
assets in determining gross proceeds. Only when the services or 
property received cannot be valued does the broker need to look to the 
fair market value of the transferred digital assets. For broker 
services giving rise to digital asset transaction costs, the proposed 
regulations required brokers to look to the fair market value of the 
digital assets used to pay for digital asset transaction costs because 
it is likely to be significantly easier for brokers to determine the 
value of the transferred digital assets than it is to value their 
services. These valuation rules are reasonable and appropriate because 
they are consistent with United States v. Davis, 370 U.S. 65 (1962); 
Philadelphia Park Amusement Co. v. United States, 126 F. Supp. 184 (Ct. 
Cl. 1954); Rev. Rul. 55-757, 1955-2 C.B. 557, discussed previously in 
this Part I.E.1. The proposed alternatives do not conform with these 
authorities. Additionally, these rules provide practical approaches for 
brokers to use that are less burdensome than a rule requiring a case-
specific valuation of services or other property, particularly for 
digital asset brokers who likely have more experience valuing digital 
assets transferred.
    Several comments stated that brokers would need more detailed 
guidance on how to determine fair market value in digital asset 
transactions, including the reasonable methods brokers can use for 
assigning U.S. dollar pricing to each unique transaction. This comment 
recommended allowing brokers to choose a reasonable pricing methodology 
that is convenient for them. For example, this comment noted that it is 
standard industry practice today to use a daily volume weighted average 
price (VWAP) to value. Another comment recommended establishing a safe 
harbor rule that would allow a digital asset's price any time during 
the date of sale to be used to report gross proceeds. The final 
regulations do not adopt these comments because the suggested 
approaches are not consistent with existing case law and IRS guidance 
as the determination of fair market value must generally be determined 
at the time of the transaction. See Cottage Savings Association v. 
Commissioner, 499 U.S. 554 (1991).
2. Allocation of Digital Asset Transaction Costs
    Proposed Sec.  1.6045-1(d)(5)(iv) and (d)(6)(ii)(C)(2) followed the 
substantive tax rules provided under proposed Sec. Sec.  1.1001-7(b) 
and 1.1012-1(h) for allocating amounts paid to effect the disposition 
or acquisition of a digital asset (digital asset transaction costs). 
Specifically, these rules generally provided that in the case of a sale 
or disposition of digital assets, the total digital asset transaction 
costs paid by the customer are generally allocable to the disposition 
of the digital assets. Conversely, in the case of an acquisition of 
digital assets, the total digital asset transaction costs paid by the 
customer are generally allocable to the acquisition of the digital 
assets. The rules also provided an exception in an exchange of one 
digital asset for another digital asset differing materially in kind or 
in extent. In that case, the proposed regulations allocated one-half of 
any digital asset transaction cost paid by the customer in cash or 
property to effect the exchange to the disposition of the transferred 
digital asset and the other half to the acquisition of the received 
digital asset (the split digital asset transaction cost rule). As is 
discussed in Part II.B.1. of this Summary of Comments and Explanation 
of Revisions, many comments were received raising several concerns with 
the split digital asset transaction cost rule. For the reasons 
discussed in that Part, the final Sec. Sec.  1.1001-7(b) and 1.1012-
1(h) include revised rules to instead allocate 100 percent of the 
digital asset transaction costs to the disposition of the transferred 
digital asset in the case of an exchange of one digital asset for 
another digital asset differing materially in kind or in extent. 
Correspondingly, the final Sec.  1.6045-1(d)(5)(iv)(B) and 
(d)(6)(ii)(C)(2) include revised rules to follow the final substantive 
tax rules and now require 100 percent of the digital asset transaction 
costs to be allocated to the disposition of the transferred digital 
asset in the case of an exchange of one digital asset for another 
digital asset differing materially in kind or in extent.
    Comments were also received expressing concern in the case of 
digital asset transaction costs imposed on dispositions of digital 
assets used to pay those costs (cascading digital asset transaction 
costs). As discussed in Part II.B.4. of this Summary of Comments and 
Explanation of Revisions, the substantive rules have been revised to 
respond to these comments, and final Sec.  1.6045-1(d)(5)(iv)(C) 
correspondingly provides that, in the case of a sale of digital assets 
in exchange for different digital assets, for which the acquired 
digital assets are withheld to pay the digital asset transaction costs 
to effect the original transaction, the total digital asset transaction 
costs paid by the customer to effect both the original transaction and 
any dispositions of digital assets to pay such costs are allocable 
exclusively to the original transaction. Final Sec.  1.1012-
1(h)(2)(ii)(C) includes a similar rule. Additionally, final Sec.  
1.6045-1(d)(6)(ii)(C)(2) follows this rule by cross referencing the 
rules at final Sec.  1.6045-1(d)(5)(iv)(C).
3. Ordering Rules
a. Adequate Identification of Digital Assets
    The proposed information reporting regulations provided ordering 
rules for a broker to determine which units of the same digital asset 
should be treated as sold when the customer previously acquired, or had 
transferred in, multiple units of that same digital asset on different 
dates or at different prices by cross referencing the identification 
rules in the proposed substantive tax law regulations. Specifically, 
proposed Sec.  1.1012-1(j)(3)(ii) provided that the taxpayer can make 
an adequate identification of the units sold, disposed of, or 
transferred by specifying to the broker, no later than the date and 
time of sale, disposition, or transfer, the particular units of the 
digital asset to be sold, disposed of, or transferred by reference to 
any identifier (such as purchase date and time or purchase price paid 
for the units) that the broker designates as sufficiently specific to 
allow it to determine the basis and holding period of those units. The 
units so identified, under the proposed regulations, are treated as the 
units of the digital asset sold, disposed of, or transferred to 
determine the basis and holding period of such units. This 
identification must also be taken into consideration in identifying the 
taxpayer's remaining units of the digital asset for purposes of 
subsequent sales, dispositions, or transfers. Identifying the units 
sold, disposed of, or transferred solely on the taxpayer's books or 
records is not an adequate identification of the digital assets if the 
assets are held in the custody of a broker.
    To make the final regulations more accessible for brokers, the 
final regulations set forth the identification rules in final Sec.  
1.6045-1(d)(2)(ii)(B) as well as in final Sec.  1.1012-1(j)(3) for 
taxpayers. A few comments criticized proposed Sec.  1.1012-1(j)(3)(i) 
for requiring

[[Page 56513]]

an adequate identification of digital assets held in the custody of 
brokers to be made no later than the date and time of the transaction. 
One comment advised that the proposed rule would provide less 
flexibility than currently allowed for making an adequate 
identification of stock under Sec.  1.1012-1(c)(8). The limited 
flexibility, the comment warned, would pose as ``a trap for the 
unwary'' for some taxpayers. The final regulations do not adopt these 
comments. On the contrary, the volatile nature of digital assets and 
their markets makes the timing requirement necessary. The proposed rule 
is analogous to Sec.  1.1012-1(c)(8) because settlement for securities 
takes place one or more days after a trade while the settlement period 
for digital asset transactions is typically measured in minutes. In 
both cases, a specific identification must be made before the relevant 
asset is delivered for settlement. Accordingly, the Treasury Department 
and the IRS have determined that the timing requirement for adequate 
identifications does not pose an undue burden on taxpayers, and the 
final rules retain the principles set forth in proposed Sec.  1.1012-
1(j)(3)(i).
    One comment recommended that the final rules adopt a more flexible, 
principles-based approach for identifying digital assets held in the 
custody of brokers that would allow brokers the flexibility to 
implement basis identification in a manner that fits their particular 
systems and business models, so long as the end result provides 
sufficient transparency and accuracy. The Treasury Department and the 
IRS have determined that a uniform rule is preferable to the proposed 
discretionary rule because of administrability concerns and because it 
does not result in an undue burden for brokers. As a result, the 
Treasury Department and the IRS do not adopt this recommendation.
    A few comments recommended the inclusion of a rule allowing 
taxpayers to make adequate identifications by standing orders so 
taxpayers would be able to make these identifications using a 
predetermined set of parameters rather than making them on a per-
transaction basis, for example, uniformly identifying the highest cost 
or closest cost basis available. The final regulations adopt this 
recommendation. Accordingly, final Sec. Sec.  1.1012-1(j)(3)(ii) and 
1.6045-1(d)(2)(ii)(B)(2) include a rule allowing taxpayers to use a 
standing order or instruction to make adequate identifications.
    Another comment requested guidance on whether a taxpayer would be 
treated as having made an adequate identification under proposed Sec.  
1.1012-1(j)(3)(ii) if the notified broker is only able to offer one 
method by which identifications can be made for units of a digital 
asset held in the broker's custody. The final regulations adopt a 
clarification pursuant to this comment. Accordingly, in the case of a 
broker who only offers one method by which a taxpayer may make a 
specific identification for units of a digital asset held in the 
broker's custody, final Sec. Sec.  1.1012-1(j)(3)(ii) and 1.6045-
1(d)(2)(ii)(B)(2) treat such method as a standing order or instruction 
for the specific identification of the digital assets, and thus as an 
adequate identification unless the special rules in final Sec. Sec.  
1.1012-1(j)(3)(iii) and 1.6045-1(d)(2)(ii)(B)(3) apply.
    Another comment requested clarification on whether an email sent by 
a taxpayer would satisfy the broker-notification requirement of 
proposed Sec.  1.1012-1(j)(3)(ii). The Treasury Department and the IRS 
have determined that it would be most appropriate to allow brokers the 
discretion to determine the forms by which a notification can or must 
be made and whether a particular type of notification, by email or 
otherwise, is sufficiently specific to identify the basis and holding 
period of the sold, disposed of, or transferred units. Accordingly, to 
provide brokers with maximum flexibility, the final regulations do not 
adopt a rule concerning the form of the notification.
    A few comments recommended against the proposed regulations' use of 
similar ordering rules for digital assets as apply to stocks because 
blockchains are uniquely different from traditional financial systems. 
The final regulations do not adopt this comment. Although some digital 
assets may differ in certain ways from other asset classes, the 
Treasury Department and the IRS have concluded that the proposed 
ordering rules provide the most accurate methodology to determine basis 
and holding period of digital assets.
    As discussed in Part VI.C. of this Summary of Comments and 
Explanation of Revisions, the final regulations add a default specific 
identification rule to avoid the need to separately report and backup 
withhold on certain units withheld in a transaction to pay other costs. 
In particular, in a transaction involving the sale of digital assets in 
exchange for different digital assets and for which the broker 
withholds units of the digital assets received in the exchange to pay 
the customer's digital asset transaction costs or to satisfy the 
broker's obligation under section 3406 to deduct and withhold a tax 
with respect to the underlying transaction, final Sec. Sec.  1.1012-
1(j)(3)(iii) and 1.6045-1(d)(2)(ii)(B)(3) provide that the withheld 
units when sold will be treated as coming from the units received 
regardless of any other adequate identification (including standing 
order) to the contrary.
    This special default specific identification rule ensures that the 
disposition of the withheld units will not give rise to gain or loss. 
Final Sec.  1.6045-1(c)(3)(ii)(C) provides that the units that are so 
withheld for the purpose of paying the customer's digital asset 
transaction costs are exempt from reporting, thus minimizing the burden 
on brokers who would have to otherwise report on this low value (and no 
gain or loss) transaction and any other further withheld units to pay 
for cascading transaction fees that do not give rise to gains or 
losses. As discussed in Part VI.C. of this Summary of Comments and 
Explanation of Revisions, although units that are so withheld for the 
purpose of satisfying the broker's obligation under section 3406 to 
deduct and withhold a tax with respect to the underlying transaction 
also do not give rise to gain or loss, final Sec.  1.6045-
1(c)(3)(ii)(D) provides that these units are only exempt from reporting 
if the broker sells the withheld units for cash immediately after the 
underlying sale. The latter limitation was added to the reporting 
exemption to decrease the valuation risks of units withheld for the 
purpose of satisfying the broker's backup withholding obligations. See 
Part VI.B. of this Summary of Comments and Explanation of Revisions, 
for a more detailed discussion of these valuation risks.
b. No Identification of Units Made
    In cases where a customer does not provide an adequate 
identification by the date and time of sale, proposed Sec.  1.6045-
1(d)(2)(ii)(B) provided that the broker should treat the units of the 
digital asset that are sold as the earliest units of that type of 
digital asset that were either purchased within or transferred into the 
customer's account with the broker. The proposed regulations provided 
that units of a digital asset are treated as transferred into the 
customer's account as of the date and time of the transfer.
    Numerous comments raised concerns with the rule requiring brokers 
to treat units transferred into the customer's account as if they were 
purchased on the transfer-in date without regard to whether the 
customer provided the broker with actual purchase date information 
because it is inconsistent

[[Page 56514]]

with the default identification rule, which requires that the units 
sold be based on actual purchase dates. As such, these comments noted, 
the rule will disrupt the reasonable expectations of brokers and 
customers that make a good faith effort to track lots and basis to have 
lot identifications align. Additionally, one comment raised the concern 
that this ordering rule would force custodial brokers to keep track of 
multiple acquisition dates for customers, one for broker ordering 
purposes and another for the customer's cost-basis purposes. Another 
comment recommended that exceptions to the ordering rule be made to 
enhance accuracy, align tax treatment with real-world transactions, and 
minimize reporting errors. One comment recommended allowing brokers the 
option of applying the existing first-in-first-out (FIFO) rules for 
securities brokers, provided they do so consistently. For a discussion 
of the FIFO rules, see Part II.C.3. of this Summary of Comments and 
Explanation of Revisions. That is, until rules under section 6045A 
rules are in place, this comment recommended that the final regulations 
allow brokers to rely upon records generated in the ordinary course of 
the broker's business that evidence the customer's actual acquisition 
date for a digital asset, either because another broker provided that 
information or the customer provided it upon transfer, unless the 
broker knows that information is incorrect.
    The Treasury Department and the IRS solicited comments on whether 
there were any alternatives to requiring that the ordering rules for 
digital assets left in the custody of a broker be followed on an 
account-by-account basis, for example, if brokers have systems that can 
otherwise account for their customers' transactions. Several comments 
advised against the adoption of account-based ordering rules, viewing 
such rules as imposing unnecessary costs and technical challenges, 
impeding industry innovation, and ignoring the current industry 
practice of using omnibus accounting structures or transaction 
aggregation. Instead, these comments recommended the adoption of 
discretionary ordering rules for digital assets left in the custody of 
brokers that would allow brokers to decide how to track and report the 
basis of these digital assets. Another comment recommended that the 
final rules adopt a more flexible, principles-based approach for 
digital assets in the custody of a broker that would allow brokers the 
flexibility to implement basis identification in a manner that fit 
their systems and business models, so long as the result provides 
sufficient transparency and accuracy. Another comment recommended that 
brokers be allowed to apply more flexible ``lot-relief'' ordering 
rules. Another comment recommended that the final rules require the 
consistent application of a uniform rule for identifying digital assets 
in the custody of a broker. Consistency, the comment advised, would be 
key to maintaining the integrity of cost basis for transfers of digital 
assets in the custody of a broker between brokers and eliminating the 
need for taxpayers to reconcile discrepancies. The final regulations do 
not adopt the recommendations to provide brokers with the discretion to 
implement their preferred ordering rules for digital assets in the 
custody of brokers. The Treasury Department and the IRS have determined 
that a uniform rule is preferable to the proposed discretionary rule 
because of administrability concerns and because having all brokers 
follow a single, consistent method does not result in an undue burden 
for brokers.
    Numerous comments requested that the final regulations provide safe 
harbor penalty relief to brokers that rely on reasonably reliable 
outside data that supplies purchase-date information. In this regard, 
several comments noted that the aggregation market offers software 
solutions to track digital assets as they move through the blockchain 
ecosystem, thus enabling these aggregators to keep meticulous records 
of taxpayers' digital asset tax lots. Accordingly, these comments 
opined that purchase date information from these aggregators 
constitutes reasonably reliable purchase-date information. Although one 
comment suggested that any information provided by a customer should be 
considered reasonably reliable, other comments had more specific 
suggestions, such as email purchase/trade confirmations from other 
brokers or immutable data on a public distributed ledger. Other 
comments suggested that brokers should also be allowed to consider 
purchase date information received from independent third parties, such 
as official platform records from recognized digital asset trading 
platforms, because these records are typically subject to regulatory 
oversight and verification. Another comment recommended that brokers be 
allowed to rely upon records audited by reputable third party firms 
that undergo rigorous verification processes as well as information 
from any government-approved source or tax authority.
    The Treasury Department and the IRS have determined that 
inconsistencies between broker records and customer records regarding 
digital asset lots in the custody of a broker may give rise to 
complexities and reporting inaccuracies. Accordingly, final Sec.  
1.6045-1(d)(2)(ii)(B)(4) provides that a broker may take into account 
customer-provided acquisition information for purposes of identifying 
which units are sold, disposed of, or transferred under the 
identification rules. Customer-provided acquisition information is 
defined as reasonably reliable information, such as the date and time 
of acquisition units of a digital asset, provided to the broker by a 
customer or the customer's agent no later than the date and time of a 
sale, disposition, or transfer. Reasonably reliable information for 
this purpose includes purchase or trade confirmations at other brokers 
or immutable data on a public distributed ledger. A broker that takes 
into account customer-provided acquisition information for purposes of 
identifying which units are sold, disposed of, or transferred is deemed 
to have relied upon this information in good faith if the broker 
neither knows nor has reason to know that the information is incorrect 
for purposes of the information reporting penalties under sections 6721 
and 6722. This penalty relief does not apply, however, to a broker who 
takes into account customer-provided acquisition information for 
purposes of voluntarily reporting the customer's basis. The Treasury 
Department and the IRS, notwithstanding, plan to study further the 
types of information that could be included in customer-provided 
acquisition information to determine if certain information is 
sufficiently reliable to permit reporting the customer's basis. 
Finally, it should be noted that, although taxpayers may in some cases 
be entitled to penalty relief from reporting incorrect amounts on their 
Federal income tax returns due to reasonable cause reliance on 
information included on a Form 1099, this relief would not be permitted 
to the extent the information included on that Form is due to 
incomplete or incorrect customer-provided acquisition information.
    Final Sec.  1.6045-1(d)(2)(i)(B)(8) requires brokers to report on 
whether they relied upon such customer-provided acquisition information 
in identifying the unit sold to alert customers and the IRS that the 
information supplied on the Form 1099-DA is, in part, based on 
customer-provided acquisition information described in final Sec.  
1.6045-1(d)(2)(ii)(B)(4). Under this rule, if the broker takes into 
account customer-

[[Page 56515]]

provided acquisition information in determining which unit was sold, 
the broker must report that it has done so, regardless of whether 
information on the particular unit sold was derived from the broker's 
own records or from the customer or its agent. The Treasury Department 
and the IRS anticipate that brokers will likely identify all units sold 
as relying on customer-provided acquisition information for customers 
that regularly transfer digital assets to that broker and provide that 
broker with customer-provided acquisition information.
    Final Sec.  1.6045-1(d)(2)(ii)(B) revises the rule in proposed 
Sec.  1.6045-1(d)(2)(ii)(B) for the identification of the digital asset 
unit sold so that it also applies to dispositions and other transfers 
as well as sales because brokers need clear identification rules for 
these transactions to ensure they have the information they need about 
the digital assets that are retained in the customer's account. 
Additionally, the final regulations add a rule to accommodate the 
unlikely circumstance in which the broker does not have any transfer-in 
date information about the units in the broker's custody--such as could 
be the case if the broker's transfer-in records are destroyed and the 
broker has not received any reasonably reliable acquisition date 
information from the customer or the customer's agent. Addressing that 
circumstance, final Sec.  1.6045-1(d)(2)(ii)(B)(1) provides that in 
cases in which the broker does not receive an adequate identification 
of the units sold from the customer by the date and time of the sale, 
disposition, or transfer, and in which the broker does not have 
adequate transfer-in date records and does not have or take into 
account customer-provided acquisition information, the broker must 
first report the sale, disposition, or transfer of units that were not 
acquired by the broker for the customer. Thereafter, the broker must 
treat units as sold, disposed of, or transferred in order of time from 
the earliest date on which units of the same digital asset were 
acquired by the customer. A broker may take into account customer-
provided acquisition information described in final Sec.  1.6045-
1(d)(2)(ii)(B)(4) to determine when units of a digital asset were 
acquired by the customer if the broker neither knows nor has reason to 
know that the information is incorrect. For this purpose, unless the 
broker takes into account customer-provided acquisition information, 
the broker must treat units of a digital asset that are transferred 
into the customer's account as acquired as of the date and time of the 
transfer. Finally, while it is inevitable that some customers will fail 
to provide their brokers with reasonably reliable acquisition 
information or that brokers will decline in some circumstances to rely 
upon customer-provided acquisition information, customers nonetheless 
can avoid lot identification inconsistencies by adopting a fallback 
standing order to track lots in a manner consistent with the broker's 
tracking requirements.
    Finally, one comment requested that the final regulations set forth 
the procedures the IRS will follow when a broker's reported cost basis 
amount does not match the cost basis reported by customers due to lot 
identification inconsistences. The final regulations do not adopt this 
comment as being outside the scope of these regulations.
F. Basis Reporting Rules
    Section 6045(g) requires a broker that is otherwise required to 
make a return under section 6045(a) with respect to covered securities 
to report the adjusted basis with respect to those securities. Under 
section 6045(g)(3)(A), a covered security is any specified security 
acquired on or after the acquisition applicable date if the security 
was either acquired through a transaction in the account in which the 
security is held or was transferred to that account from an account in 
which the security was a covered security, but only if the broker 
received a transfer statement under section 6045A with respect to that 
security. Because rulemaking under section 6045A with respect to 
digital assets was not proposed, much less finalized, the proposed 
regulations limited the definition of a covered security for purposes 
of digital asset basis reporting to digital assets that are acquired in 
a customer's account by a broker providing hosted wallet services (that 
is, custodial services for such digital assets). Accordingly, under the 
proposed regulations, mandatory basis reporting was only required for 
sales of digital assets that were previously acquired, held until sale, 
and then sold by a custodial broker for the benefit of a customer.
    One comment raised the concern that brokers do not have access to 
cost-basis information with respect to transactions that are effected 
by other brokers. This comment recommended that the final regulations 
delay requiring brokers to report adjusted basis until the purchase 
information sharing mechanism under section 6045A is implemented. The 
proposed regulations did not require basis reporting for sale 
transactions effected by custodial brokers of digital assets that were 
not previously acquired by that broker in the customer's account. 
Accordingly, the final regulations do not adopt this comment. However, 
a clarification has been made to final Sec.  1.6045-1(d)(2)(i)(D) in 
order to avoid confusion on this point.
    Section 80603(b)(1) of the Infrastructure Act added digital assets 
to the list of specified securities for which basis reporting is 
specifically required and provided that a digital asset is a covered 
security if it is acquired on or after January 1, 2023 (the acquisition 
applicable date for digital assets). Based on this specific authority 
provided by the Infrastructure Act, the proposed regulations provided 
that for each sale of a digital asset that is a covered security for 
which a broker is required to make a return of information, the broker 
must also report the adjusted basis of the digital asset sold, the date 
and time the digital asset was purchased, and whether any gain or loss 
with respect to the digital asset sold is long-term or short-term 
(within the meaning of section 1222 of the Code). Additionally, 
proposed Sec.  1.6045-1(a)(15)(i)(J) modified the definition of a 
covered security for which adjusted basis reporting would be required 
to include digital assets acquired in a customer's account on or after 
January 1, 2023, by a broker providing hosted wallet services.
    Several comments raised the concern that adjusted basis reporting 
for digital assets acquired before the applicability date of the 
regulations would make accurate reporting of adjusted basis difficult 
and, in some cases, impossible. These comments instructed that, to 
accurately track the adjusted basis of digital assets in an account, 
brokers need not only purchase price information but also clear lot 
ordering rules to be sure that the basis of a digital asset sold is 
removed from the basis pool of the digital assets remaining in the 
account. Additionally, these comments noted that, the basis reported to 
customers will not be accurate unless customers applied the same lot 
ordering rules. The comments also indicated that taxpayers do not have 
the means to provide brokers with adequate identification of shares 
they previously sold. Thus, while brokers likely have information about 
digital assets acquired on or after January 1, 2023, because there were 
no clear ordering rules in place for transactions that took place on or 
after January 1, 2023, brokers will not know which lots their customers 
previously reported as sold between January 1, 2023 and the January 1, 
2026 date their systems are in place to allow for cost-basis reporting 
under these final regulations. Thus,

[[Page 56516]]

brokers do not have the information necessary to track the basis of the 
digital assets that remain in the customer's account.
    Several comments also raised the concern that brokers need time, 
not only to capture the original cost basis for digital asset lots and 
to build systems to track adjusted basis of digital assets consistent 
with the ordering rules in the final regulations, but also to build 
systems capable of performing complex adjustments for gifting and other 
blockchain events. While one comment indicated that the earliest that 
brokers could implement adjusted basis tracking is January 1, 2025, 
other comments stated that brokers should not be required to start 
building (or revising existing systems) until these regulations are 
final. Accordingly, these comments recommended aligning the acquisition 
applicable date for digital assets with the proposed January 1, 2026, 
applicable date for basis reporting to allow digital asset brokers to 
build basis reporting systems and basis tracking systems at the same 
time.
    The Treasury Department and the IRS considered these comments. 
Despite the critical value of adjusted basis tracking and reporting to 
the broker's customers and to overall tax administration, the final 
regulations adopt the recommendation made by these comments to align 
the acquisition applicable date for digital assets with the January 1, 
2026, applicability date for adjusted basis reporting. The Treasury 
Department and the IRS, however, strongly encourage brokers to work 
with their customers who, as described in Part II.C.2. of this Summary 
of Comments and Explanation of Revisions, are subject to the new 
ordering rules for transactions beginning on or after January 1, 2025, 
to facilitate an earlier transition to these new basis tracking rules 
to the extent possible.
    The proposed regulations required adjusted basis reporting for 
sales of digital assets treated as covered securities and for non-
digital asset options and forward contracts on digital assets only to 
the extent the sales are effected on or after January 1, 2026, in order 
to allow brokers additional time to build appropriate reporting and 
basis retrieval systems. Several comments requested a delay in the 
proposed applicability date for basis reporting. One comment suggested 
that further delay was warranted because the applicability date for 
digital asset basis reporting is not consistent with the length of time 
that stockbrokers were given to implement cost basis reporting rules.
    The final regulations do not adopt this request for a delay for 
several reasons. First, brokers have been on notice that cost basis 
reporting in some form would be required since the Infrastructure Act 
was enacted in 2021. Second, many brokers already have systems in place 
to report cost basis to their customers as a service and other brokers 
have contracts with third party service providers to do the same. 
Third, cost basis reporting is essential to taxpayers and the IRS to 
ensure that gains and losses are accurately reported on taxpayers' 
Federal income tax returns. Fourth, the initial applicability date for 
cost basis reporting for digital assets--over four years after the 
Infrastructure Act was enacted--is not inconsistent with the initial 
2011 implementation of the cost basis reporting rules for stockbrokers, 
which was only three years after the Energy Improvement and Extension 
Act of 2008 was enacted. Notwithstanding this decision, the IRS intends 
to work closely with stakeholders to ensure the smooth implementation 
of the basis reporting rules, including the mitigation of penalties in 
the early stages of implementation for all but particularly egregious 
cases involving intentionally disregarding these rules.
G. Exceptions To Reporting of Sales Effected by Brokers on Behalf of 
Exempt Foreign Persons and Non-U.S. Broker Reporting
1. In General
    The proposed regulations provided the same exceptions to reporting 
in Sec.  1.6045-1(c) for exempt recipients and excepted sales for 
brokers effecting sales of digital assets (digital asset brokers) that 
are in the final regulations for securities brokers. Similar to the 
case of a securities broker effecting a sale of an asset other than a 
digital asset, the proposed regulations provided an exception to a 
broker's reporting of a sale of digital assets effected for a customer 
that is an exempt foreign person and requirements for applying the 
exception. See Sec.  1.6045-1(g)(1) through (3) (for sales other than 
digital assets) and proposed Sec.  1.6045-1(g)(4) (for sales of digital 
assets). For a broker to treat a customer as an exempt foreign person 
for a sale of a digital asset, the proposed regulations provided 
requirements for valid documentation of foreign status, standards of 
knowledge for a broker's reliance on this documentation, and 
presumption rules in the absence of documentation that may be relied 
upon to determine a customer's status as a U.S. or foreign person. 
Under the proposed regulations, these requirements differed in certain 
respects depending on the broker's status as a U.S. digital asset 
broker, a non-U.S. digital asset broker, a controlled foreign 
corporation (CFC), a digital asset broker conducting activities as a 
money services business (MSB), or as a non-U.S. digital asset broker or 
a CFC digital asset broker not conducting activities as an MSB (each as 
defined in the proposed regulations). See proposed Sec.  1.6045-
1(g)(4)(i). A broker's status within one of the foregoing categories 
also dictated whether a sale of digital assets was considered effected 
at an office either inside or outside the United States, a 
determination that in some cases dictated whether a broker was treated 
as a broker for a sale of a digital asset under proposed Sec.  1.6045-
1(a)(1) and whether the exception to backup withholding under Sec.  
31.3406(g)-1(e) applied to a sale that is reportable. See proposed 
Sec.  1.6045-1(a)(1) (defining broker).
    Under the proposed regulations, a U.S. digital asset broker is a 
U.S. payor or middleman as defined in Sec.  1.6049-5(c)(5), other than 
a CFC, that effects sales of digital assets on behalf of others. A U.S. 
payor or middleman includes a U.S. person (including a foreign branch 
of a U.S. person), a CFC (as defined in Sec.  1.6049-5(c)(5)(i)(C)), 
certain U.S. branches that agree to be treated as U.S. persons, a 
foreign partnership with controlling U.S. partners or a U.S. trade or 
business, and a foreign person for which 50 percent or more of its 
gross income is effectively connected with a U.S. trade or business. 
Thus, a U.S. digital asset broker included both U.S. persons and 
certain categories of non-U.S. persons (other than CFCs). Because it is 
a U.S. payor or middleman, a U.S. digital asset broker is a broker 
under proposed Sec.  1.6045-1(a)(1) with respect to all sales of 
digital assets it effects for its customers, such that the broker must 
report with respect to a sale absent an applicable exception to 
reporting. To except reporting based on a customer's status as an 
exempt foreign person, a U.S. digital asset broker must have obtained a 
withholding certificate (that is, an applicable Form W-8) to which it 
must have applied certain reliance requirements when it was not 
permitted to treat the customer as a foreign person under a presumption 
rule. If a U.S. digital asset broker was not permitted to treat a 
customer as an exempt foreign person and failed to obtain a valid Form 
W-9 for the customer when required under Sec.  1.6045-1(c), backup 
withholding under section 3406 applied to proceeds from digital assets 
sales made on behalf of the customer.
    The proposed regulations also specified requirements for foreign

[[Page 56517]]

brokers that are not U.S. digital asset brokers for sales of digital 
assets. Under the proposed regulations, a broker effecting sales of 
digital assets that is not a U.S. digital asset broker is either a CFC 
digital asset broker or a non-U.S. digital asset broker, which have 
different requirements depending on whether they conduct activities as 
a MSB. A non-U.S. digital asset broker or CFC digital asset broker 
conducts activities as an MSB under the proposed regulations when it is 
registered with the Department of the Treasury under 31 CFR part 
1022.380 (or any successor guidance) as an MSB, as defined in 31 CFR 
part 1010.100(ff). The requirements for non-U.S. digital asset brokers 
and CFC digital asset brokers conducting activities as MSBs reference 
the requirements that apply to a U.S. digital asset broker. In the case 
of a CFC digital asset broker not conducting activities as an MSB, the 
broker is (similar to a U.S. digital asset broker) a U.S. payor or 
middleman, such that it is a broker under proposed Sec.  1.6045-1(a)(1) 
with respect to all sales of digital asset it effects for its 
customers. Unlike a U.S. digital asset broker, however, a CFC digital 
asset broker not conducting activities as an MSB was not permitted to 
treat a customer as an exempt foreign person based on certain 
documentary evidence supporting the customer's foreign status (in lieu 
of a Form W-8), and, because sales of digital assets it effects for 
customers are treated as effected at an office outside the United 
States, the exception to backup withholding in proposed Sec.  
31.3406(g)-1(e) applied to a sale reportable by the broker.
    In the case of a non-U.S. digital asset broker not conducting 
activities as an MSB, more limited requirements applied than those that 
applied to other digital asset brokers. Under the proposed regulations, 
unless the broker collects certain information about a customer that 
shows certain specified ``U.S. indicia,'' the broker has no reporting 
or backup withholding requirements under the proposed regulations. If 
the broker has such U.S. indicia for a customer, a sale effected for 
the customer is treated as effected at an office of the broker inside 
the United States. In that case, the broker was required to report with 
respect to a sale of a digital asset it effected for the customer when 
required under Sec.  1.6045-1(c) unless it was permitted to treat the 
customer as an exempt foreign person based on certain documentary 
evidence or a withholding certificate it was permitted to rely upon, or 
when the broker was permitted to treat the customer as a foreign person 
under a presumption rule. Finally, the exception to backup withholding 
in proposed Sec.  31.3406(g)-1(e) would have applied to a sale of 
digital assets reportable by a non-U.S. digital asset broker not 
conducting activities as an MSB.
2. Non-U.S. Digital Asset Brokers and the CARF
    Several comments on the proposed regulations' rules requiring non-
U.S. brokers to report information on digital asset transactions 
recommended that the rules be revised to provide that non-U.S. brokers 
that are reporting information on U.S. customers to other jurisdictions 
under the CARF should not be required to report information to the IRS 
and should not have to obtain a separate U.S. certification from a 
customer. Other comments requested that the implementation of rules for 
non-U.S. brokers be delayed until they are harmonized with the CARF. 
Other comments relating to the proposed regulations' rules requiring 
non-U.S. brokers to report information on digital asset transactions 
recommended that a single diligence standard apply to all non-U.S. 
brokers.
    The Treasury Department and the IRS agree that rules requiring non-
U.S. brokers to report information on digital asset transactions should 
be revised in order to allow for the implementation of the CARF by the 
United States. As described in the preamble to the proposed 
regulations, under the CARF, the IRS would provide information on 
foreign persons for whom U.S. brokers effect sales of digital assets to 
other countries that have implemented the CARF and receive information 
from those countries about transactions by U.S. persons with non-U.S. 
digital asset brokers. Regulations implementing the CARF would exempt 
non-U.S. brokers that are reporting information on U.S. customers to 
jurisdictions that exchange information with the IRS pursuant to an 
automatic exchange of information mechanism from reporting information 
on such U.S. customers to the IRS under section 6045. This would mean 
that such non-U.S. brokers would not be required to report information 
on U.S. customers to both the IRS and a foreign tax administration that 
is exchanging information with the IRS. The rules provided in the 
proposed regulations, when finalized and as revised to take into 
account comments received on diligence standards and other issues, 
therefore would be expected to apply only to a limited set of non-U.S. 
brokers in jurisdictions that do not implement the CARF and exchange 
digital asset information with the United States. Accordingly, the 
final regulations reserve on the rules requiring non-U.S. brokers to 
report information on U.S. customers to the IRS, in order to coordinate 
the rules for non-U.S. brokers under section 6045 with new rules that 
will implement the CARF.
    The Treasury Department and the IRS intend to propose regulations 
that would, if finalized, implement CARF in sufficient time for the 
United States to begin exchanges of information with appropriate 
partner jurisdictions in 2028 with respect to transactions effected in 
the 2027 calendar year. It is anticipated that those proposed 
regulations also would require U.S. digital asset brokers to report 
information on their foreign customers resident in such jurisdictions, 
so that the IRS could provide that information to those jurisdictions 
pursuant to automatic exchange of information mechanisms. Since the 
proposed CARF regulations would require additional reporting by U.S. 
digital asset brokers, the final regulations have been drafted taking 
the CARF definitions into account where feasible in order to minimize 
differences between the types of information that U.S. digital asset 
brokers are required to report under the final regulations and under 
forthcoming proposed CARF regulations. It is anticipated, however, that 
the information required to be reported by U.S. digital asset brokers 
under the forthcoming proposed CARF regulations would differ from the 
information required to be reported under the final regulations in 
significant ways. For example, the CARF requires reporting of 
acquisitions and transfers of digital assets, requires all reporting to 
take place on an aggregate basis, and has different rules for reporting 
of stablecoins than the final regulations.
    As the final regulations reserve on the rules of Sec.  1.6045-
1(g)(4) relating to non-U.S. brokers, the final regulations limit the 
definition of a U.S. digital asset broker for purposes of applying the 
provisions of Sec.  1.6045-1(g)(4). For these brokers, these provisions 
include documentation, reliance, and presumption rules to determine 
whether they may treat customers as exempt foreign persons. The final 
regulations indicate as reserved those paragraphs of the proposed 
regulations that addressed definitions or requirements specific to 
brokers that are not U.S. digital asset brokers. For example, the final 
regulations reserve the rules for CFC digital asset brokers, non-U.S. 
digital asset brokers conducting activities as money service businesses 
and other non-U.S. digital asset brokers that were described in 
proposed Sec.  1.6045-1(g)(4).

[[Page 56518]]

As a result, the remainder of this Part I.G. discusses those comments 
relevant to U.S. digital asset brokers (or digital asset brokers 
generally) and excludes discussion of comments specific to only non-
U.S. brokers. Comments specific to non-U.S. brokers will be addressed 
as part of future regulations.
3. Revised U.S. Indicia for Brokers To Rely on Documentation
    As referenced in Part I.G.1. of this Summary of Comments and 
Explanation of Revisions, under the proposed regulations a digital 
asset broker is subject to specified requirements for relying on a Form 
W-8 to treat a customer as an exempt foreign person. With respect to a 
Form W-8 that is a beneficial owner withholding certificate, the 
proposed regulations provided that a digital asset broker may rely on 
the certificate unless the broker has actual knowledge or reason to 
know that the certificate is unreliable or incorrect. Similar to a 
securities broker effecting a sale, a digital asset broker is treated 
as having ``reason to know'' that a beneficial owner withholding 
certificate for a customer is unreliable or incorrect based on certain 
indicia of the customer's U.S. status (U.S. indicia), which are for 
this purpose cross-referenced in proposed Sec.  1.6045-1(g)(4)(vi)(B) 
to the U.S. indicia in proposed Sec.  1.6045-1(g)(4)(iv)(B)(1) through 
(5) (setting forth the U.S. indicia relevant to a non-U.S. digital 
asset broker's requirements under the proposed regulations).
    The U.S. indicia in proposed Sec.  1.6045-1(g)(4)(iv)(B)(1) through 
(5) included the U.S. indicia in Sec.  1.1441-7(b)(5), which generally 
apply to determine when a U.S. withholding agent is treated as having 
``reason to know'' that a beneficial owner withholding certificate is 
unreliable or incorrect and which are also applied for that purpose to 
a securities broker effecting a sale. See Sec.  1.6045-1(g)(1)(ii). 
Proposed Sec.  1.6045-1(g)(4)(iv) further includes as U.S. indicia the 
following: (1) a customer's communication with the broker using a 
device (such as a computer, smart phone, router, server or similar 
device) that the broker has associated with an internet Protocol (IP) 
address or other electronic address indicating a location within the 
United States; (2) cash paid to the customer by a transfer of funds 
into an account maintained by the customer at a bank or financial 
institution in the United States, cash deposited with the broker by a 
transfer of funds from such an account, or if the customer's account is 
linked to a bank or financial account maintained within the United 
States; or (3) one or more 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 to be 
organized within the United States, or the customer's account is linked 
to a digital asset broker that the broker knows or has reason to know 
to be organized within the United States. As noted in the preamble to 
the proposed regulations, the additional U.S. indicia were included to 
account for the digital nature of the activities of digital asset 
brokers, including that they do not typically have physical offices and 
communicate with customers by digital means rather than by mail.
    Many comments were received that raised issues with the proposed 
new U.S. indicia. Some comments noted coordination issues that could 
arise from the new indicia for brokers effecting sales of both 
securities and digital assets. These comments requested that the U.S. 
indicia for digital asset brokers be aligned with the U.S. indicia 
applicable to traditional financial brokers so that brokers effecting 
sales in both capacities could avoid maintaining parallel systems to 
monitor differing U.S. indicia depending on the type of sale. A comment 
noted that some securities brokers may transact only digitally with 
customers, such that the stated reasoning for the new U.S. indicia is 
not limited to digital asset brokers.
    Other comments objected to one or more of the specified new U.S. 
indicia, questioning the usefulness of certain of the indicia for 
identifying potential U.S. customers and noting excessive burdens on 
brokers in tracking the required information. They noted that IP 
addresses are not reliable indicators of a customer's residence given 
that the location indicated by an IP address will change when customers 
travel outside of their countries of residence and can be masked by the 
use of a virtual private network (VPN) so that a customer's actual 
location cannot be determined. A comment noted that the proposed 
regulations do not describe whether an IP address would be required to 
be checked for all contacts with the customer as they do not define a 
``customer contact'' for this purpose.
    Some comments raised concerns with the U.S. indicia relating to 
transfers effected for customers to and from U.S. bank accounts and 
U.S. digital asset brokers. Certain of those comments noted that the 
proposed regulations do not specify how a broker should determine that 
a customer's transfer is to or from a U.S. digital asset broker, with 
one comment suggesting an actual knowledge standard be permitted, and 
another comment suggesting that the IRS publish a list of U.S. digital 
asset brokers. Another comment noted that a customer's dealings with 
U.S. digital asset brokers or U.S. banks is not a good indication of a 
customer's U.S. status. Finally, some comments noted that requiring 
determinations of U.S. status for every transfer would add burdens on 
digital asset brokers that exceed those resulting from the static forms 
of U.S. indicia that apply to securities brokers (such as for standing 
instructions to pay amounts to a U.S. account) and may be read to 
require documentation cures at multiple times.
    Because the comments raise concerns sufficient for the Treasury 
Department and the IRS to reconsider the additional U.S. indicia, the 
final regulations do not include any of the additional U.S. indicia 
that are in the proposed regulations for U.S. digital asset brokers. 
Thus, for purposes of the reliance requirements of U.S. digital asset 
brokers, the final regulations include only the U.S. indicia generally 
applicable to U.S. securities brokers. The Treasury Department and the 
IRS intend to consider whether additional U.S. indicia should be part 
of the proposed requirements that would be applicable to non-U.S. 
digital asset brokers (as referenced in Part I.G.2. of this Summary of 
Comments and Explanation of Revisions).
4. Transitional Determination of Exempt Foreign Status
    To provide additional time for digital asset brokers to collect the 
necessary documentation to treat existing customers as exempt foreign 
persons, the proposed regulations provided a transitional rule for a 
broker to treat a customer as an exempt foreign person for sales of 
digital assets effected before January 1, 2026, that were held in a 
preexisting account established with a broker before January 1, 2025. A 
broker may apply this transitional rule if the customer has not been 
previously classified as a U.S. person by the broker, and information 
the broker has for the customer includes a residence address that is 
not a U.S. address. See proposed Sec.  1.6045-1(g)(4)(vi)(F).
    No comments were received in response to this proposed rule. The 
final regulations include this transitional relief. The dates for which 
relief will apply have been modified to apply to sales effected before 
January 1, 2027, that were held in an account established with a broker 
before January 1, 2026.

[[Page 56519]]

5. Certification of Individual Customer's Presence in U.S.
    With respect to the requirements for a valid beneficial owner 
withholding certificate provided by a customer to a broker to treat the 
customer as an exempt foreign person, the proposed regulations stated 
that a beneficial owner withholding certificate provided by an 
individual (that is, a Form W-8BEN) must include a certification that 
the beneficial owner has not been, and at the time the certificate is 
furnished reasonably expects not to be, present in the United States 
for 183 days or more during each calendar year to which the certificate 
pertains. See proposed Sec.  1.6045-1(g)(4)(ii)(B). This certification 
is based on the same requirement applicable to a securities broker in 
Sec.  1.6045-1(g)(1)(i) to allow the broker to rely on a beneficial 
owner withholding certificate to treat an individual as an exempt 
foreign person. One comment stated that this certification requirement 
would not add sufficient value or reliability to a standard or 
substitute Form W-8BEN and further noted that language relating to the 
substantial presence test is included only in the instructions for Form 
W-8BEN, with a cross-reference in the form's jurat. The comment thereby 
asserted that an individual may be unaware they are attesting to this 
standard when they sign a Form W-8BEN. The comment suggested that this 
language be removed in the final regulations.
    As referenced in the comment, this certification relates to a 
customer's potential classification as a U.S. individual under the 
substantial presence test in Sec.  301.7701(b)-1(c). It also relates to 
whether an individual customer is subject to tax on capital gains from 
sales or exchanges under section 871(a)(2) of the Code when the 
individual remains a resident alien under section 7701(b)(3)(B) of the 
Code despite being present in the United States for 183 days or more 
during a year. As indicated in the preamble to the proposed 
regulations, Form W-8BEN specifically requires that an individual 
certify to the individual's status as an exempt foreign person in 
accordance with the instructions to the form, which include this 
requirement (relating to broker and barter transactions associated with 
the form). Thus, this certification is both sufficiently described in 
the proposed regulations with respect to its reference to Form W-8BEN 
and relevant to an individual's claim of exempt foreign person status. 
Moreover, this certification is required today for Forms W-8BEN 
collected by securities brokers and the Treasury Department and the IRS 
have determined that the same certification should be required for 
Forms W-8BEN collected by digital asset brokers. Thus, this comment is 
not adopted, and this certification requirement is included in the 
final regulations for a beneficial owner withholding certification 
provided to a U.S. digital asset broker. In response to this comment, 
the IRS may consider revising Form W-8BEN or its instructions to 
highlight this requirement more prominently for individuals completing 
the form.
6. Substitute Forms W-8
    As described in Part I.G.1. of this Summary of Comments and 
Explanation of Revisions, the proposed regulations provided that a 
digital asset broker may treat a customer as an exempt foreign person 
if the broker receives a valid Form W-8 upon which it may rely. They 
also permit a broker to rely upon a substitute Form W-8 that meets the 
requirements of Sec.  1.1441-1(e)(4). See proposed Sec.  1.6045-
1(g)(4)(ii)(B) and (g)(4)(vi)(A)(1). Some comments requested that the 
final regulations be amended to allow substitute certification forms 
based on other reporting regimes to reduce broker compliance burdens, 
reduce customer confusion, and streamline global information reporting. 
Some comments specially suggested that FATCA or Common Reporting 
Standard (CRS) self-certifications (adjusted to account for digital 
assets) be permitted as qualifying substitute forms. A comment 
supported the use of the type of substitute form described in Notice 
2011-71, 2011 I.R.B. 233 (August 19, 2011), to establish a payee's 
status as a foreign person for section 6050W reporting purposes.
    The Treasury Department and the IRS agree that a broker's ability 
to leverage a certification form already in use for other purposes may 
reduce compliance burdens associated with documenting customers. As 
stated in the preceding paragraph, however, the proposed regulations 
already permitted brokers to rely on substitute certification forms 
that meet the standard that applies for purposes of section 1441 of the 
Code. Under this standard, a substitute form must include information 
substantially similar to that required on an official certification 
form and the certifications relevant to the transactions associated 
with the form. This standard is similar to the standard for the 
substitute form specified in Notice 2011-71 (in reference to the 
comment to use that substitute form). Additionally, as the comments 
referencing the use of self-certifications pertaining to foreign 
reporting regimes presumably were made with respect to their use by 
non-U.S. brokers, and as the requirements for non-U.S. brokers are 
reserved, these comments are not further considered for the final 
regulations. See Part I.G.2. of this Summary of Comments and 
Explanation of Revisions. As under the proposed regulations, the final 
regulations provide that a U.S. digital asset broker may rely on a 
substitute Form W-8 that meets the standard for purposes of section 
1441 to establish a customer's foreign status.
H. Definitions and Other Comments
    The proposed regulations defined a hosted wallet as a custodial 
service provided to a user that electronically stores the private keys 
to digital assets held on behalf of others and an unhosted wallet as a 
non-custodial means of storing, electronically or otherwise, a user's 
private keys to digital assets held by or for the user. Included in the 
definition of unhosted wallets was a statement that unhosted wallets 
can be provided through software that is connected to the internet (a 
hot wallet) or through hardware or physical media that is disconnected 
from the internet (a cold wallet). Several comments noted that these 
definitions were confusing because the proposed regulations failed to 
define a wallet more generally. The final regulations adopt this 
comment and define a wallet as a means of storing, electronically or 
otherwise, a user's private keys to digital assets held by or for the 
user. Final Sec.  1.6045-1(a)(25)(i).
    The proposed regulations also provided that ``a digital asset is 
considered held in a wallet or account if the wallet, whether hosted or 
unhosted, or account stores the private keys necessary to transfer 
access to, or control of, the digital asset.'' Several comments 
expressed confusion with this definition. One comment suggested that 
this definition was not consistent with how distributed ledgers work 
because digital assets themselves are not held in wallets but rather 
exist on the blockchain. The Treasury Department and the IRS recognize 
that digital assets are not actually stored in wallets. Indeed, the 
preamble to the proposed regulations explained that references to an 
owner ``holding'' digital assets generally or ``holding'' digital 
assets in a wallet or account were meant to refer to holding or 
controlling, whether directly or indirectly through a custodian, the 
keys to the digital assets. To address the comment, however, the final 
regulations conform the definition in the text to the preamble's

[[Page 56520]]

explanation. Accordingly, under the final Sec.  1.6045-1(a)(25)(iv), 
``[a] digital asset is referred to in this section as held in a wallet 
or account if the wallet, whether hosted or unhosted, or account stores 
the private keys necessary to transfer control of the digital asset.'' 
Additionally, the final definition provides that a digital asset 
associated with a digital asset address that is generated by a wallet, 
and a digital asset associated with a sub-ledger account of a hosted 
wallet, are similarly referred to as held in a wallet. The same concept 
applies to references to ``held at a broker,'' ``held by the user of a 
wallet,'' ``acquired in a wallet or account,'' or ``transferred into a 
wallet or account.'' Holding, acquiring, or transferring, in these 
cases, refer to holding, acquiring, or transferring the ability to 
control, whether directly or indirectly through a custodian, the keys 
to the digital assets.
    Another comment suggested references to ``wallet or account'' in 
this definition and elsewhere in the proposed regulations failed to 
recognize the difference between those terms in the digital asset 
industry. The final regulations do not adopt this comment. Although 
many terms in the digital asset industry may have their own unique 
meaning, the terms wallet and account, in these final regulations, are 
used synonymously.
    Another comment indicated that there were several additional 
unclear definitions, including ``software'', ``platform'', and 
``ledger.'' The regulations do not adopt this comment. Standard rules 
of construction apply to give undefined terms, such as software, 
ledger, and platform, their usual meaning. These terms are sufficiently 
basic to not warrant additional definitions.
I. Comments Based on Constitutional Concerns
1. First Amendment
    Multiple comments alleged that the proposed regulations, if 
finalized, would violate the First Amendment to the U.S. Constitution 
on a variety of asserted bases. Some comments viewed the proposed 
regulations as requiring developers to include code in their products 
that would reveal customer data, while others asserted that the 
proposed regulations would require persons who fit the definition of 
broker to write their software in a manner that goes directly against 
their closely held political, moral, and social beliefs. Comments also 
said the proposed regulations would infringe on a taxpayer's freedom of 
association under the First Amendment because the IRS could use the 
taxpayer identification information and wallet data reported by brokers 
to monitor their financial associations.
    The Department of the Treasury and the IRS do not agree that the 
regulations as proposed or as finalized infringe upon rights guaranteed 
by the First Amendment. The First Amendment provides, among other 
things, that ``Congress shall make no law . . . abridging the freedom 
of speech.'' U.S. CONST. Amend. I. Protected speech includes the right 
to utter, print, distribute, receive, read, inquire about, contemplate, 
and teach ideas. Griswold v. Connecticut, 381 U.S. 479, 482 (1965). It 
also includes the right to freely associate with others for expressive 
purposes. Freeman v. City of Santa Ana, 68 F.9d 1180, 1188 (9th Cir. 
1995). Protected speech includes conduct designed to express and convey 
ideas. New Orleans S.S. Ass'n v. General Longshore Workers, 626 F.2d 
455, 462 (5th Cir. 1980), aff'd. Jacksonville Bulk Terminals, Inc. v. 
International Longshoremen's Ass'n, 457 U.S. 702 (1982). The rights 
protected by the First Amendment include both the right to speak freely 
and the right to refrain from speaking at all. Wooley v. Maynard, 430 
U.S. 705, 714 (1977). A First Amendment protection against compelled 
speech, however, has been found only in the context of governmental 
compulsion to disseminate a particular political or ideological 
message. See, e.g., Miami Herald Publ'g Co. v. Tornillo, 418 U.S. 241 
(1974) (holding unconstitutional a state statute requiring newspapers 
to publish the replies of political candidates whom they had 
criticized); Wooley v. Maynard, 430 U.S. 705 (1977) (holding that a 
state may not require a citizen to display the state motto on his 
license plate). Challenges to government-compelled disclosures that are 
based on the freedom of association are determined on an ``exacting 
scrutiny'' standard, which requires a ``substantial relation between 
the disclosure requirement and a sufficiently important governmental 
interest.'' Americans for Prosperity Foundation v. Bonta, 594 U.S. 595 
(2021) (quoting Doe v. Reed, 561 U.S. 186, 196 (2010) (internal 
quotation marks omitted)).
    The final regulations do not compel political or ideological 
speech. Although they do require disclosure of certain information, 
they do not infringe on a taxpayer's right to free association. 
Instead, the final regulations merely require information reporting for 
tax compliance purposes, a sufficiently important governmental 
interest. See Collett v. United States, 781 F.2d 53, 55 (6th Cir. 1985) 
(rejecting a taxpayer's First Amendment challenge to the imposition of 
a frivolous return penalty under section 6702 and holding that ``the 
maintenance and viability of the tax system is a sufficiently important 
governmental interest to justify incidental regulation upon speech and 
non-speech communication'') (citing United States v. Lee, 455 U.S. 252, 
260 (1982)). The information required from brokers with respect to 
digital asset sales is similar to the information required to be 
reported by brokers with respect to other transactions required to be 
reported, and the IRS has an important interest in receiving this 
information. The IRS gathers third-party information about income 
received and taxes withheld to verify self-reported income and tax 
liability reported on Federal income tax returns. The use of reliable 
and objective third-party verification of income increases the 
probability of tax evasion being detected and increases the cost of 
evasion to the taxpayers, thereby decreasing the overall level of tax 
evasion by taxpayers. Information reporting also assists taxpayers 
receiving such reports to prepare their Federal income tax returns and 
helps the IRS determine whether such returns are correct and complete. 
Accordingly, the Treasury Department and the IRS have concluded the 
final regulations would pass muster under First Amendment scrutiny.
2. Fourth Amendment
    Multiple comments contended the proposed regulations, if finalized, 
would violate the Fourth Amendment's prohibition on warrantless 
searches and seizures of a person's papers and effects because they do 
not currently provide their brokers with their personal information 
when they transact in digital assets. Comments asserted the proposed 
regulations would violate the Fourth Amendment because reporting 
information that would link an individual's identity to transaction ID 
numbers and their digital asset addresses would allow the government to 
see historical and prospective information about the individual's 
activities. Although the Treasury Department and the IRS do not agree 
that requiring the reporting of this information would violate the 
Fourth Amendment, the final regulations do not require this information 
to be reported. Instead, the final regulations require this information 
to be retained by the broker to ensure the IRS will have access to all 
the records it needs if requested by IRS personnel as part of

[[Page 56521]]

an audit or other enforcement or compliance effort.
    The Fourth Amendment protects against ``unreasonable searches and 
seizures.'' U.S. CONST. Amend IV. The Fourth Amendment's protections 
extend only to items or places in which a person has a constitutionally 
protected reasonable expectation of privacy. See California v. Ciraolo, 
476 U.S. 207, 211 (1986). Customers of digital asset brokers do not 
have a reasonable expectation of privacy with respect to the details of 
digital asset sale transactions effectuated by brokers. See United 
States v. Gratkowski, 964 F.3d 307, 311-12 (5th Cir. 2020) (rejecting 
the defendant's Fourth Amendment claim of a reasonable expectation of 
privacy in transactions recorded in a publicly available blockchain and 
in the records maintained by the virtual currency exchange documenting 
those transactions, noting that ``the nature of the information and the 
voluntariness of the exposure weigh heavily against finding a privacy 
interest.''). See also, Goldberger & Dublin, P.C., 935 F.2d 501, 503 
(2nd Cir. 1991) (citing United States v. Miller, 425 U.S. 435, 444 
(1976); Cal. Bankers Ass'n v. Shultz, 416 U.S. 21, 59-60 (1974)) 
(summarily rejecting a Fourth and Fifth Amendment challenge to 
information reporting requirements under section 6050I and noting that 
similar ``contentions relative to the Fourth and Fifth Amendments have 
been rejected consistently in cases under the Bank Secrecy Act by both 
the Supreme Court and this Court.'') (additional citations omitted). 
Gains or losses from these sale transactions must be reflected on a 
Federal income tax return. Customers of digital asset brokers do not 
have a privacy interest in shielding from the IRS the information that 
the IRS needs to determine tax compliance. Moreover, these taxable 
transactions will be reported to the IRS in due course anyway. To the 
extent the digital asset sale transactions are recorded on public 
ledgers, those transactions are not private. Just because customers 
might choose not to exchange identifying information with brokers when 
engaging in digital assets transactions does not render the underlying 
transactions private, particularly when the customers choose to engage 
in such transactions in a public forum, such as a public blockchain. 
Therefore, the Treasury Department and the IRS have concluded that the 
final regulations do not violate the Fourth Amendment.
3. Fifth Amendment and Assertions of Vagueness
    Some comments stated that the proposed regulations, if finalized, 
would violate the Fifth Amendment's prohibition on depriving any person 
of life, liberty, or property without due process of law. These 
comments based this assertion on a variety of views, including that the 
proposed regulations are unconstitutionally vague and impossible to 
apply in practice, particularly rules relating to customer 
identification and documentation. Other comments stated the proposed 
regulations violate the Fifth Amendment due process clause because the 
definitions of broker, effect, and digital asset middleman are too 
vague to be applied fairly. Some comments stated the proposed 
regulations violate the Fifth Amendment's protections against compelled 
self-incrimination.
    The Due Process Clause of the Fifth Amendment provides that ``no 
person shall . . . be deprived of life, liberty, or property, without 
due process of law.'' This provision has been interpreted to require 
that statutes, regulations, and agency pronouncements define conduct 
subject to penalty ``with sufficient definiteness that ordinary people 
can understand what conduct is prohibited.'' See Kolender v. Lawson, 
461 U.S. 352, 357 (1983). Although some comments stated that digital 
asset users have not routinely exchanged identifying information with 
their brokers in the past, this does not mean the requirement that 
brokers obtain customers' identifying information going forward is 
vague--much less unconstitutionally so. ``The `void for vagueness' 
doctrine is a procedural due process concept,'' United States v. 
Professional Air Traffic Controllers Organization, 678 F.2d 1, 3 (1st 
Cir. 1982), but `` '[a]bsent a protectible liberty or property 
interest, the protections of procedural due process do not attach.'' 
United States v. Schutterle, 586 F.2d 1201, 1204-05 (8th Cir. 1978). 
There is no protectible liberty or property interest in the information 
required to be disclosed under the regulation. In any event, the 
relevant test is that a ``regulation is impermissibly vague under the 
Due Process Clause of the Fifth Amendment if it `fails to provide a 
person of ordinary intelligence fair notice of what is prohibited, or 
is so standardless that it authorizes or encourages seriously 
discriminatory enforcement.' '' United States v. Szabo, 760 F.3d 997, 
1003 (9th Cir. 2014) (quoting Holder v. Humanitarian Law Project, 561 
U.S. 1, 18 (2010)). The regulation is not unconstitutionally vague by 
this measure. To be sure, brokers will have to obtain the identifying 
information of users they may not have met in person. However, online 
brokers have successfully navigated this issue in other contexts.
    The Fifth Amendment also provides that ``[n]o person . . . shall be 
compelled in any criminal case to be a witness against himself.'' U.S. 
CONST. Am. V. The U.S. Supreme Court has held that this right, properly 
understood, only prevents the Government from ``compel[ing] 
incriminating communications . . . that are `testimonial' in 
character.'' United States v. Hubbell, 530 U.S. 27, 34 (2000). The 
Supreme Court has held that ``the fact that incriminating evidence may 
be the byproduct of obedience to a regulatory requirement, such as 
filing an income tax return . . . [or] maintaining required records . . 
. does not clothe such required conduct with the testimonial 
privilege.'' Hubbell, 530 U.S. at 35.
    Some comments specifically stated that the definitions of broker, 
effect, and digital asset middleman are unconstitutionally vague. As 
discussed in Part I.B.1. of this Summary of Comments and Explanation of 
Revisions, the final regulations apply only to digital asset industry 
participants that hold custody of their customers' digital assets and 
the final regulations revise and simplify the definition of a PDAP. The 
Treasury Department and the IRS continue to study the non-custodial 
industry and intend to issue separate final regulations describing 
information reporting rules for non-custodial industry participants. 
Therefore, any concerns regarding the perceived vagueness of the 
definitions as they apply to custodial industry participants have been 
addressed in these final regulations.
4. Privacy and Security Concerns
    Comments expressed a variety of concerns related to the privacy and 
safety implications of requiring brokers to collect financial data and 
social security numbers. The Treasury Department and the IRS considered 
the privacy and security implications of the proposed regulations. 
Section 80603 of the Infrastructure Act made several changes to the 
broker reporting provisions under section 6045 to clarify the rules 
regarding how digital asset transactions should be reported by brokers. 
The purpose behind information reporting under section 6045 is to 
provide information to assist taxpayers receiving the reports in 
preparing their Federal income tax

[[Page 56522]]

returns and to help the IRS determine whether such returns are correct 
and complete. The customer's name and TIN are necessary to match 
information on Federal income tax returns with section 6045 reporting. 
Although this is personally identifiable information that customers may 
wish to keep private and secure, the IRS interest in receiving this 
information outweighs any privacy concerns about requiring brokers to 
collect and retain this information. The final regulations do not 
require brokers to report the transaction ID numbers or digital asset 
addresses. If brokers do not believe their existing security measures 
are sufficient to keep personally identifiable information and tax 
information private and secure, they can choose to implement new 
security measures or choose to contract with third parties with 
expertise in securing confidential data.
    Comments said they were concerned about brokers, especially smaller 
brokers, being able to securely store customer data and one comment 
requested that the final regulations include requirements for the IRS 
to monitor broker compliance with security measures. Other comments 
requested a reporting exception for small digital asset brokers that 
would be based on the value of assets traded during a calendar year or 
a valuation of the broker's business. These comments were not adopted 
for the final regulations. Traditional brokers, including smaller 
brokers, have operated online for many years and have implemented their 
own online security policies and protocols without specific security 
regulations under section 6045. The final regulations do not include a 
general de minimis threshold that would exempt small brokers from 
reporting; however, the Treasury Department and the IRS are providing 
penalty relief under certain circumstances for transactions occurring 
during calendar year 2025 and brokers can use this time to improve 
existing security practices or put a security system in place for the 
first time.
    Some comments expressed concerns about numerous third parties, such 
as multiple brokers, having access to customer data and questioned the 
ability of brokers to securely transfer customer data to third parties. 
Comments also included concerns about the IRS's ability to securely 
store customer data. The final regulations do not require the 
information reported to be disseminated to third parties, but as with 
many other information returns, require filing the complete information 
with the IRS and furnishing a statement to the taxpayer which can 
include a truncated TIN rather than the entire TIN. The final 
regulations also provide a multiple broker rule, which require only one 
broker to be responsible for obtaining and reporting the financial and 
identifying information of a person who participated in a digital asset 
transaction. Furthermore, and as more fully explained in Part I.B.2. of 
this Summary of Comments and Explanation of Revisions, the final 
regulations require PDAPs to file information returns with respect to a 
buyer's disposition of digital assets only if the processor already may 
obtain customer identification information from the buyer to comply 
with AML obligations pursuant to an agreement or arrangement with the 
buyer. The Treasury Department and the IRS acknowledge the concerns 
raised regarding the IRS's ability to securely store customer data and 
the information reported on digital asset transactions. The information 
on Forms 1099-DA will be subject to the same security measures as other 
information reported to the IRS. Generally, tax returns and return 
information are confidential, as required by section 6103 of the Code. 
Additionally, the Privacy Act of 1974 (Pub. L. 93-679) affords 
individuals certain rights with respect to records contained in the 
IRS's systems of records. One customer asserted that any information 
collected on the blockchain is public information, not ``return 
information'' under section 6103 and is therefore subject to the 
Freedom of Information Act (FOIA). Although the blockchain itself is 
public, all information reported on a Form 1099-DA and filed with the 
IRS becomes protected in the hands of the IRS under section 6103(b)(2) 
and is not subject to FOIA.
    Some comments express concerns about TIN certification and 
predicted that individuals would be confused when digital asset brokers 
requested their TINs. Some comments expressed fear that malicious 
actors who were not brokers would try to trick individuals into 
providing their personal information. Some comments said that as 
potential brokers, they were concerned about having customer data and 
that data being accessed by unauthorized individuals or entities. 
Concerns about malicious actors tricking customers into providing their 
personal information through online scams such as phishing attacks, 
while unfortunate, are not unique to digital asset reporting. Digital 
asset brokers who have a legitimate need for the TIN and other personal 
information of customers should provide their customers with an 
explanation for their requests to ensure their customers will not be 
confused or concerned. Additionally, brokers should act responsibly to 
safely store any information required to be reported on Form 1099-DA, 
Form 1099-S, Form 1099-B, and Form 1099-K including personal 
information of customers.
5. Authority for and Timing of Regulations
    Multiple comments expressed concerns that the Treasury Department 
and the IRS lacked authority to promulgate the digital asset broker 
regulations or asserted that the proposed regulations were published 
too soon or without sufficient development. For example, some comments 
said the IRS should wait to regulate digital assets until after 
consulting with other Federal agencies or that the proposed regulations 
addressed issues that should first be addressed by Congress or other 
agencies. Congress enacted the Infrastructure Act in 2021 and section 
80603 made several changes to the broker reporting provisions under 
section 6045 to clarify the rules regarding how certain digital asset 
transactions should be reported by brokers, and to expand the 
categories of assets for which basis reporting is required to include 
all digital assets. Congress's power to lay and collect taxes extends 
to the requirement that brokers report information on taxable digital 
asset transactions. The proposed regulations were published on August 
29, 2023, and the final regulations are intended to implement the 
Infrastructure Act; therefore, the IRS is not attempting to regulate 
digital assets without prior Congressional approval. No inference is 
intended as to when a sale of a digital asset occurs under any other 
legal regime, including the Federal securities laws and the Commodities 
Exchange Act, or to otherwise impact the interpretation or 
applicability of those or any other laws, which are outside the scope 
of these final regulations.
    Comments said the proposed regulations exceeded the authority 
granted by Congress. Section 80603 of the Infrastructure Act clarifies 
and expands the rules regarding how digital assets should be reported 
by brokers under sections 6045 and 6045A to improve IRS and taxpayer 
access to gross proceeds and adjusted basis information when taxpayers 
dispose of digital assets in transactions involving brokers. The 
Treasury Department and the IRS are issuing these final regulations to 
implement these statutory provisions. The Treasury Department

[[Page 56523]]

and the IRS disagree that these final regulations preempt Congressional 
action because as discussed in Parts I.A.2. and I.B.1.b. of this 
Summary of Comments and Explanation of Revisions, the final regulations 
are consistent with statutory language.
    Comments said the proposed regulations are hostile and aggressively 
opposed to digital asset technology and are not technologically 
neutral. Third-party information reporting addresses numerous types of 
payments, regardless of whether or not these payments are made online. 
Section 6045(a) requires brokers to file information returns, 
regardless of whether or not the brokerage operates online. The 
Infrastructure Act clarifies and expands the rules regarding how 
digital assets should be reported by brokers under sections 6045 and 
6045A to improve IRS and taxpayer access to gross proceeds and adjusted 
basis information when taxpayers dispose of digital assets in 
transactions involving brokers. The final regulations implement the 
Infrastructure Act and require brokers to file information returns that 
contain information similar to the existing Form 1099-B. The 
Infrastructure Act defines a digital asset broadly to mean any digital 
representation of value which is recorded on a cryptographically 
secured distributed ledger or any similar technology as specified by 
the Secretary; therefore, the final regulations that require this 
additional reporting do not exceed statutory authority.
    Other comments raised a variety of policy considerations including 
that the proposed regulations could negatively impact the growth of the 
digital asset industry which offers a variety of benefits. Information 
reporting assists taxpayers receiving such reports to prepare their 
Federal income tax returns and helps the IRS determine whether such 
returns are correct and complete. The legislation enacted by Congress 
confirming that information reporting by digital asset brokers is 
required represents a judgment that tax administration concerns should 
prevail over the policy considerations raised by the comments. 
Furthermore, information reporting from these regulations may result in 
reduced costs for taxpayers to monitor and track their digital asset 
portfolios. These reduced costs and the increased confidence potential 
digital asset owners will gain as a result of brokers being compliant 
with Federal tax laws may increase the number of digital asset owners 
and may increase existing owners' digital asset trade volume. Digital 
asset owners currently must closely monitor and maintain records of all 
their transactions to correctly report their tax liability at the end 
of the year. This is a complicated and time-consuming task that is 
prone to error. Those potential digital asset owners who have little 
experience with accounting for digital assets may have been unwilling 
to enter the market due to the high learning and record maintenance 
costs. Eliminating these high entry costs will allow more potential 
digital asset owners to enter the market. In addition, these 
regulations may ultimately mitigate some compliance costs for brokers 
by providing clarity, certainty, and consistency on which types of 
transactions and information are, and are not, subject to reporting.

II. Final Sec. Sec.  1.1001-7, 1.1012-1(h), and 1.1012-1(j)

A. Comments on the Taxability of Digital Asset-for-Digital Asset 
Exchanges
    A few comments questioned the treatment, under the rules in 
proposed Sec.  1.1001-7(b)(1) and (b)(1)(iii)(C), of an exchange of one 
digital asset for another digital asset, differing materially in kind 
or in extent, as a taxable disposition. Such treatment, a comment 
advised, would be detrimental to taxpayers, because it would ignore the 
virtual nature of digital assets and volatile and drastic price swings 
in this market and the potential adverse tax consequences of having to 
recognize capital gains immediately but with allowable capital losses 
being limited in some instances. Another comment stated the proposed 
treatment would be administratively impractical, because such a rule, 
the comment argued, rests on the false presumption that an exchange of 
digital assets is akin to an exchange of stocks/securities and that, 
unlike those exchanges, taxpayers have opportunities to engage in 
digital asset exchanges in a manner that may go unnoticed by the IRS, 
and therefore, untaxed. Another comment challenged the proposed 
treatment, because digital assets, the comment opined, are software 
that do not encompass legal rights within the meaning of Cottage 
Savings Association v. Commissioner, 499 U.S. 554 (1991).
    The final regulations do not adopt these comments. The Treasury 
Department and the IRS have determined that treating an exchange of 
digital assets for digital assets is a realization event, within the 
meaning of section 1001(a) and existing precedents. See, e.g., Cottage 
Savings Ass'n, 499 U.S. at 566 (``Under [the Court's] interpretation of 
[section] 1001(a), an exchange of property gives rise to a realization 
event so long as the exchanged properties are `materially different'--
that is, so long as they embody legally distinct entitlements''). 
Moreover, the Treasury Department and the IRS have determined that the 
treatment is consistent with longstanding legal principles. Nor do the 
Treasury Department and the IRS agree with the comment's assessment 
that digital assets are only software that do not represent legally 
distinct entitlements. Accordingly, final Sec.  1.1001-7(b)(1) and 
(b)(1)(iii)(C) retain the rules in proposed Sec.  1.1001-7(b)(1) and 
(b)(1)(iii)(C) treating such an exchange as a realization event.
    Alternatively, one comment criticized treating an exchange of 
digital assets for digital assets, differing materially either in kind 
or in extent, as a taxable disposition, without also providing guidance 
defining the factors necessary for determining what are material 
differences. The absence of such guidance, the comment believed, would 
require taxpayers and brokers to rely on decades-old case law to make 
such determinations and would result in discrepancies in information 
reporting for the same types of transactions. Accordingly, the comment 
recommended the final rules include guidance on these factors. The 
final regulations do not adopt this recommendation. The Treasury 
Department and the IRS have concluded that a determination of whether 
property is materially different in kind or in extent is a factual one, 
and, thus, beyond the scope of these regulations.
B. Digital Asset Transaction Costs
    Proposed Sec.  1.1001-7(b)(2)(i) defined the term digital asset 
transaction costs as the amount in cash, or property (including digital 
assets), to effect the disposition or acquisition of a digital asset 
and includes transaction fees, transfer taxes, and any other 
commissions. By cross-reference to proposed Sec.  1.1001-7(b)(2)(i), 
proposed Sec.  1.1012-1(h)(2)(i) adopted the same meaning for this 
term.
    Proposed Sec.  1.1001-7(b)(2)(ii) provided rules for allocating 
digital asset transaction costs to the disposition or acquisition of a 
digital asset. Proposed Sec.  1.1001-7(b)(2)(ii)(A) set forth the 
general rule for allocating digital asset transaction costs for 
purposes of determining the amount realized. Proposed Sec.  1.1001-
7(b)(2)(ii)(B) included a special rule, in the case of digital assets 
received in exchange for other digital assets that differ materially in 
kind or extent, allocating one-half of the total digital asset 
transaction costs paid by the taxpayer to the disposition of the 
transferred digital asset for

[[Page 56524]]

purposes of determining the amount realized.
    Proposed Sec.  1.1012-1(h)(2)(ii) provided rules for allocating 
digital asset transaction costs to acquired digital assets. Proposed 
Sec.  1.1012-1(h)(2)(ii)(A) included a general rule requiring such 
costs to be allocated to the basis of the digital assets received. As a 
corollary to proposed Sec.  1.1001-7(b)(2)(ii)(B), proposed Sec.  
1.1012-1(h)(2)(ii)(B) included a special rule in the case of digital 
assets received in exchange for other digital assets that differ 
materially in kind or extent, allocating one-half of the total digital 
asset transaction costs paid by the taxpayer to the acquisition of the 
received digital assets for purposes of determining the basis of those 
received digital assets.
1. Proposed Split Digital Asset Transaction Cost Rule
    The Treasury Department and the IRS solicited comments on whether 
the proposed split digital asset transaction cost rule, as described in 
proposed Sec. Sec.  1.1001-7(b)(2)(ii)(B) and 1.1012-1(h)(2)(ii)(B), 
would be administrable. The responses to this inquiry varied widely. 
One comment viewed the split digital asset transaction cost rule as 
administrable but only if the digital assets used to pay the digital 
asset transaction costs can be reasonably valued and recognized at 
their acquisition cost. The final regulations do not adopt this 
comment. The determination of whether digital assets can be reasonably 
valued could be made differently by different brokers and give rise to 
inconsistent reporting. The sale or disposition of digital assets 
giving rise to digital asset transaction costs is subject to the rules 
of final Sec. Sec.  1.1001-7 and 1.1012-1(h), which provide consistent 
rules for all digital asset-for-digital asset transactions.
    Another comment opined that the proposed split digital asset 
transaction cost rule would be administrable, but that its application 
would pose an increased risk of error and would not reflect current 
industry practice. In contrast, several comments expressed the view 
that the proposed split digital asset transaction cost rule, in fact, 
would not be administrable. These comments cited a variety of reasons, 
including that the rule's application would be too burdensome, 
complicated, or confusing for brokers and taxpayers and would render 
oversimplified allocations not reflective of the diverse and complex 
nature of digital asset transactions. Other comments opined that the 
lack of administrability would derive, in part, from the disparity of 
having a different allocation rule for exchanged digital assets than 
the allocation rules applied to other asset classes, which, in their 
view, would result in disparate tax treatment for the latter type of 
costs. A few comments advised that the administrability issues would be 
caused in part, from the difficulties the rule would create when later 
seeking to reconcile transaction accounting and transaction validation. 
One comment shared the view that the proposed rule would be difficult 
for decentralized digital asset trading platforms to administer because 
it would require coordination of multiple parties providing 
facilitative services, and no such coordination currently exists in the 
form of technological infrastructure and standardized processes for 
tracking and communicating cost-basis information across these 
platforms.
    Several comments noted that digital asset transaction costs paid 
for effecting an exchange of digital assets were generally low, with 
one comment opining that such costs were generally less than 1 percent 
of a transaction's total value. These comments often noted that the 
resulting allocations from applying the proposed split digital asset 
transaction cost rule would result in no or minimal timing differences 
in the associated income. Other comments questioned whether the 
benefits derived from having taxpayers and brokers apply the proposed 
split digital asset transaction cost rule would be commensurate with 
the additional administrative burdens that would be placed on the 
parties. A few comments shared the concern that the proposed split 
digital asset transaction cost rule would impose additional burdens and 
complexity, because such a rule would require brokers to implement or 
modify their existing accounting systems, develop new software, and 
retain additional professional service providers in order to comply. 
One comment also noted the resulting allocations from the proposed 
split digital asset transaction cost rule would be inconsistent with 
the allocations required by Generally Accepted Accounting Principles 
and would produce unnecessary book-tax differences. Some comments 
expressed the concern that the proposed split digital asset transaction 
cost rule would produce arbitrary approximations not necessarily 
reflecting the economic reality of the particular transactions. 
Additionally, one comment stated that the proposed split digital asset 
transaction cost rule would pose litigation risks for the IRS because 
such a rule would override the parties' contracted cost allocations and 
thus impede their rights under contract law. Another comment argued 
that the proposed split digital asset transaction cost rule would 
impede the right of taxpayers and brokers to determine which party 
bears the economic burden of digital asset transaction costs. The 
Treasury Department and the IRS have concluded that the proposed split 
digital asset transaction cost rule would be overly burdensome for 
taxpayers and brokers to administer. Accordingly, the final regulations 
do not adopt the proposed rule.
2. Recommended Alternatives for the Split Digital Asset Transaction 
Cost Rule
    A few comments recommended the adoption of a rule allocating 
digital asset transaction costs based on the actual amounts paid for 
the specific disposition or acquisition, which some viewed as promoting 
taxpayer equity. One comment also recommended that this rule be coupled 
with flexibility sufficient to accommodate different types of 
transactions and technological solutions for ease of administration. 
Several comments recommended that the final regulations adopt a 
discretionary rule allowing brokers to decide how to allocate these 
costs (discretionary allocation rule). Most of these comments also 
recommended that brokers be required to notify taxpayers of the cost 
allocations and to apply the allocations in a consistent manner. The 
cited benefits for this recommendation included that the resulting 
allocations would be more consistent with the economics of the actual 
fees charged by brokers, and that the recommended rule would create 
symmetry with the rules applied to transactions involving other asset 
classes. In addition to recommending adoption of a discretionary 
allocation rule, a few comments also recommended the inclusion of safe 
harbors for brokers. In urging the inclusion of safe harbors, one 
comment suggested limiting their availability to those brokers who 
maintain records documenting the actual cost allocations. Of the 
comments recommending a discretionary allocation rule, most viewed such 
a rule as comparable with the current rules for allocating 
transactional costs incurred in transactions with other asset classes. 
One comment also recommended that the discretionary allocation rule be 
extended to cover taxpayers' allocations of digital asset transaction 
costs.
    In addition to recommending a discretionary allocation rule, many 
comments also recommended that the

[[Page 56525]]

final rules provide an option, allowing brokers or taxpayers to 
allocate digital asset transaction costs on a per-transaction basis. 
This approach, in their view, was necessary because of the diverse 
types of digital asset transactions. Comments claimed that a ``one-
size-fits-all'' approach would not account for the inevitable 
variability, and that the recommended approach would promote fairness 
and administrability. One comment recommended that the final 
regulations include a de minimis rule excluding digital asset 
transaction costs under a specified threshold. Another comment 
recommended that the split digital asset transaction cost rule be 
replaced with rules requiring taxpayers to account for digital asset 
transaction costs in accordance with the principles of section 263(a) 
of the Code, while permitting brokers to allocate and report digital 
asset transaction costs either as a reduction in the amount realized on 
the disposed digital assets or as an additional amount paid for the 
acquired digital assets so long as the brokers' reporting is 
consistently applied. One comment recommended the inclusion of a 
simplified reporting rule with less emphasis on precise allocations of 
digital asset transaction costs for smaller transactions. The comment 
did not offer parameters for defining smaller transactions in this 
context. The final regulations do not adopt these recommendations. The 
Treasury Department and the IRS have determined that the adoption of 
discretionary allocation rules would place additional administrative 
burdens on taxpayers, brokers, and the IRS. Such rules would render 
disparate treatment of such costs among brokers and/or taxpayers with 
multiple wallet or broker accounts, thus necessitating the need for 
additional tracking and coordination to avoid discrepancies. In 
contrast, a uniform rule is less susceptible to manipulation and avoids 
administrative complexities.
3. Proposed 100 Percent Digital Asset Transaction Cost Rule
    The Treasury Department and the IRS also solicited comments on 
whether a rule requiring a 100 percent allocation of digital asset 
transaction costs to the disposed-of digital asset in an exchange of 
one digital asset for a different digital asset (100 percent digital 
asset transaction cost rule) would be less burdensome.
    Several comments agreed that the proposed 100 percent digital asset 
transaction cost rule would be less burdensome. Other comments, 
however, did not share this view for a variety of reasons. Some 
comments stated that the resulting allocations would not accurately 
reflect the economic realities of the transactions, although one 
comment expressed the view that these allocations would more closely 
reflect economic realities than the allocations resulting from the 
proposed split digital asset transaction cost rule. One comment cited 
the rule's rigidity, which the comment concluded would lead to 
increased potential disputes between the IRS and taxpayers and expose 
both parties to additional litigation and administrative burdens. One 
comment cited the oversimplifying effect the rule would have on diverse 
and complex digital asset transactions, which would, in the comment's 
view, result in inaccurate reporting of gains and losses and other 
unintended tax consequences, pose a potential disincentive for 
taxpayers to engage in smaller transactions, and disproportionately 
impact investors engaged in certain investment strategies. The Treasury 
Department and the IRS do not agree that the resulting allocations 
rendered by the 100 percent digital asset transaction cost rule are 
inconsistent with the economic realities of some digital asset 
transactions. The 100 percent digital asset transaction cost rule 
likely creates minor timing differences, but such differences do not 
outweigh the benefits, in the form of clarity and certainty in 
determining the allocated costs. Further, the Treasury Department and 
the IRS have concluded that the 100 percent digital asset transaction 
cost rule appropriately balances concerns about administrability, 
compliance burdens, manipulability, and accuracy. Specifically, it 
alleviates the burdens placed on brokers and taxpayers from having to 
track the allocated costs separately to ensure the amounts are 
accurate. Additionally, the 100 percent digital asset transaction cost 
rule, applied to both unhosted wallets and accounts held in the custody 
of a broker, is less burdensome than the proposed split digital asset 
transaction cost rule and the recommended discretionary allocation 
rule.
    One comment cited the current industry consensus to treat an 
exchange of one digital asset for another digital asset as two separate 
transactions consisting of: a sale of the disposed digital asset 
followed by a purchase of the received digital asset. Because of this 
industry consensus, the comment recommended that these costs be treated 
as selling expenses reducing the amount realized on the disposed 
digital assets. The final regulations adopt this comment. Final Sec.  
1.1001-7(b)(2)(ii) sets forth rules for allocating digital asset 
transaction costs, as defined in final Sec.  1.1001-7(b)(2)(i), by 
retaining the general rule in proposed Sec.  1.1001-7(b)(2)(ii)(A), and 
revising proposed Sec.  1.1001-7(b)(2)(ii)(B). Final Sec.  1.1001-
7(b)(2)(ii)(A) replaces the split digital asset transaction cost rule 
with the 100 percent digital asset transaction cost rule. Under final 
Sec.  1.1001-7(b)(2)(ii)(A), the total digital asset transaction costs, 
other than in the case of certain cascading digital asset transaction 
costs described in final Sec.  1.1001-7(b)(2)(ii)(B), are allocable to 
the disposed digital assets.
    Final Sec.  1.1012-1(h)(2)(ii) also includes corresponding rules to 
those in final Sec.  1.1001-7(b)(2)(ii), for allocating digital asset 
transaction costs, as defined in final Sec.  1.1012-1(h)(2)(i). Final 
Sec.  1.1012-1(h)(2)(ii) retains the general rule in proposed Sec.  
1.1012-1(h)(2)(ii)(A), and revises the special rule in proposed Sec.  
1.1012-1(h)(2)(ii)(B), removing the split digital asset transaction 
cost rule and allocating digital asset transaction costs paid to effect 
an exchange of digital assets for other digital assets, differing 
materially in kind or in extent, exclusively to the disposition of 
digital assets. Under final Sec.  1.1012-1(h)(2)(ii)(A), digital asset 
transaction costs, other than those described in final Sec.  1.1012-
1(h)(2)(ii)(B) and (C), are allocable to the digital assets received. 
Under final Sec.  1.1012-1(h)(2)(ii)(B), if digital asset transaction 
costs are paid to effect the exchange of digital assets for other 
digital assets, differing materially in kind or in extent, then such 
costs are allocable exclusively to the disposed digital assets. Final 
Sec.  1.1012-1(h)(2)(ii) also adds special rules in final Sec.  1.1012-
1(h)(2)(ii)(C) for allocating certain cascading digital asset 
transaction costs, which are discussed in Part II.B.4. of this Summary 
of Comments and Explanation of Revisions. Final Sec.  1.1012-
1(h)(2)(ii) also states that any allocations or specific assignments, 
other than those in accordance with final Sec.  1.1012-1(h)(2)(ii)(A) 
through (C), are disregarded.
    Finally, final Sec.  1.1001-7(b)(2)(ii)(B) adds a new special rule 
for cascading digital asset transaction costs. See Part II.B.4. of this 
Summary of Comments and Explanation of Revisions for a discussion of 
the special rule in final Sec.  1.1001-7(b)(2)(ii)(C) for allocating 
certain cascading digital asset transaction costs and the Treasury 
Department's and the IRS's reasons for adopting that rule.

[[Page 56526]]

4. Cascading Digital Asset Transaction Costs
    The Treasury Department and the IRS solicited comments on whether 
cascading digital asset transaction costs, that is, a digital asset 
transaction cost paid with respect to the use of a digital asset to pay 
for a digital asset transaction cost, should be treated as digital 
asset transaction costs associated with the original transaction.
    A few comments agreed that cascading digital asset transaction 
costs should be allocated to the original transaction. Most comments, 
however, opposed allocating such costs exclusively to the original 
transaction, citing an array of reasons. A few comments advised that 
such an approach would improperly aggregate economically distinct 
transactions and would fail to accurately measure cost basis and any 
gains or losses on the disposed digital assets used to pay the 
subsequent digital asset transaction costs. These comments expressed 
the position that the proposed approach would conflict with existing 
tax jurisprudence and fail to reflect economic reality. One comment 
cited the oversimplifying effect of such a rule, which would, in the 
comment's view, lead to inequitable tax treatment and imposition of 
undue operational burdens.
    A few comments cited the significant operational burdens placed on 
both taxpayers and brokers to implement such a rule. One of these 
comments also cited the complicating and potentially inequitable effect 
such a rule would have on making the allocation and tax calculations. 
Comments recommended a variety of alternatives for allocating cascading 
digital asset transaction costs. Some comments recommended that these 
costs be allocated to each specific transaction giving rise to the 
costs. In recommending this approach, one comment noted that it would 
offer a more nuanced and accurate reflection of the financial realities 
of digital asset transactions, thus ensuring ``fairer'' tax treatment, 
``clearer'' records, and ``easier'' audit trails, while also 
acknowledging that it may impose increased administrative burdens. In 
addition to making the above recommendation, one comment also offered 
an alternative approach suggesting that such costs be allocated 
proportionally based on the significance of each transaction in the 
cascading chain. This alternative recommendation, the comment noted, 
would balance the needs for accurate cost reporting and accounting, and 
would reduce disproportionately high tax burdens arising from minor 
transaction costs, while the comment acknowledged that it may be 
complex to implement. Another comment recommended allocating cascading 
digital asset transaction costs based on some other factors, such as 
the complexity or difficulty of each transaction and market conditions. 
The final regulations do not adopt these comments for allocating 
cascading digital asset transaction costs. The Treasury Department and 
the IRS have determined that these costs should be allocated in the 
same manner provided in the general allocation rules with a limited 
exception because this framework is less burdensome, produces accurate 
tax determinations, and reduces the potential for errors and 
inconsistencies.
    A few comments included a description of network fees, exchange 
fees, one time access fees, and other service charges and recommended 
that the final rules treat these types of fees as cascading digital 
asset transaction costs. Final Sec. Sec.  1.1001-7 and 1.1012-1(h) do 
not adopt these recommendations. The Treasury Department and the IRS 
have determined that whether a type of transaction fee fits within the 
definition of cascading digital asset transaction costs is a factual 
determination and is beyond the scope of these regulations.
    Final Sec.  1.1001-7(b)(2)(ii)(B) adopts a modified special rule 
for allocating certain cascading digital asset transaction costs for an 
exchange described in final Sec.  1.1001-7(b)(1)(iii)(C) (an exchange 
of digital assets for other digital assets differing materially in kind 
or in extent) and for which digital assets acquired in the exchange are 
withheld from digital assets acquired in the original transaction to 
pay the digital asset transaction costs to effect the original 
transaction. For such transactions, the total digital asset transaction 
costs paid by the taxpayer, to effect the original exchange and any 
dispositions of the withheld digital assets, are allocable exclusively 
to the disposition of digital assets from the original exchange. For 
all other transactions not otherwise described in final Sec.  1.1001-
7(b)(2)(ii)(B), digital asset transaction costs are allocable in 
accordance with the general allocation rule set forth in final Sec.  
1.1001-7(b)(2)(ii)(A), that is, digital asset transaction costs are 
allocable to the specific transaction from which they arise.
    Final Sec.  1.1012-1(h)(2)(ii) adds corresponding special 
allocation rules for certain cascading digital asset transaction costs 
paid to effect an exchange of one digital asset for another digital 
asset and for which digital assets are withheld from those received in 
the exchange to pay the digital asset transaction costs to effect such 
an exchange. For such transactions, the total digital asset transaction 
costs paid by the taxpayer to effect the exchange and any dispositions 
of the withheld digital assets are allocable exclusively to the digital 
assets disposed of in the original exchange.
C. Basis
    Final Sec.  1.1012-1(j) clarifies the scope of the lot 
identification rules for digital assets defined by cross-reference to 
Sec.  1.6045-1(a)(19), except for digital assets the sale of which is 
not reported by a broker as the sale of a digital asset because the 
sale is a sale of a dual classification asset described in Part 
I.A.4.a. of this Summary of Comments and Explanation of Revisions that 
is cleared or settled on a limited-access regulated network subject to 
the coordination rule in final Sec.  1.6045-1(c)(8)(iii), a disposition 
of contracts covered by section 1256(b) subject to the coordination 
rule in final Sec.  1.6045-1(c)(8)(ii), or is a sale of a dual 
classification asset that is an interest in a money market fund subject 
to the coordination rule in final Sec.  1.6045-1(c)(8)(iv). Final Sec.  
1.1012-1(j)(3) applies to digital assets held in the custody of a 
broker, whereas the final rules in Sec.  1.1012-1(j)(1) and (2) apply 
to digital assets not held in the custody of a broker. Final Sec.  
1.1012-1(j) also defines the terms wallet, hosted wallet, unhosted 
wallet, and held in a wallet by cross-reference to the definitions for 
these terms in Sec.  1.6045-1(a)(25)(i) through (iv).
1. Digital Assets Not Held in the Custody of a Broker
    For units not held in the custody of a broker, such as in an 
unhosted wallet, proposed Sec.  1.1012-1(j)(1) provided that if a 
taxpayer sells, disposes of, or transfers less than all the units of 
the same digital asset held within a single wallet or account, the 
units disposed of for purposes of determining basis and holding period 
are determined by a specific identification of the units of the 
particular digital asset in the wallet or account that the taxpayer 
intends to sell, dispose of, or transfer. Under the proposed 
regulations, for a taxpayer that does not specifically identify the 
units to be sold, disposed of, or transferred, the units in the wallet 
or account disposed of are determined in order of time from the 
earliest purchase date of the units of that same digital asset. For 
purposes of making this determination, the dates the units were 
transferred into the taxpayer's wallet or account are

[[Page 56527]]

disregarded. Proposed Sec.  1.1012-1(j)(2) provided that a specific 
identification of the units of a digital asset sold, disposed of, or 
transferred is made if, no later than the date and time of sale, 
disposition, or transfer, the taxpayer identifies on its books and 
records the particular units to be sold, disposed of, or transferred by 
reference to any identifier, such as purchase date and time or the 
purchase price for the unit, that is sufficient to identify the basis 
and holding period of the units sold, disposed of, or transferred. A 
specific identification could be made only if adequate records are 
maintained for all units of a specific digital asset held in a single 
wallet or account to establish that a unit is removed from the wallet 
or account for purposes of subsequent transactions.
a. Methods and Functionalities of Unhosted Wallets
    The Treasury Department and the IRS solicited comments on whether 
there are methods or functionalities that unhosted wallets can provide 
to assist taxpayers with the tracking of a digital asset upon the 
transfer of some or all units between custodial brokers and unhosted 
wallets. In response, one comment stated that unhosted wallets 
currently lack the functionalities to allow taxpayers to make specific 
identifications, as provided in proposed Sec.  1.1012-1(j)(2), of their 
basis and holding periods by the date and time of a sale, disposition, 
or transfer from an unhosted wallet even if taxpayers were to employ 
transaction-aggregation tools. In contrast, another comment advised 
that existing transaction-aggregation tools could provide the needed 
assistance for tracking digital assets held in unhosted wallets. The 
remaining comments suggested that no methods or functionalities are 
currently available or feasible that would allow unhosted wallets to 
track purchase dates, times, and/or the basis of specific units. Noting 
that unhosted wallets are open-source software created by developers 
with limited resources, one comment opined that any expectation that 
such functionalities can be added to these wallets before 2030 would be 
unreasonable. Creating such functionalities, some comments also stated, 
would require the adoption of universal industry-wide standards or 
methods for reliably tracking cost basis information across wallets and 
transactions, yet existing technology challenges and the complexity of 
some transactions would serve as impediments to their adoption. These 
comments also stated that the addition of comprehensive cost-basis 
tracking to unhosted wallets would make such wallets prohibitively 
risky for taxpayers, thus depriving them of their privacy, security, 
and control benefits.
    The Treasury Department and the IRS have determined that the final 
ordering rules for digital assets not held in the custody of a broker 
should strike a balance between the compliance burdens placed on 
taxpayers and the necessity for rules that will comply with the 
statutory requirements of section 1012(c)(1) to render accurate tax 
results. Accordingly, notwithstanding existing technology limitations, 
final Sec.  1.1012-1(j)(2) provides that specific identification of the 
units of a digital asset sold, disposed of, or transferred is made if, 
no later than the date and time of the sale, disposition, or transfer, 
the taxpayer identifies on its books and records the particular units 
to be sold, disposed of, or transferred by reference to any identifier, 
such as purchase date and time or the purchase price for the unit, that 
is sufficient to identify the units sold, disposed of, or transferred 
in order to determine the basis and holding period of such units. 
Taxpayers can comply with these rules by keeping books and records 
separate from the data in the unhosted wallet. A specific 
identification can be made only if adequate records are maintained for 
the unit of a specific digital asset not held in the custody of a 
broker to establish that a unit sold, disposed of, or transferred is 
removed from the wallet. Taxpayers that wish to simplify their record 
maintenance tasks may adopt a standing rule in their books and records 
that specifically identifies a unit selected by an unhosted wallet for 
sale, disposition or transfer as the unit sold, disposed of or 
transferred, if that would be sufficient to establish which unit is 
removed from the wallet.
b. Ordering Rule for Digital Assets Not Held in the Custody of a Broker
    The Treasury Department and the IRS also solicited comments on 
whether the ordering rules of proposed Sec.  1.1012-1(j)(1) and (2) for 
digital assets not held in the custody of a broker should be applied on 
a wallet-by-wallet basis, as proposed, on a digital asset address-by-
digital asset address basis, or on some other basis. The Treasury 
Department and the IRS received a variety of responses to this inquiry.
    A few comments recommended the adoption of a universal or multi-
wallet rule for all digital assets held in unhosted wallets, with one 
such comment opining that there is not a strong policy reason for 
prohibiting this approach. The final regulations do not adopt this 
recommendation because a wallet-by-wallet approach is more consistent 
with the statutory requirements in section 1012(c)(1), which requires 
that regulations prescribe an account-by-account approach for 
determining the basis of specified securities that are sold, exchanged, 
or otherwise disposed of.
    One comment recommended that proposed Sec.  1.1012-1(j)(1) be 
modified to require taxpayers to determine the basis of identical 
digital assets by averaging the acquisition cost of each identical 
digital asset if it is acquired at separate times during the same 
calendar day in executing a single trade order and the executing broker 
provides a single confirmation that reports an aggregate total cost or 
an average cost per share. The comment also suggested that taxpayers be 
provided an option to override the mandatory rule and determine their 
basis by the actual cost on a per-unit basis if the taxpayer notifies 
the broker in writing of this intent by the earlier of: the date of the 
sale of any of such digital assets for which the taxpayer received the 
confirmation or one year after the date of the confirmation (with the 
receiving broker having the option to extend the one-year notification 
period, so long as the extended period would end no later than the date 
of sale of any of the digital assets). The comment noted a similar rule 
exists for certain stock acquisitions, citing Sec.  1.1012-1(c)(1)(ii). 
This comment is not adopted. A key feature of the rules provided in 
Sec.  1.1012-1(c)(1)(ii) is the confirmation required by U.S. 
securities laws to be sent from a security broker to the customer 
shortly after the settlement of a securities trade, which may report 
the use of average basis for a single trade order that is executed in 
multiple tranches. Digital asset industry participants do not 
necessarily issue equivalent confirmations for digital asset purchases. 
As a result, a customer would not know whether the broker used average 
basis until the customer received an information return from the 
broker, even though the customer may need to know whether the broker 
used average basis sooner, such as when the customer decides which 
units to dispose of in a transaction.
    One comment recommended that the final rules adopt an address-based 
rule for all digital assets held in unhosted wallets, viewing this 
approach as posing less of a compliance burden on taxpayers. The 
statutory requirements of section 1012(c)(1) require that in the case 
of the sale, exchange, or other disposition of a specified security on 
or after the applicable date for that security, the conventions 
prescribed by the regulations must be applied on an

[[Page 56528]]

account-by-account basis. Accordingly, the final regulations do not 
adopt this recommendation.
    A few comments expressed general concerns about applying the 
proposed ordering rules to digital assets held in unhosted wallets, 
with one comment stating that the rules (1) would not align with how 
taxpayers currently use unhosted wallets; (2) would require complex 
tracing, making accurate basis reporting infeasible and unnecessarily 
complex; and (3) would drive digital asset transactions to offshore 
exchanges, recommending instead that the ordering rules be applied on a 
per-transaction basis. Another comment recommended a uniform wallet-
based rule for all digital assets held in unhosted wallets. In 
contrast, a few comments viewed such a rule as imposing administrative 
difficulties because of technological differences in how different 
blockchains record and track units, explaining that current blockchains 
employ one of two types of technology for this purpose: the unspent 
transaction output (UTXO) model and the account model. The UTXO model, 
comments described, is similar to a collection of transaction receipts 
or gift cards with the inputs to a transaction being marked as spent 
and any outputs remaining under the control of the wallet after a 
transaction's execution as ``unspent outputs'' or ``UTXOs.'' In 
contrast, comments described the account model as aggregating the 
taxpayer's unspent units into a cumulative balance. A relevant 
difference between the two models, these comments noted, is that units 
recorded/tracked by a UTXO model are not divisible, whereas those 
recorded/tracked by an account model are divisible.
    In light of these differences, a comment recommended that the final 
rules include separate ordering rules based on the type of model used 
to record the particular units. This comment recommended that units of 
a digital asset recorded/tracked with the UTXO model should be 
identified by taxpayers using the specific identification rule and 
applied on a wallet-by-wallet basis, defining wallet for this purpose 
as a collection of logically related digital asset addresses for which 
the wallet may form transactions involving more than a single address. 
This comment also recommended that units recorded by the account model 
should be identified by taxpayers using the FIFO ordering rule and 
applied on a digital asset address-by-digital asset address basis. The 
final regulations do not adopt these recommendations. As explained 
later in this preamble, the final rules adopt uniform basis 
identification rules not tied to a specific technology. The Treasury 
Department and the IRS have concluded that the use of different rules 
based on existing recording models would limit the rules' utility and 
render disparate timing results of the associated gains or losses. The 
final rules offer flexibility to accommodate evolving recording models. 
Moreover, as discussed earlier in this preamble, the recommended 
address-based rule for units recorded by the account model would not 
conform to the statutory requirements of section 1012(c)(1).
    One comment assessed the benefits and drawbacks of both the wallet-
based rule and the address-based rule. This comment viewed the wallet-
based rule as offering taxpayer simplicity and audit efficiency but 
posing added complexity and audit burdens in some instances, and the 
address-based rule as providing more granular tracking results, more 
accurately reflecting a taxpayer's intentions for a particular 
transaction but adding additional administrative burdens and increasing 
the risk of reporting errors. This comment recommended that the final 
rules adopt a discretionary rule allowing a taxpayer to choose either 
rule based on the taxpayer's circumstances. The final regulations do 
not adopt this recommendation because the Treasury Department and the 
IRS have determined that such a rule would increase the possibility of 
manipulation and errors in taxpayers' calculations.
    One comment rejected both a wallet-based rule and an address-based 
rule. This comment stated that a wallet-based rule would add complexity 
and administrative burdens to tracking basis and would pose an 
increased risk for reporting errors. This comment also stated that an 
address-based rule would produce excessive granular data, raise privacy 
concerns, and present technical challenges. Instead, this comment 
recommended two alternatives, the first of which would be to apply the 
ordering rules for unhosted wallets by grouping digital asset addresses 
or wallets, and the second of which would be to allow taxpayers to 
identify or report only transactions above a minimum balance or 
transactional volume. The Treasury Department and the IRS have 
determined that both approaches would create undue administrative 
burden. Additionally, the Treasury Department and the IRS have 
determined that the de minimis approach would create an unnecessary 
disparity between the ordering rules for digital assets in unhosted 
wallets and the ordering rules for digital assets held in the custody 
of a broker as well as the ordering rules applicable to other assets. 
Accordingly, the final regulations do not adopt either of these 
recommendations.
    A few comments expressed concerns that technology limitations would 
make the proposed specific identification rule unfeasible for all 
digital assets held in unhosted wallets regardless of the model used by 
the blockchain to record and track units. Alternatively, a comment 
recommended, if a uniform ordering rule is desired for UTXO and account 
models, then the address-based rule should be adopted but with an 
option allowing taxpayers to identify related digital asset addresses, 
subject to a burden-of-proof showing of the relatedness. The comment 
suggested that this alternative would be easy to administer, provide a 
verifiable audit trail and flexibility, and avoid potential tax 
reporting discrepancies. The final regulations do not adopt these 
suggestions. The Treasury Department and the IRS have concluded that 
the suggested approaches tied to current technology would have limited 
usefulness since technology can be expected to change in the future. 
Accordingly, the final regulations adopt a uniform ordering rule for 
digital assets not held in the custody of a broker because this rule 
reduces the risk of errors and simplifies taxpayers' gain or loss 
calculations.
    One comment recommended, as an alternative to the proposed ordering 
rules for digital assets held in unhosted wallets, that taxpayers be 
required to determine their cost basis of a unit of a digital asset by 
averaging their costs for all units of the identical digital asset 
irrespective of their holding periods. This comment suggested that this 
approach would simplify determination of the basis of individual units 
because it would eliminate the need to track the acquisition details of 
each digital asset. This comment noted that certain other countries 
employ variations of this approach, suggesting, for example, that its 
adoption would align future information exchanges with other countries 
under the CARF. The final regulations do not adopt this recommendation 
because it is inconsistent with sections 1222 and 1223 of the Code, 
which require taxpayers to determine whether gains or losses with 
respect disposed digital assets are long term or short term, within the 
meaning of section 1222, based on the taxpayer's holding period for the 
disposed asset as determined under section 1223.
    One comment recommended that the proposed ordering rules be revised 
to adopt the meaning of ``substantially similar or related'' as the 
term is used

[[Page 56529]]

in IRS Tax Publication 550, Investment Income and Expenses. The final 
regulations do not adopt this recommendation. The Treasury Department 
and the IRS have determined that this term refers to special rules not 
covered by these regulations. Accordingly, the term would not serve as 
a relevant benchmark by which to apply the ordering rules for digital 
assets held in unhosted wallets.
    A comment requested guidance on how taxpayers should comply with 
the proposed specific identification rules for digital assets held in 
unhosted wallets when using tracking software that neither provides a 
way to mark the units sold nor incorporates these sold units into gain 
and loss calculations. The final regulations do not adopt this comment. 
The Treasury Department and the IRS have determined that additional 
guidance on how taxpayers maintain their books and records to meet 
their substantiation obligations is not needed and is beyond the scope 
of this project. The specific identification rules should not apply 
differently simply because currently available basis tracking software 
may not have the ability to mark specific units as sold or otherwise 
track basis in a manner consistent with the specific identification 
rules.
    The Treasury Department and the IRS have determined that the final 
regulations should include a uniform wallet-based ordering rule for all 
digital assets held in unhosted wallets rather than separate rules 
based on existing technological differences. The Treasury Department 
and the IRS have determined that such a rule best facilitates accurate 
tax determinations. Moreover, such a rule satisfies the statutory 
requirements of section 1012(c)(1), which requires that the conventions 
prescribed by regulations be applied on an account-by-account basis in 
the case of a sale, exchange, or other disposition of a specified 
security, on or after the applicable date as defined in section 
6045(g). Additionally, to conform with this decision, final Sec.  
1.1012-1(j)(1) and (2) retain the term held in a wallet as defined in 
final Sec.  1.6045-1(a)(25), but no longer incorporate the term 
``account'' to avoid confusion with industry usage of the term to refer 
to the account-based models used by blockchains to record and track 
units of a digital asset. The Treasury Department and the IRS have 
determined that the term wallet, as defined by Sec.  1.6045-1(a)(25), 
is sufficiently broad to incorporate both wallets and accounts and the 
removal of the latter term avoids confusion.
    Finally, as discussed in Part VII. of this Summary of Comments and 
Explanation of Revisions, the final regulations under Sec.  1.6045-1 
are applicable beginning January 1, 2025. Accordingly, digital assets 
constitute specified securities and are subject to these requirements 
beginning January 1, 2025.
2. Digital Assets Held in the Custody of Brokers
    For taxpayers that leave their digital assets in the custody of a 
broker, unless the taxpayer provides the broker with an adequate 
identification of the units sold, disposed of, or transferred, proposed 
Sec.  1.1012-1(j)(3)(i) provided that the units disposed of for 
purposes of determining the basis and holding period of such units is 
determined in order of time from the earliest units of that same 
digital asset acquired in the taxpayer's account with the broker. 
Because brokers do not have the purchase date information about units 
purchased outside the broker's custody and transferred into the 
taxpayer's account, proposed Sec.  1.6045-1 instead required brokers to 
treat units of a particular digital asset that are transferred into the 
taxpayer's account as purchased as of the date and time of the transfer 
(rather than as of the date actually acquired as proposed Sec.  1.1012-
1(j)(3)(i) requires taxpayers to do). The rule for units that are 
transferred into the custody of a broker, the comments received in 
response to this rule, and the final decisions made after considering 
those comments are discussed in Part I.E.3.b. of this Summary of 
Comments and Explanation of Revisions. See also, final Sec. Sec.  
1.1012-1(j)(3)(i) and 1.6045-1(d)(2)(ii)(B). Additionally, see Part 
I.E.3.b. of this Summary of Comments and Explanation of Revisions, for 
a discussion of final Sec.  1.1012-1(j)(3)(ii) for how and when a 
taxpayer can make an adequate identification of the units sold, 
disposed of, or transferred when the taxpayer leaves multiple units of 
a type of digital asset in the custody of a broker.
3. Transitional Guidance
    The IRS published Virtual Currency FAQs \5\ explaining how 
longstanding Federal tax principles apply to virtual currency held by 
taxpayers as capital assets. For example, FAQs 39-40 explain that a 
taxpayer may specifically identify the units of virtual currency deemed 
to be sold, exchanged, or otherwise disposed of either by referencing 
any identifier, such as the private key, public key, or by records 
showing the transaction information for units of virtual currency held 
in a single account, wallet, or address. The information required by 
these FAQs include: (1) the date and time each unit was acquired; (2) 
the taxpayer's basis and the fair market value of each unit at the time 
acquired; (3) the date and time each unit was sold, exchanged, or 
otherwise disposed of; and (4) the fair market value of each unit when 
sold, exchanged, or disposed of, and the amount of money or the value 
of property received for each unit. FAQ 41 further explains that if a 
taxpayer does not identify specific units of virtual currency, the 
units are deemed to have been sold, exchanged, or otherwise disposed of 
in chronological order beginning with the earliest unit of the virtual 
currency a taxpayer purchased or acquired, that is, on a FIFO basis.
---------------------------------------------------------------------------

    \5\ The IRS first published the Virtual Currency FAQs on October 
9, 2019. Since that time, the FAQs have been revised and renumbered. 
References to FAQ numbers in this preamble are to the numbering in 
the version of the FAQs as of June 6, 2024.
---------------------------------------------------------------------------

    Comments expressed concern that the proposed basis identification 
rules of proposed Sec.  1.1012-1(j) would apply differently from those 
in FAQs 39-41. Comments also noted that many taxpayers have interpreted 
FAQs 39-41 as permitting, or at least not prohibiting, taxpayers from 
specifically identifying units or applying the FIFO rule on a 
``universal or multi-wallet'' basis. The comments generally described 
this approach as one in which a taxpayer holds units of a digital asset 
in a combination of unhosted wallets or exchange accounts and sells, 
disposes of, or transfers units from one wallet or account, but either 
specifically identifies units or applies the FIFO rule to effectively 
treat the units sold, disposed of, or transferred as coming from a 
different wallet or account. For example, assume D holds 50 units of 
digital asset GH in D's unhosted wallet, each of which was acquired on 
March 1, Year 1, and has a basis of $5. D also acquires 50 units of 
digital asset GH through Exchange FYZ, each of which was acquired on 
July 1, Year 1, and has a basis of $1. Using the universal or multi-
wallet approach, D directs Exchange FYZ on December 1, Year 1, to sell 
20 units of digital asset GH on D's behalf but specifically identifies 
the 20 units sold as 20 units coming from D's unhosted wallet for 
purposes of determining the basis. As a result of the sale, D holds 30 
units of GH with Exchange FYZ and 50 units of GH in D's unhosted 
wallet. Of those 80 units, D treats 30 units as having a basis of $1 
and 50 units as having a basis of $5,

[[Page 56530]]

without regard to whether the units were purchased through Exchange FYZ 
or in D's unhosted wallet. Whatever the merits of the comments' points, 
regulations implementing section 1012(c)(1) are required to adopt an 
account-by-account method for determining basis and the universal or 
multi-wallet approach does not conform with the statutory requirements. 
See Part II.C.1.b. of this Summary of Comments and Explanation of 
Revisions.
    These comments also expressed concerns that taxpayers, who seek to 
transition either prospectively or retroactively from the ``universal 
or multi-wallet'' approach to the proposed basis identification rules 
would experience, perhaps unknowingly, ongoing discrepancies. Some of 
the discrepancies, in their view, may be exacerbated by the limitations 
of current basis-tracking software. A comment also noted that taxpayers 
often have multiple numbers of different tokens and multiple numbers of 
different blockchains, both of which further enhance the significant 
complexity of basis tracking. These complexities, in the comment's 
view, make it impractical for taxpayers to specifically identify 
digital assets as provided in proposed Sec.  1.1012-1(j)(1) or to apply 
the default identification rule in proposed Sec.  1.1012-1(j)(2).
    A comment requested that taxpayers who previously made basis 
identifications or applied the FIFO rule on a universal or multi-wallet 
basis consistently with FAQs 39-41 be exempt from the basis 
identification rules of proposed Sec.  1.1012-1(j). The final 
regulations do not adopt the request to exempt previously acquired 
digital assets from the proposed basis identification rules because 
such a rule would create significant complexity and confusion if 
taxpayers used different methods for determining basis for existing and 
newly acquired digital assets. However, see this Part II.C.3. of this 
Summary of Comments and Explanation of Revisions for a discussion of 
transitional guidance with respect to these issues.
    A few comments requested additional rules and examples, explaining 
how taxpayers should transition from the universal or multi-wallet 
approach to specifically identify digital assets as provided in final 
Sec.  1.1012-1(j)(1) or apply the default identification rule in final 
Sec.  1.1012-1(j)(2). The Treasury Department and the IRS have 
determined that any basis adjustments necessary to comply with these 
final rules is a factual determination. However, to promote taxpayer 
readiness to comply with the rules in final Sec.  1.1012-1(j) beginning 
in 2025, Revenue Procedure 2024-28 is being issued contemporaneously 
with these final regulations, and will be published in the Internal 
Revenue Bulletin, to provide transitional relief. The transitional 
relief will take into account that a transition from the universal 
approach to the specific identification or default identification rules 
involves evaluating a taxpayer's remaining digital assets and pool of 
basis originally calculated under the universal approach and may 
result, unknowingly, in ongoing discrepancies that could be exacerbated 
by the limitations of currently available basis tracking software. This 
relief applies to transactions that occur on or after January 1, 2025. 
Additionally, the IRS will continue to work closely with taxpayers and 
other stakeholders to ensure the smooth implementation of final Sec.  
1.1012-1(j), including the mitigation of penalties in the early stages 
of implementation for all but particularly egregious cases. 
Accordingly, final Sec.  1.1012-1(j) will apply to all acquisitions and 
dispositions of digital assets on or after January 1, 2025.
D. Comments Requesting Substantive Guidance on Specific Types of 
Digital Asset Transactions
    A few comments requested that the final rules address the tax 
treatment of specific transactions such as wrapping, burning, liquidity 
transactions, splitting or combining digital assets into smaller or 
larger units, and the character and source of revenue-sharing 
agreements. These regulations provide generally applicable gross 
proceeds and basis determination rules for digital assets and therefore 
are not the proper forum to address those issues. Therefore, the final 
regulations do not adopt these recommendations. See Part I.C.2. of this 
Summary of Comments and Explanation of Revisions for a further 
discussion of reporting on such transactions.
E. Examples in Proposed Sec.  1.1001-7(b)(5)
    A few comments recommended revisions to certain examples included 
in proposed Sec.  1.1001-7(b)(5). One comment stated that the 
transaction described in proposed Sec.  1.1001-7(b)(5)(iii) (Example 3) 
is not realistic and should be revised. Final Sec.  1.1001-7(b)(5)(iii) 
includes a modified example but does not incorporate the comment's 
recommendation. The Treasury Department and the IRS have determined 
that the example in final Sec.  1.1001-7(b)(5)(iii) illustrates the 
rules necessary to assist taxpayers in determining amounts realized and 
that the comment's recommended revisions would limit its usefulness. 
Another comment recommended that proposed Sec.  1.1001-7(b)(5)(i) 
(Example 1) be revised to address a transaction in which the digital 
assets are recorded on the blockchain using the UTXO model. The final 
regulations do not adopt this recommendation. The Treasury Department 
and the IRS have determined that the recommended revisions are not 
necessary to highlight the general rules set forth herein.
F. Miscellaneous Comments Relating to Fair Market Value, Amount 
Realized, and Basis
    A comment also recommended that the proposed rules be coordinated 
with other Federal agencies to harmonize the reporting and tax 
treatment of digital assets across different jurisdictions and markets 
and should include a uniform standard for determining the fair market 
value, amount realized, and basis of digital assets, and should include 
a requirement that brokers report the same information to the IRS and 
to the customers on Form 1099-B. Such a rule, the comment believed, 
could be aligned with the requirements of other Federal agencies, which 
would simplify valuations and reduce the risk of errors or disputes. 
The final regulations do not adopt this recommendation. These 
regulations concern Federal tax laws under the Internal Revenue Code 
only. No inference is intended with respect to any other legal regime, 
including the Federal securities laws and the Commodity Exchange Act, 
which are outside the scope of these regulations.
    A comment advised that the proposed rules would produce results 
that would not reflect economic reality or the preferences of 
taxpayers, who may already employ different methods and standards for 
tracking their transactions and calculating their gains and losses. The 
comment recommended that the final rules adopt rules consistent with 
existing Federal tax principles and guidance, such as Notice 2014-21, 
or allow more flexibility and choice for taxpayers to use any 
reasonable standards consistent with their records and tax reporting. 
The final regulations do not adopt these recommendations. The Treasury 
Department and the IRS have determined that providing uniform rules 
will ease the administrative burdens placed on taxpayers, brokers, and 
the IRS. A comment expressed concerns that applying the cost allocation 
rules would require meticulous record-keeping on the part

[[Page 56531]]

of taxpayers, which may be challenging for some taxpayers, particularly 
those engaged in high-frequency trading or small-scale transactions. 
These issues are also applicable to taxpayers who engage in high-
frequency trading of traditional securities. The Treasury Department 
and the IRS have determined that special rules are not warranted for 
digital assets.
    A few comments suggested that the use of digital assets to pay for 
transaction costs or certain other services should not be taxable. 
These comments are not adopted because the Treasury Department and the 
IRS have determined that treating an exchange of digital assets for 
services is a realization event, within the meaning of section 1001(a) 
and existing precedents. See Part II.A. of this Summary of Comments and 
Explanation of Revisions for a further discussion of digital asset 
dispositions as realization events.

III. Final Sec.  1.6045-4

    In addition to reporting on dispositions by real estate buyers of 
digital assets in exchange for real estate, the proposed regulations 
required real estate reporting persons to report on digital assets 
received by sellers of real estate in real estate transactions. One 
comment questioned the authority behind this change because the 
Infrastructure Act did not specifically reference reporting of digital 
asset payments made in real estate transactions. Section 6045(a) 
provides that a broker must make a return showing ``such details 
regarding gross proceeds and such other information as the Secretary 
may by forms or regulations require.'' Additionally, section 6045(e)(2) 
provides that ``[a]ny person treated as a real estate reporting person 
. . . shall be treated as a broker.'' Accordingly, the statute gives 
the Secretary explicit authority to require real estate reporting 
persons to report on digital asset payments made in real estate 
transactions.
    As discussed in Part I.B.4. of this Summary of Comments and 
Explanation of Revisions, one comment raised the concern that in some 
real estate transactions, direct (peer to peer) payments of digital 
assets from buyers to sellers may be paid outside of closing and not 
reflected in the real estate contract for sale. In such transactions, 
the comment stated that the real estate reporting person would not 
ordinarily know that the buyer used digital assets to make payment. 
Instead, the comment suggested that the buyer (or buyer's 
representative) would be closer to the details of the transaction and 
should, therefore, be the reporting party. Section 6045(e) provides 
authority for just one person to report on the real estate transaction. 
Accordingly, the final regulations do not make any changes to require a 
second person to report on the digital asset payment. The Treasury 
Department and the IRS, however, have determined that it is not 
appropriate to require reporting by real estate reporting persons on 
digital asset payments received by the real estate seller when the real 
estate reporting person does not know, or would not ordinarily know, 
that digital assets were used by the real estate buyer to make payment. 
Accordingly, these regulations add final Sec.  1.6045-4(h)(3), which 
limits the real estate reporting person's obligation to report on 
digital asset payments received by the seller of real estate unless the 
real estate reporting person has actual knowledge, or ordinarily would 
know, that digital assets were received by the real estate seller. 
Additionally, the regulations modify Example 10 at final Sec.  1.6045-
4(r)(10) to reflect this change. See Part I.B.4. of this Summary of 
Comments and Explanation of Revisions, for a discussion of the 
application of this same standard for real estate reporting persons 
reporting on the buyer of real estate under final Sec.  1.6045-1.
    Another comment recommended against requiring reporting of digital 
asset addresses and transaction IDs because that information is not 
relevant to the seller's gross proceeds or basis. Although the 
requirement to report digital asset addresses and transaction IDs was 
included in the proposed regulations to determine if valuations of 
digital assets and real estate were done properly, the final 
regulations have removed the requirement. See Part I.D.1. of this 
Summary of Comments and Explanation of Revisions for a discussion of 
the rationale behind removing the requirement to report this 
information under final Sec.  1.6045-1.
    One comment raised the concern that reporting on digital assets 
would be burdensome for real estate reporting persons because real 
estate transactions are stand-alone transactions and not ongoing 
account relationships. This comment stated that valuations would be 
particularly burdensome in installment sale transactions, where the 
real estate reporting person would need to report the fair market value 
as of the time of closing of digital assets to be paid later. Instead, 
this comment recommended that a new check box be added to Form 1099-S 
to indicate that digital assets were received by the transferor instead 
of reporting the gross proceeds from the digital asset transfer.
    The Treasury Department and the IRS considered these comments. The 
final regulations do not adopt this suggestion, however, for several 
reasons. First, the information reporting rules help to reduce the 
overall income tax gap because they provide information necessary for 
taxpayers to prepare their Federal income tax returns and reduce the 
number of inadvertent errors or intentional misstatements shown on 
those returns. Information reporting also provides information to the 
IRS that identifies taxpayers who have engaged in these digital asset 
transactions and may not be reporting their income appropriately. The 
fair market value of digital assets used to purchase property 
(including real property) is generally equal to the value of the 
property. The real estate reporting person has several ways it can 
ascertain the value of real estate. For example, the agreed upon price 
of the real estate could be detailed in the contract of sale. To the 
extent this agreed upon price influences, for example, the commissions 
due to real estate agents or the taxes due at closing, this amount may 
already need to be shared with the real estate reporting person. 
Additionally, depending on the digital assets, the valuation could be 
relatively easy to determine if, for example, the digital asset is one 
that tracks the U.S. dollar or is otherwise widely traded. Also, the 
real estate reporting person could also ask both the buyer and seller 
whether they had agreed upon the value of the digital assets paid. 
Finally, if all these avenues to determine the value of digital assets 
paid are not successful, the regulations permit the real estate 
reporting person to report the value as undeterminable.
    One comment requested that the examples involving closing attorneys 
that are real estate reporting persons be revised to refer to closing 
agents instead to reflect the more common and more general term. This 
comment has been adopted.
    Finally, unrelated to transactions involving digital assets, the 
proposed regulations updated the rules to reflect the section 
6045(e)(5) exception from reporting for gross income up to $250,000 of 
gain on the sale or exchange of a principal residence if certain 
conditions are met. As part of this update, proposed Sec.  1.6045-
4(b)(1) modified an illustration included in the body of the rule of a 
transaction that is treated as a sale or exchange even though it may 
not be currently taxable so that it specifically references this 
exception (that is, a sale of a principal residence giving rise to gain 
up to $250,000 or $500,000 in the case of married persons filing 
jointly) to the

[[Page 56532]]

reporting rule. One comment questioned whether the example should 
reflect the actual dollars in the reporting exception rule or if the 
example should, instead, reference the ``prescribed amount'' because 
the actual prescribed amounts could change in the future. The final 
regulations do not adopt this change because referencing ``prescribed 
amounts'' could be confusing, and the amounts referenced are merely 
included in an example and not in any operative rule.

IV. Final Sec. Sec.  1.6045A-1 and 1.6045B-1

    The proposed regulations did not provide guidance or otherwise 
implement the changes made by the Infrastructure Act that require 
transfer statement reporting in the case of digital asset transfers 
under section 6045A(a) or broker information reporting under section 
6045A(d) for digital asset transfers that are not sales or are not 
transfers to accounts maintained by persons that the transferring 
broker knows or has reason to know are also brokers. Additionally, it 
was unclear whether brokers had systems in place to provide transfer 
statements under section 6045A or whether issuers had procedures in 
place to report information about certain organizational actions (like 
stock splits, mergers, or acquisitions) that affect basis under section 
6045B for assets that qualify both as digital assets and specified 
securities under the existing rules. Accordingly, the proposed 
regulations provided that any specified security of a type that would 
have been a covered security under section 6045A pursuant to the pre-
2024 final regulations under section 6045 (that is, described in Sec.  
1.6045-1(a)(14)(i) through (iv) of the pre-2024 final regulations) that 
is also a digital asset is exempt from transfer statement reporting 
under section 6045A and similarly proposed to exempt issuers from 
reporting under section 6045B on any such specified security that is 
also a digital asset. The proposed regulations also provided penalty 
relief to transferors and issuers that voluntarily provide these 
transfer statements and issuer reporting statements.
    One comment raised the concern that the decision to delay transfer 
statements for digital assets under section 6045A will mean that 
brokers will not receive the important information regarding basis that 
would be included on those transfer statements. Another comment 
recommended that the section 6045A rules remain applicable to transfers 
of securities that are also digital assets.
    The Treasury Department and the IRS have determined that specified 
securities that are digital assets should generally be exempt from the 
section 6045A transfer reporting requirements because it is unclear at 
this point how digital asset brokers would be able to provide the 
necessary information to make basis reporting work efficiently for 
digital assets that are broadly tradeable. While brokers may more 
readily be able to provide transfer statements for tokenized 
securities, the transfer of such assets on a distributed ledger may not 
necessarily accommodate the provision of transfer statements. Brokers 
who wish voluntarily to provide transfer statements for digital assets 
may do so and will not be subject to penalties for failure to furnish 
the information correctly under section 6722. Accordingly, the final 
regulations do not make any broadly applicable changes to the 
regulations under section 6045A in response to these comments. The 
final regulations do, however, revise the language in proposed Sec.  
1.6045A-1(a)(1)(vi) to limit the transfer statement exemption only to 
those specified securities, the sale of which would be reportable as a 
digital asset after the application of the coordination rules in final 
Sec.  1.6045-1(c)(8). See Part I.A.4.a. of this Summary of Comments and 
Explanation of Revisions, for a discussion of the new coordination rule 
in final Sec.  1.6045-1(c)(8)(iii) treating sales of dual 
classification assets that are digital assets solely because the sale 
of such assets are cleared or settled on a limited-access regulated 
network as sales of securities or commodities and not sales of digital 
assets. Additionally, until the Treasury Department and the IRS 
determine the information that will be required on transfer statements 
with respect to digital assets, final Sec.  1.6045A-1(a)(1)(vi) limits 
the penalty relief for voluntarily provided transfer statements to 
those dual classification assets that are tokenized securities under 
final Sec.  1.6045-1(c)(8)(i)(D). See Part I.A.4.a. of this Summary of 
Comments and Explanation of Revisions, for a discussion of the new 
coordination rule in final Sec.  1.6045-1(c)(8)(i)(D) regarding 
tokenized securities.
    One comment agreed with the proposal to exempt issuers from 
reporting under section 6045B on any specified security that is also a 
digital asset and recommended delaying the application of section 6045B 
until after the IRS provides guidance under substantive tax law on 
which corporate actions affect the basis in specified securities that 
are digital assets. Another comment recommended against delaying issuer 
statements under section 6045B because that will hinder the ability of 
brokers to make basis adjustments related to covered digital assets. 
Another comment recommended against exempting issuers from reporting on 
any security that is also a digital asset because tokenized funds, 
which are 1940 Act Funds, are already subject to section 6045B 
reporting, and this reporting provides critical information to 
institutional investors that are otherwise exempt from Form 1099 
reporting if they are corporations.
    The Treasury Department and the IRS agree that issuers that are 
already providing issuer statements should continue to do so. The 
ability of an issuer of traditional securities to provide information 
about organizational events should not be affected by whether those 
securities are sold on a cryptographically secured distributed ledger, 
because issuers may provide the information by posting it on their 
website. Accordingly, final Sec.  1.6045B-1(a)(6) provides that an 
issuer of specified securities that was subject to the issuer statement 
requirements before the application of these final regulations (legacy 
specified securities) should continue to be subject to those rules 
notwithstanding that such specified securities are also digital assets. 
Additionally, final Sec.  1.6045B-1(a)(6) provides that an issuer of 
specified securities that are digital assets and not legacy specified 
securities is permitted, but not required, to file an issuer return 
under section 6045B. An issuer that chooses to provide this reporting 
and furnish statements for a specified security under section 6045B 
will not be subject to penalties under section 6721 or 6722 for failure 
to report or furnish this information correctly. Finally, the final 
regulations do not make any changes to address the comment requesting 
guidance under substantive tax law on which corporate actions affect 
the basis in specified securities that are digital assets because the 
comment addresses questions of substantive tax law that are outside the 
scope of these regulations.

V. Final Sec.  1.6050W-1

    Prior to the issuance of the proposed regulations, several digital 
asset brokers reported sales of digital assets under section 6050W. The 
proposed regulations did not take a position regarding the 
appropriateness of treating payments of cash for digital assets, or 
payments of one digital asset in exchange for a different digital asset 
as reportable payments under the 2010 final regulations under section 
6050W. Instead, to the extent these transactions would be reportable 
under the proposed section 6045 broker reporting rules, the

[[Page 56533]]

proposed regulations added a tie-breaker rule that generally provided 
that section 6045 (and not section 6050W) would apply to these 
transactions. Thus, when a payor makes a payment using digital assets 
as part of a third party network transaction involving the exchange of 
the payor's digital assets for goods or services and that payment 
constitutes a sale of digital assets by the payor under the broker 
reporting rules under section 6045, the amount paid by the payee in 
settlement of that exchange would be subject to the broker reporting 
rules (including any exemptions from these rules) and not section 
6050W. Additionally, when goods or services provided by a payee are 
digital assets, and the exchange is a sale of digital assets by the 
payee under the broker reporting rules under section 6045, the payment 
to the payee in settlement of that exchange would be reportable under 
the broker reporting rules (including any exemptions from these rules) 
and not section 6050W.
    As discussed in Part I.B.1. of this Summary of Comments and 
Explanation of Revisions, the final regulations reserve and do not 
finalize rules on the treatment of decentralized exchanges and certain 
unhosted digital asset wallet providers as brokers. Because these 
entities will not be subject to reporting on the sales of digital 
assets as brokers under final Sec.  1.6045-1, the final regulations 
have been revised to apply the tie-breaker rule only to payors that are 
brokers under final Sec.  1.6045-1(a)(1) that effected the sale of such 
digital assets. Accordingly, the tie-breaker rule will not apply to 
decentralized exchanges, unhosted digital asset wallet providers, or 
any other industry participant not subject to these final regulations 
to the extent they are already subject to reporting under section 
6050W.
    The proposed regulations also included an example at proposed Sec.  
1.6050W-1(c)(5)(ii)(C) (Example 3) illustrating the tie-breaker rule in 
the case of a third party network transaction undertaken by CRX, a 
third party settlement organization. In the example, CRX effects a 
payment using an NFT buyer's digital assets that have been deposited 
with CRX to a participating payee (J) that is a seller of NFTs 
representing digital artwork. The NFTs that J sells have also been 
deposited with CRX. Although the payment from buyer to J would have 
otherwise been reportable under section 6050W because the transaction 
constitutes the settlement of a reportable payment transaction by CRX, 
the example concludes that because it is also a sale under proposed 
Sec.  1.6045-1(a)(9)(ii), CRX must file an information return under 
section 6045 and not under section 6050W.
    A comment recommended against treating all NFTs as goods and 
services but instead recommended a case by case determination be made 
based on the underlying asset or rights referenced by the NFT. To 
address this comment, the final regulations revise the analysis in 
Sec.  1.6050W-1(c)(5)(ii)(C) (Example 3) of the proposed regulations, 
redesignated as final Sec.  1.6050W-1(c)(5)(ii)(B) (Example 2) in the 
final regulations, to make it clear that the example applies only to 
NFTs that represent goods or services such as the NFT in the example, 
which represents unique digital artwork. The comment also asserted that 
NFTs representing digital artwork cannot be a good or a service because 
it cannot be seen, weighed, measured, felt, touched, or otherwise 
perceived by the senses. The Treasury Department and the IRS have 
determined that the definition of a good or a service should not be 
limited in the way suggested by this comment and the final regulations 
do not do so. One comment requested that the final regulations provide 
a bright line test or other safe harbor guidance for classifying NFTs 
that represent more than one asset or right as a good or a service. The 
final regulations do not adopt this comment because it involves 
determinations about NFTs that are outside the scope of these 
regulations. Another comment requested that the final regulations under 
section 6050W be revised to define goods or services and what it means 
to guarantee payments, which are components of the definition of a 
third party payment network transaction subject to reporting under 
section 6050W. The final regulations do not adopt this comment because 
it addresses definitions under section 6050W and is thus outside the 
scope of these regulations.
    The proposed regulations also clarified that in the case of a third 
party settlement organization that has the contractual obligation to 
make payments to participating payees, a payment in settlement of a 
reportable payment transaction includes the submission of an 
instruction to a purchaser to transfer funds directly to the account of 
the participating payee for purposes of settling the reportable payment 
transaction. One comment suggested that a settlement organization that 
provides instructions to a purchaser to transfer funds should not be 
treated as making or guaranteeing payment. The Treasury Department and 
the IRS do not agree with this suggestion and no changes are made to 
this clarification. Section 6050W(b)(3) provides that a third party 
settlement organization is a type of payment settlement entity that is 
a central organization which has the contractual obligation to make 
payment to participating payees in settlement of third party network 
transactions. The section 6050W regulations already provided in Sec.  
1.6050W-1(a)(2) that a payment settlement entity is making a payment in 
settlement of a reportable transaction if the payment settlement entity 
submits the instruction to transfer funds to the account of the 
participating payee. The final regulations merely clarify these 
instructions may be made to the purchaser. They do not affect any of 
the other factors that make a third party a third party settlement 
organization, such as the existence of an agreement or arrangement 
that, among other things, guarantees persons providing goods or 
services pursuant to such agreement or arrangement that such persons 
will be paid for providing those goods and services, as provided in 
section 6050W(d)(3)(C).
    Another comment recommended that the tie-breaker rule be reversed 
so that transactions involving digital assets would remain reportable 
under section 6050W rather than under section 6045 because the 
information reportable under section 6045 is generally for sales of 
capital assets, whereas the information reportable under section 6050W 
is for both sales of property and payments for services. This comment 
also suggested that, since marketplaces that list unique or collectible 
NFTs resemble well-known marketplaces for tangible goods which are 
subject to section 6050W reporting, that these NFT marketplaces should 
report NFT transactions in the same matter as the established 
marketplaces. Another comment raised the concern that NFT artists find 
it difficult to calculate their tax under the existing information 
reporting rules.
    The final regulations do not adopt the comment recommending that 
the tie-breaker rule be reversed because section 6045 was affirmatively 
amended by Congress to regulate the information reporting of digital 
asset transactions. Additionally, as a broad statutory provision, 
section 6045 is better suited for reporting on NFTs, the uses for which 
continue to evolve in ways that the use of goods and services 
traditionally subject to section 6050W reporting do not. Moreover, 
broadly applicable information reporting rules help to reduce the 
overall income tax gap because it provides necessary information to 
taxpayers, as explained by one comment stating that the existing rules 
are not sufficient for artists to

[[Page 56534]]

prepare their Federal income tax returns (and reduce the number of 
inadvertent errors or intentional misstatements shown on those returns) 
from NFT transactions. Information reporting also provides information 
to the IRS that identifies taxpayers who have engaged in these 
transactions. One comment suggested that a payee statement reflecting 
the information provided on a Form 1099-K would be easier for taxpayers 
to reconcile to Federal their income tax return because the 
transactions are reported in a single aggregate form. The final 
regulations do not adopt this comment because, as discussed in Part 
I.D.3. of this Summary of Comments and Explanation of Revisions, the 
final regulations already allow brokers to report sales of specified 
NFTs under an optional aggregate reporting method. Another comment 
recommended that reporting by brokers on Form 1099-DA for NFT sales 
should distinguish between sales by NFT creators or minters (primary 
sales) and sales by NFT resellers (secondary sales). As discussed in 
Part I.D.3. of this Summary of Comments and Explanation of Revisions, 
the final regulations adopt this comment by requiring brokers that 
report under the optional reporting method for specified NFTs to 
indicate the portion of the aggregate gross proceeds reported that is 
attributable to the specified NFT creator's or minter's first sale to 
the extent ordinarily known by the broker.
    Finally, a comment requested that guidance be provided regarding 
the character of the percentage payments made to the original NFT 
creator or minter after a secondary sale of that same NFT because this 
determination would impact whether these payments are reportable as a 
royalty (with a $10 de minimis threshold) or as a payment reportable 
under section 6045 or some other information reporting provision. 
Additionally, the character of the payment could impact the source of 
the payment income for purposes of withholding under chapter 3 of the 
Code and application of treaty benefits (if applicable). The final 
regulations do not adopt this comment as it is outside the scope of 
these regulations.

VI. Final Sec. Sec.  31.3406(b)(3)-2, 31.3406(g)-1, 31.3406(g)-2, 
31.3406(h)-2

    Section 3406 and the regulations thereunder require certain payors 
of reportable payments, including payments of gross proceeds required 
to be reported by a broker under section 6045, to deduct and withhold a 
tax on a payment at the statutory backup withholding rate (currently 24 
percent) if the payee fails to provide a TIN, generally on a Form W-9, 
along with a certification under penalties of perjury that the TIN 
furnished is correct (certified TIN), or if the payee provides an 
incorrect TIN. See Sec.  31.3406(b)(3)-2(a) (Reportable barter 
exchanges and gross proceeds of sales of securities or commodities by 
brokers). The proposed regulations added digital assets to the title of 
Sec.  31.3406(b)(3)-2 of the 2002 final regulations but did not make 
any substantive changes to the rules therein because these rules were 
considered broad enough to cover digital asset transactions that are 
reportable under section 6045. Additionally, proposed Sec.  31.3406(g)-
2(e) provided that a real estate reporting person must withhold under 
section 3406 and, pursuant to the rules under Sec.  31.3406(b)(3)-2 of 
the 2002 final regulations, on a reportable payment made in a real 
estate transaction with respect to a purchaser that exchanges digital 
assets for real estate to the extent that the exchange is treated as a 
sale of digital assets subject to reporting under proposed Sec.  
1.6045-1.
A. Digital Assets Sales for Cash
    Many comments recommended that the final regulations apply the 
backup withholding rules only to reportable payments associated with 
digital assets that are sold for cash. One comment explained that 
brokers that exchange customers' digital assets for cash are regulated 
under Federal law as MSBs and under State law as money transmitters. As 
a result, these brokers already have programs in place to comply with 
applicable AML and customer identification requirements. This comment 
suggested that because these brokers already have the infrastructure in 
place to collect proper tax documentation from customers, they can use 
their existing systems to deduct and withhold backup withholding taxes 
on payments of cash made in exchange for digital assets. Other comments 
requested that the Treasury Department and the IRS provide sufficient 
time to allow these brokers to contact existing customers to collect 
certified TINs on Forms W-9. In response to these comments, the 
Treasury Department and the IRS have concluded that it is appropriate 
to provide temporary relief on the imposition of backup withholding for 
these transactions to give brokers the time they need to build and 
implement backup withholding systems for these types of transactions. 
See Part VI.D. of this Summary of Comments and Explanation of Revisions 
for a description of the transitional relief that will be provided.
B. Digital Asset Sales for Non-Cash Property
    Section 3406 requires payors to deduct and withhold the backup 
withholding tax on the payment made to the payee. When reportable 
payments made to the payee are made in property (other than money), 
Sec.  31.3406(h)-2(b)(2)(i) provides that the payor (broker) must 
withhold 24 percent of the fair market value of the property determined 
immediately before or on the date of payment. As with all backup 
withholding, the payor is liable for the amount required to be withheld 
regardless of whether the payor withholds from such property. Under the 
general rule, payors are prohibited from withholding from any 
alternative source maintained by the payor other than the source with 
respect to which the payor has a withholding liability. Sec.  
31.3406(h)-2(b)(1). Exceptions from this general rule are provided in 
Sec.  31.3406(h)-2(b)(2) for certain payments made in (non-cash) 
property. Specifically, under these rules, instead of withholding from 
the property payment itself, Sec.  31.3406(h)-2(b)(2)(i) provides that 
a payor may withhold ``from the principal amount being deposited with 
the payor or from another source maintained by the payee with the 
payor.'' The regulation cross-references to an example illustrating 
methods of withholding permitted for payments constituting prizes, 
awards, and gambling winnings paid in property other than cash. See 
Sec.  31.3406(h)-2(b)(2)(i) (cross-reference to Sec.  31.3402(q)-1(d) 
(Example 5) later redesigned as Sec.  31.3402(q)-1(f) (Example 4) by TD 
9824, 82 FR 44925 (September 27, 2017)). This example illustrates that 
payors making payments in property may either gross up the overall 
payment with cash to pay the withholding tax (plus the withholding tax 
on that grossed-up payment) or have the payee pay the withholding tax 
to the payor. For a payor that cannot locate an alternative source of 
cash from which to withhold, Sec.  31.3406(h)-2(b)(2)(ii) permits the 
payor to defer its obligation to withhold (except for reportable 
payments made with prizes, awards, or gambling winnings) until the 
earlier of the date sufficient cash to satisfy the withholding 
obligation is deposited into the payee's account maintained with the 
payor or the close of the fourth calendar year after the obligation 
arose. If no cash becomes available in these other sources by the close 
of the fourth calendar year after the obligation arose, however, the 
payor is liable for the backup withholding tax.

[[Page 56535]]

    Several comments requested that the final regulations clarify how 
the backup withholding rules apply to sales of digital assets for 
different digital assets and other non-cash property. One comment 
requested that the final regulations provide added flexibility to allow 
brokers to meet their withholding obligations. First, to the extent 
that these comments assumed that non-cash property proceeds cannot be 
subdivided, it should be noted that some digital assets do allow for 
subdivision and, when they do, the payor can satisfy backup withholding 
obligations by liquidating a portion of those proceeds. Additionally, 
depending on contractual relationships with their customers, brokers 
may be permitted to liquidate alternative sources that are comprised of 
digital assets to satisfy their withholding obligations. Accordingly, 
brokers effecting sales of digital assets for different digital assets 
in many cases may have the ability to satisfy their withholding 
obligations from the digital assets received in the transaction (that 
is, from the reportable payment) or from an alternative source of 
digital assets maintained by the payee with the payor.
    Another comment asked if brokers are permitted to withhold from 
digital assets being disposed of instead of the digital assets received 
in the exchange when market considerations would make that approach 
less costly. The Treasury Department and the IRS have determined that 
withholding from disposed-of digital assets is analogous to having the 
payee pay the withholding tax to the payor as illustrated in the 
example of permitted withholding methods for prizes, awards, and 
gambling winnings. Sec.  31.3402(q)-1(f) (Example 4). Accordingly, 
whether a broker can withhold from digital assets being disposed of is 
a matter for brokers and customers to determine based on the legal or 
other arrangements between them. No changes are made to the final 
regulations to address this comment. The Treasury Department and the 
IRS intend to study the rules under Sec.  31.3406(h)-2(b) further and 
may issue guidance providing brokers a greater ability to liquidate 
alternative sources of digital assets to satisfy backup withholding 
obligations. Additionally, such guidance may address the four-year 
deferral rule in fact patterns where digital assets are maintained by 
the payee with the payor.
    One comment recommended that the withholding rate be reduced for 
dispositions of digital assets for different digital assets or other 
non-cash property. The final regulations do not adopt these suggestions 
because the withholding rate is set by statute in section 3406(a)(1). 
Another comment recommended that the rules permit a delay in the 
payment of withheld taxes to the later of 180-days or until the end of 
the calendar year to allow customers to provide their tax 
documentation. As discussed in Part VI.D. of this Summary of Comments 
and Explanation of Revisions, the final regulations address this 
comment by delaying the application of the backup withholding rules.
    Although a few comments expressed the view that brokers have the 
ability to administer backup withholding on dispositions of digital 
assets for certain types of non-cash property, numerous other comments 
raised concerns with the logistics of withholding on sales of digital 
assets for different digital assets, particularly when the price of the 
digital assets received in the exchange (received digital asset) 
fluctuates between the time of transaction and the time the received 
digital assets are liquidated into U.S. dollars for deposit with the 
Treasury Department. These comments noted that, even for received 
digital assets that do not experience large fluctuations in value, it 
is not operationally possible for brokers to be certain that they can 
liquidate 24 percent of the received digital assets at the same 
valuation price as applies to the underlying transaction giving rise to 
the withholding obligation. Accordingly, these comments questioned 
whether the withholding tax payment would be deficient if the 
liquidated value of the withheld digital assets falls below the value 
of 24 percent of the received digital assets at the time of the 
underlying transaction and requested relief to the extent the 
liquidated value is deficient. Another comment questioned if any excess 
value must be paid to the Treasury Department when the liquidated value 
of the withheld digital assets is greater than 24 percent of the 
received digital assets at the time of the underlying transaction. 
Another comment stated that some brokers do not have processes in place 
to liquidate received digital assets daily to make required backup 
withholding deposits in U.S. dollars and requested that deposits to the 
Treasury Department be permitted in digital assets.
    Section 3406 provides that if a payee fails to provide a TIN or 
certain other conditions are satisfied, the payor shall deduct and 
withhold from the reportable payment a tax equal to a rate that is 
currently 24 percent. The responsibility for ensuring that sufficient 
withholding tax is withheld is by statute a payor responsibility. 
Moreover, brokers are in the best position to mitigate any volatility 
risks associated with disposing of digital assets received in an 
exchange of digital assets. For example, brokers may be able to 
minimize or eliminate their risk by implementing systems to shorten the 
time between the initial transaction and the liquidation of the 
withheld digital asset. Accordingly, the Treasury Department and the 
IRS have determined that it is not appropriate for the Federal 
government to accept the market risk of a customer's withheld digital 
asset. Instead, the risk should be borne in the first instance by the 
broker offering digital asset transactions to its customers. 
Accordingly, the final regulations do not adopt the suggestion to pass 
the price volatility risk of withheld digital assets onto the Federal 
government. However, see Part VI.D. of this Summary of Comments and 
Explanation of Revisions regarding temporary penalty relief for backup 
withholding, which is based in part on the risk of payment shortfalls 
due to the volatility of some digital assets.
    The Treasury Department and the IRS understand that a broker may 
shift the withholding liability risk associated with price volatility 
to a customer who has invested in the withheld digital asset and has 
not provided a TIN under penalties of perjury. For example, as 
suggested by one comment, brokers could mandate that their customers 
who have not provided a certified TIN maintain with the broker cash 
margin accounts or digital asset accounts with relatively stable 
digital assets (such as stablecoins) for brokers to use to satisfy 
their backup withholding obligations. Brokers could also require their 
customers to agree to allow the brokers to sell for cash 24 percent of 
the disposed digital assets at the time of the transaction. In 
addition, brokers could remind customers that fail to provide their 
TINs as requested that the customer may be liable for penalties under 
section 6723 of the Code. Finally, brokers could mandate that their 
customers provide accurate tax documentation to avoid backup 
withholding obligations altogether. Because any such arrangement would 
be a commercial arrangement between the broker and its customer, these 
final regulations do not address such arrangements.
    Several comments requested guidance (with examples) setting forth 
operational solutions to avoid broker liability with respect to this 
price fluctuation risk and additional time to put those solutions in 
place. The final regulations do not include specific examples because 
there appears to be

[[Page 56536]]

many solutions brokers could adopt that are industry and business 
specific. However, the Treasury Department and the IRS intend to study 
these rules further and may issue additional guidance.
    One comment recommended that the final regulations be revised to 
prevent the application of cascading backup withholding in a sale of 
digital assets for different digital assets when the broker sells 24 
percent of the received digital assets to pay the backup withholding 
tax on the initial transaction. For example, a customer exchanges 1 
unit of digital asset AB for 100 units of digital asset CD (first 
transaction), and to apply backup withholding, the broker sells 24 
percent (or 24 units) of digital asset CD for cash (second 
transaction). The comment recommended that the sale of the 24 units of 
CD in the second transaction not be subject to backup withholding if 
that sale is effected by the broker to satisfy its backup withholding 
obligations with respect to a sale of digital assets in exchange for 
different assets and the cash sale was effected by the broker on or 
prior to the date that the broker is required to deposit the backup 
withholding tax liability with respect to the underlying digital asset 
exchange. The Treasury Department and the IRS have determined that a 
limited backup withholding exception should apply in the case of 
cascading backup withholding obligations. To address this cascading 
backup withholding problem, the final regulations except certain sales 
for cash of withheld digital assets from the definition of sales 
required to be reported if the sale is undertaken immediately after the 
underlying sale to satisfy the broker's obligation under section 3406 
to deduct and withhold a tax with respect to the underlying 
transaction. If that condition is met, the sale will be excepted from 
broker reporting and backup withholding will not apply. See final Sec.  
1.6045-1(c)(3)(ii)(D). The special rule for the identification of units 
withheld from a transaction, discussed in Part I.E.3.a. of this Summary 
of Comments and Explanation of Revisions, also ensures that the 
excepted sale of the withheld units does not give rise to any 
additional gain or loss.
    Numerous comments requested an exception from backup withholding 
for transactions in which digital assets are exchanged for property 
(other than relatively liquid digital assets), such as traditional 
financial assets, real estate, goods, services, or different digital 
assets that cannot be fractionalized, such as NFTs and tokenized 
financial instruments (illiquid property), when there is insufficient 
cash in the customer's account. Backup withholding is an essential 
enforcement tool to ensure that complete and accurate information 
returns can be filed by payors with respect to payments made to payees. 
Accurate TINs and other information provided by payors are critical to 
matching such information with income reported on a payee's Federal 
income tax return. A complete exception from backup withholding or an 
exception for sales of digital assets for illiquid property would 
increase the likelihood that customers will not provide correct TINs to 
their brokers. Such an exception would also raise factual questions 
about whether certain property received in a transaction is truly 
illiquid. For example, one broker might assert that a stored-value card 
in a fixed amount is illiquid if the broker cannot withhold 24 percent 
of the value of the card or if the resale market for those cards does 
not facilitate full face value payments. On the other hand, a different 
broker might decide to require the payee to send back cash in an amount 
representing 24 percent of the of the value of the card. Moreover, 
brokers have some ability to minimize their backup withholding in these 
circumstances by taking steps to ensure that the customer pays the 
backup withholding tax instead of the broker. For example, brokers 
could remind customers that failure to provide their TINs as requested 
may result in customers being liable for penalties under section 6723. 
Brokers also may be able to require customers that refuse to provide 
accurate tax documentation to maintain cash accounts or other digital 
asset accounts with the broker. Accordingly, subject to the transition 
relief discussed in Part VI.D. of this Summary of Comments and 
Explanation of Revisions, the final regulations do not provide an 
exception to backup withholding for sales of digital assets in exchange 
for illiquid property.
    One comment requested relief from backup withholding when the fair 
market value of the received digital asset is not readily 
ascertainable. This comment also requested that the final regulations 
provide guidance clarifying what the broker must do to conclude that 
the value of received digital assets is not readily ascertainable. The 
final regulations do not adopt this comment because the fact pattern is 
not unique to digital asset transactions. Moreover, the final 
regulations provide rules, at final Sec.  1.6045-1(d)(5)(ii)(A)(1) 
through (3), that brokers can use to determine the fair market value of 
gross proceeds received by a customer in a digital asset transaction. 
For example, in the case of a customer that receives a unique NFT in 
exchange for other digital assets, the broker can look to the value of 
the disposed digital assets and use that value for the NFT.
    Several comments requested an exemption from backup withholding for 
any sale of a qualifying stablecoin (whether for cash, another digital 
asset, or other property) because of the low likelihood that these 
stablecoin sales will give rise to significant gains or losses. Backup 
withholding on these transactions is a necessary tool to ensure that 
customers provide their tax documentation in accordance with regulatory 
requirements and to allow for correct income tax reporting of the gains 
and losses that do occur. Brokers that request customer TINs in 
accordance with regulatory requirements are not liable for information 
reporting penalties with respect to customers who refuse to comply. 
Backup withholding, therefore, is the only way to ensure that either 
the broker's customers will provide their TINs and the IRS will receive 
the information reporting required or that a tax is collected from 
those customers who do not want the IRS to learn about their 
activities. Additionally, and as discussed in Part I.D.2. of this 
Summary of Comments and Explanation of Revisions, the Treasury 
Department and the IRS have concluded that information about certain 
qualifying stablecoin transactions is essential to the IRS gaining 
visibility into previously unreported digital asset transactions. 
Accordingly, the final regulations do not adopt this comment. However, 
it should be noted, as discussed in Part I.D.1. of this Summary of 
Comments and Explanation of Revisions, if a broker reports information 
on designated qualifying stablecoins sales under the optional method of 
reporting, sales of non-designated qualifying stablecoins will not be 
reported. As such, final Sec.  31.3406(b)(3)-2(b)(6)(i)(B)(1) provides 
that these non-designated sales of qualifying stablecoins will not be 
subject to backup withholding.
    As discussed in Part I.D.2.a. of this Summary of Comments and 
Explanation of Revisions, there may be circumstances in which a digital 
asset loses its peg during a calendar year and therefore does not 
satisfy the conditions required to be a qualifying stablecoin. To give 
brokers time to learn about such de-pegging events and turn on backup 
withholding for non-designated sales, final Sec.  31.3406(b)(3)-
2(b)(6)(i)(B)(2) provides a grace period before withholding is 
required. Specifically, in

[[Page 56537]]

the case of a digital asset that would have satisfied the definition of 
a non-designated sale of a qualifying stablecoin under final Sec.  
1.6045-1(d)(10)(i)(C) for a calendar year but for a non-qualifying 
event during that year, a broker is not required to withhold under 
section 3406 on such sale if it occurs no later than the end of the day 
that is 30 days after the first non-qualifying event with respect to 
such digital asset during such year. For this purpose, a non-qualifying 
event is defined as the first date during a calendar year on which the 
digital asset no longer satisfies all three conditions described in 
final Sec.  1.6045-1(d)(10)(ii)(A) through (C) to be a qualifying 
stablecoin. Finally, final Sec.  31.3406(b)(3)-2(b)(6)(i)(B)(2) also 
provides that the date on which a non-qualifying event has occurred 
with respect to a digital asset and the date that is no later than 30 
days after such non-qualifying event must be determined using UTC. As 
discussed in Part I.D.2.b. of this Summary of Comments and Explanation 
of Revisions, UTC time was chosen for this purpose to ensure that the 
same digital assets will or will not be subject to backup withholding 
for all brokers regardless of the time zone in which such broker keeps 
its books and records.
    One comment recommended that the final regulations provide a de 
minimis threshold, similar to the $600 threshold for income subject to 
reporting under section 6041, before backup withholding would be 
required for dispositions of digital assets for different digital 
assets or other non-cash property. Under section 3406(b)(4) and (6), 
unless the payment is of a kind required to be shown on a return 
required under sections 6041(a) or 6041A(a), the determination of 
whether any payment is of a kind required to be shown on a return must 
be made without regard to any minimum amount which must be paid before 
a return is required. While the Secretary may have the authority to 
apply a threshold that is established by regulation when determining 
whether any payment is of a kind that must be shown on a required 
return for backup withholding purposes, the Treasury Department and the 
IRS have determined that the application of these thresholds to the 
backup withholding rules would not be appropriate. Accordingly, 
although the final regulations provide de minimis thresholds for 
reporting payment transaction sales and designated sales of qualifying 
stablecoins and specified NFTs, the transactions that fall below the 
applicable gross proceeds thresholds are nonetheless potentially 
taxable transactions that taxpayers must report on their Federal income 
tax returns. The Treasury Department and the IRS have concluded that 
customers that have not provided tax documentation to their brokers are 
less likely to report their digital asset transactions on their Federal 
income tax returns than customers who comply with the documentation 
requirements. Accordingly, the Treasury Department and the IRS have 
determined it is important to impose backup withholding on gross 
proceeds that fall below these thresholds. Therefore, under the final 
regulations, gross proceeds that are not required to be reported due to 
the application of the $600 threshold for payment transaction sales, 
the $10,000 threshold for designated sales of qualifying stablecoins, 
or the $600 threshold for sales of specified NFTs are nonetheless 
reportable payments for purposes of backup withholding.
    See Part VI.D. of this Summary of Comments and Explanation of 
Revisions for a discussion of certain transitional relief from backup 
withholding under section 3406.
C. Other Backup Withholding Issues
    The proposed regulations requested comments addressing short sales 
of digital assets and whether any changes should be made to the backup 
withholding rules under Sec.  31.3406(b)(3)-2(b)(3) and (4). In 
response, one comment requested that the final regulations clarify how 
gains or losses from short sales of digital assets are to be treated 
and what, if any, withholding is required for short sales of digital 
assets. Another comment requested that any backup withholding rules for 
short sales of digital assets take into account factors like holding 
periods, borrowed assets, and sale conditions. After considering the 
requests, as discussed in Part I.C. of this Summary of Comments and 
Explanation of Revisions, the Treasury Department and the IRS have 
determined that the substantive issues raised by these comments require 
further study. Accordingly, the final regulations do not address these 
comments and do not make any changes to these rules. However, see Part 
VII. of this Summary of Comments and Explanation of Revisions for a 
discussion of guidance being provided along with these final 
regulations to address reporting on certain transactions requiring 
further study.
    Another comment requested guidance regarding how to apply the rules 
for making timely deposits of tax withheld by brokers that operate 24 
hours a day. This comment stated that brokers need to know what time 
(and based on what time zone) their day ends for purposes of making 
timely deposits and whether timely deposits are measured based on days 
or by 24 hour rolling periods. Another comment requested that the final 
regulations permit brokers to report based on the broker's time zone 
provided that the time zone is disclosed to the customer and is used 
consistently for all reporting years. Many businesses have continuous 
operations across several time zones. Because the proposed regulations 
did not propose any changes to the rules for making timely deposits of 
tax withheld by digital asset brokers, the final regulations do not 
provide a special rule for digital asset brokers.
    Another comment requested guidance regarding the withholding rules 
for cross-border transactions, including the appropriate withholding 
rates under existing U.S. tax treaties. The final regulations do not 
address this comment because the withholding rules under chapter 3 of 
the Code are outside the scope of these regulations. See Part VI.D. of 
this Summary of Comments and Explanation of Revisions for a discussion 
of certain transitional relief from backup withholding under section 
3406.
D. Applicability Date for Backup Withholding on Digital Asset Sales
    Several comments requested that the imposition of backup 
withholding on dispositions of digital assets for cash, different 
digital assets, or other non-cash property be delayed until brokers can 
develop systems to implement withholding on these transactions. Other 
comments advised that software currently exists that can be embedded in 
any trading platform's user interface to help brokers obtain proper tax 
document from customers. The Treasury Department and the IRS have 
determined it is appropriate to provide temporary relief on the 
imposition of backup withholding for these transactions to give brokers 
the time they need to build and implement backup withholding systems 
for these types of transactions. Accordingly, the notice discussed in 
Part VI. of this Summary of Comments and Explanation of Revisions will 
also provide transitional relief from backup withholding under section 
3406 for sales of digital assets as follows:
1. Digital Asset Sales for Cash
    The Treasury Department and the IRS recognize that, although 
brokers engaging in these cash transactions may

[[Page 56538]]

be in a good position to obtain proper tax documentation, they will 
need time to build systems to collect and retain that documentation and 
to obtain that documentation from existing customers. Accordingly, to 
promote industry readiness to comply with the backup withholding 
requirements, Notice 2024-56 is being issued contemporaneously with 
these final regulations to provide transitional relief from backup 
withholding under section 3406 on these sales. This notice, which will 
be published in the Internal Revenue Bulletin, provides that the 
effective date for backup withholding date is postponed to January 1, 
2026, for potential backup withholding obligations imposed under 
section 3406 for payments required to be reported on Forms 1099-DA for 
sale transactions. Additionally, for sale transactions effected in 2026 
for customers that have opened accounts with the broker prior to 
January 1, 2026, the notice further provides that backup withholding 
will not apply with respect to any payee that furnishes a TIN to the 
broker, whether or not on a Form W-9 in the manner required in 
Sec. Sec.  31.3406(d)-1 through 31.3406(d)-5, provided the broker 
submits that payee's TIN to the IRS's TIN matching program and receives 
a response that the TIN furnished by the payee is correct. See Sec.  
601.601(d)(2). Transitional relief also is being provided under these 
final regulations for sales of digital assets effected before January 
1, 2027, that were held in a preexisting account established with a 
broker before January 1, 2026, if the customer has not been previously 
classified as a U.S. person by the broker, and the information the 
broker has for the customer includes a residence address that is not a 
U.S. address.
2. Sales of Digital Assets in Exchange for Different Digital Assets 
(Other Than Nonfungible Tokens That Cannot Be Fractionalized)
    As discussed in Part VI.B. of this Summary of Comments and 
Explanation of Revisions, brokers are concerned with the logistics of 
withholding on sales of digital assets for different digital assets 
when the price of the digital assets received in the exchange 
fluctuates between time of transaction and the time the received 
digital assets are liquidated into U.S. dollars for deposit with the 
Treasury Department. Although there are steps brokers can take to 
diminish this price volatility risk or transfer this risk entirely to 
the customer, the Treasury Department and the IRS recognize that 
brokers need time to implement these procedures. Accordingly, in 
addition to the delayed application of the backup withholding rules 
provided for digital assets sold for cash, Notice 2024-56 also provides 
that the IRS will not assert penalties for a broker's failure to 
deduct, withhold, and pay any backup withholding tax that is caused by 
a decrease in the value of received digital assets (other than 
nonfungible tokens that the broker cannot fractionalize) between the 
time of the transaction giving rise to the backup withholding liability 
and the time the broker liquidates 24 percent of the received digital 
assets, provided the broker undertakes to effect that liquidation 
immediately after the transaction giving rise to the backup withholding 
liability.
    One comment recommended that the final regulations apply backup 
withholding to sales of digital assets other than stablecoins in 
exchange for stablecoins under the same rules as apply to sales of 
digital assets for cash. The final regulations do not adopt this 
comment. Although there may be less price volatility risks in received 
stablecoins than there is with other digital assets, stablecoins are 
not cash and are not treated as such by these regulations.
3. Sales of Digital Assets in Exchange for Other Property
    As discussed in Part VI.B. of this Summary of Comments and 
Explanation of Revisions, the final regulations do not provide an 
exception to backup withholding for sales of digital assets in exchange 
for illiquid property. The Treasury Department and the IRS, however, 
understand that there are additional practical issues with requiring 
backup withholding on PDAP sales and sales effected by real estate 
reporting persons because these brokers typically cannot withhold from 
the proceeds, which would typically be the goods or services (or real 
estate) purchased. Accordingly, in addition to the delayed application 
of the backup withholding rules provided for digital assets sold for 
cash, Notice 2024-56 also provides that the IRS will not apply the 
backup withholding rules to any PDAP sale or to any sale effected by a 
real estate reporting person until further guidance is issued.

VII. Applicability Dates and Penalty Relief

    The Treasury Department and the IRS received and considered many 
comments about the applicability dates contained in the proposed 
regulations. Multiple comments requested additional time beyond the 
proposed applicability date for gross proceeds reporting on 
transactions occurring on or after January 1, 2025, and for basis 
reporting for transactions occurring on or after January 1, 2026. 
Comments asked for time ranging from one to five years after 
publication of the final rules to prepare for reporting transactions, 
with the most common suggestion being an applicability date between 18 
and 24 months after publication of the final regulations. Several 
comments suggested that broker reporting begin at the same time as CARF 
reporting, either for all brokers or for non-U.S. brokers. Multiple 
comments requested that the final regulations become applicable in 
stages, with many suggesting that custodial industry participants 
should be required to report during the first stage but that non-
custodial participants should begin reporting a year or more later. 
Comments generally pointed to the time needed to build information 
reporting systems and to adequately document customers to support their 
recommendation of later applicability dates. They also cited concerns 
about fulfilling backup withholding requirements and adapting to filing 
a new information return, the Form 1099-DA, and about the IRS's ability 
to receive and process a large number of new forms.
    Conversely, some comments indicated that the proposed applicability 
dates were appropriate. As one comment noted, some digital asset 
brokers reported digital asset transactions on Forms 1099-B before the 
passage of the Infrastructure Act. Similarly, another comment stated 
that brokers that make payments to customers in the form of staking 
rewards or income from lending digital assets are already required to 
file and furnish Forms 1099-MISC, Miscellaneous Information, to those 
customers. Accordingly, in the view of these comments, those brokers 
have some experience with documenting customers and handling their 
personally identifiable information. Finally, one comment stated that 
if transaction ID, digital asset address, and time of the transaction 
were not required to be reported, then existing traditional financial 
reporting solutions could be expanded relatively easily to include 
reporting on dispositions of digital assets.
    The Treasury Department and the IRS agree that a phased-in or 
staged approach to broker reporting is appropriate and have determined 
that the proposed applicability dates for gross proceeds and basis 
reporting should be retained in the final regulations for custodial 
industry participants. At least some of these participants have 
experience reporting transactions involving their customers.

[[Page 56539]]

Further, as described in Part I.D. of this Summary of Comments and 
Explanation of Revisions, under the final regulations, these brokers 
will not be required to report the time of the transaction, the digital 
asset address or the transaction ID on Forms 1099-DA. Brokers will be 
required to report basis for transactions occurring on or after January 
1, 2026, but only with respect to digital assets the customer acquired 
from, and held with, the same broker on or after January 1, 2026. 
Although the proposed regulations required basis reporting for assets 
acquired on or after January 1, 2023, it is anticipated that moving the 
acquisition date to on or after January 1, 2026, and eliminating the 
need to track basis retroactively will assist brokers in preparing to 
report basis for transactions that occur beginning in 2026. See Part 
I.F. of this Summary of Comments and Explanation of Revisions for a 
discussion of the changes made to the basis reporting rules. Finally, 
and as more fully described in Part I.B.1.b. of this Summary of 
Comments and Explanation of Revisions, the proposed digital asset 
middleman rules that would apply to non-custodial industry participants 
are not being finalized with these final regulations. The Treasury 
Department and the IRS intend to expeditiously issue separate final 
regulations describing information reporting rules for non-custodial 
industry participants with an appropriate, separate applicability date.
    The rules of final Sec.  1.1001-7 apply to all sales, exchanges, 
and dispositions of digital assets on or after January 1, 2025.
    The rules of final Sec.  1.1012-1(h) apply to all acquisitions and 
dispositions of digital assets on or after January 1, 2025. The rules 
of final Sec.  1.1012-1(j) apply to all acquisitions and dispositions 
of digital assets on or after January 1, 2025.
    The rules of final Sec.  1.6045-1 apply to sales of digital assets 
on or after January 1, 2025.
    The amendments to the rules of final Sec.  1.6045-4 apply to real 
estate transactions with dates of closing occurring on or after January 
1, 2026.
    The changes made in final Sec.  1.6045A-1 limit the application of 
the pre-2024 final regulations in the case of digital assets. 
Accordingly, these changes apply as of the effective date of this 
Treasury decision.
    The rules of final Sec.  1.6045B-1 apply to organizational actions 
occurring on or after January 1, 2025, that affect the basis of digital 
assets that are also described in one or more paragraphs of Sec.  
1.6045-1(a)(14)(i) through (iv).
    The rules of final Sec.  1.6050W-1 apply to payments made using 
digital assets on or after January 1, 2025.
    The rules of final Sec.  31.3406(b)(3)-2 apply to reportable 
payments by a broker to a payee with respect to sales of digital assets 
on or after January 1, 2025, that are required to be reported under 
section 6045.
    The rules of final Sec.  31.3406(g)-1 apply on or after January 1, 
2025, and the rules of final Sec.  31.3406(g)-2 apply to sales of 
digital assets on or after January 1, 2026.
    The rules of final Sec.  301.6721-1(h)(3)(iii) apply to returns 
required to be filed on or after January 1, 2026. The rules of final 
Sec.  301.6722-1(e)(2)(viii) apply to payee statements required to be 
furnished on or after January 1, 2026.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6(b) of Executive Order 12866, as amended. Therefore, a 
regulatory impact assessment is not required.

II. Paperwork Reduction Act

    In general, the collection of information in the regulations is 
required under section 6045. The collection of information in these 
regulations with respect to dispositions of digital assets is set forth 
in final Sec.  1.6045-1 and the collection of information with respect 
to dispositions of real estate in consideration for digital assets is 
set forth in final Sec.  1.6045-4. The IRS intends that the collection 
of information pursuant to final Sec.  1.6045-1 will be conducted by 
way of Form 1099-DA and that the collection of information pursuant to 
final Sec.  1.6045-4 will be conducted through a revised Form 1099-S.
    The proposed regulations contained burden estimates regarding the 
collection of information with respect to the dispositions of digital 
assets and the collection of information with respect to dispositions 
of real estate in consideration for digital assets. For the proposed 
regulations, the Treasury Department and the IRS estimated that 
approximately 600 to 9,500 brokers would be impacted by the proposed 
regulations. The proposed regulations also contained an estimate of 
between 7.5 minutes and 10.5 minutes as the average time to complete 
the required Forms 1099 for each customer. And the proposed regulations 
also contained an estimate of 13 to 16 million customers that would 
have transactions subject to the proposed regulations. Taking the mid-
points of the ranges for the number of brokers expected to be impacted 
by these regulations, the number of taxpayers expected to receive one 
or more Forms 1099 required by these regulations, and the time to 
complete those required forms (5,050 brokers, 14.5 million recipients, 
and 9 minutes respectively), the proposed regulations estimated the 
average broker would incur 425 hours of time burden and $27,000 of 
monetized burden for the ongoing costs per year. The proposed 
regulations contained estimates of 2,146,250 total annual burden hours 
and $136,350,000 in total monetized annual burden.
    The proposed regulations estimated start-up costs to be between 
three to eight times annual costs. Given that the Treasury Department 
and the IRS expected per firm annual estimated burden hours to be 425 
hours and $27,000 of estimated monetized burden, the proposed 
regulations estimated per firm start-up aggregate burden hours to range 
from 1,275 to 3,400 hours and $81,000 to $216,000 of aggregate 
monetized burden. Using the mid-points, start-up total estimated 
aggregate burden hours was 11,804,375 and total estimated monetized 
burden is $749,925,000.
    Regarding the Form 1099-DA, the burden estimate must reflect the 
continuing costs of collecting and reporting the information required 
by these regulations as well as the upfront or start-up costs 
associated with creating the systems to collect and report the 
information taking into account all of the comments received, as well 
as the changes made in these final regulations that will affect the 
paperwork burden. A reasonable burden estimate for the average time to 
complete these forms for each customer is 9 minutes (0.15 hours). The 
Treasury Department and the IRS estimate that 13 to 16 million 
customers will be impacted by these final regulations (mid-point of 
14.5 million customers). The Treasury Department and the IRS estimate 
that approximately 900 to 9,700 brokers will be impacted by these final 
regulations (mid-point of 5,300 brokers). The Treasury Department and 
the IRS estimate the average broker to incur approximately 425 hours of 
time burden and $28,000 of monetized burden. The total estimated 
aggregate annual burden hours is 2,252,500 and the total estimated 
monetized burden is $148,400,000.
    Additionally, start-up costs are estimated to be between five and 
ten times annual costs. Given that we

[[Page 56540]]

expect per firm annual estimated burden hours to be 425 hours and 
$28,000 of estimated monetized burden, the Treasury Department and the 
IRS estimate per firm start-up aggregate burden hours from 2,125 to 
4,250 hours and $140,000 to $280,000 of aggregate monetized burden. 
Using the mid-points, start-up total estimated aggregate burden hours 
is 3,188 and total estimated monetized burden is $210,000 per firm. The 
total estimated aggregate burden hours is 16,896,400 and total 
estimated monetized burden is $1,113,000,000.
    Based on the most recent OMB burden estimate for the average time 
to complete Form 1099-S, it was estimated that the IRS received a total 
number of 2,563,400 Form 1099-S responses with a total estimated time 
burden for those responses of 411,744 hours (or 9.6 minutes per Form). 
Neither a material change in the average time to complete the revised 
Form, nor a material increase in the number of Forms that will be filed 
is expected once these final regulations are effective. No material 
increase is expected in the start-up costs and it is anticipated that 
less than 1 percent of Form 1099-S issuers will be impacted by this 
change.
    Numerous comments were received on the estimates contained in the 
proposed regulations. Many of these comments asserted that the annual 
estimated time and monetized burdens were too low. Some comments 
recommended that the estimates be recalculated using a total of 8 
billion Forms 1099-DA filed and furnished annually. The request to use 
this number was based on a public statement made by a former IRS 
employee. The Treasury Department and the IRS do not adopt this 
recommendation because the reference to 8 billion returns was not based 
on the requirements in the proposed or final regulations. Some comments 
attempted to calculate the monetized burden for specific exchanges 
using the average amounts used in the proposed regulations. The 
Treasury Department and the IRS also note that any attempts to 
recalculate the monetized burden for specific exchanges will likely 
yield unrealistic results. The monetized burden is based on average 
costs, and it is expected that smaller firms may experience lower costs 
overall but higher costs on an average per customer basis. This is 
because while the ongoing costs of reporting information to the IRS may 
be small, there will be larger costs associated with the initial setup. 
It is expected that the larger initial setup costs will likely be 
amortized among more customers for the larger exchanges. The Treasury 
Department and the IRS anticipate conducting a survey in the future to 
determine the actual costs of compliance with these regulations; 
however, the estimates used in these final regulations are based on the 
best currently available information.
    Multiple comments said that the estimated number of brokers 
impacted by the proposed regulations was too low. One comment said the 
number of entities affected should include everyone who uses credit 
cards or travels in the United States and should therefore be millions 
of people. That comment also said the number of entities affected 
should include individual taxpayers since the proposed regulations 
includes rules affecting individual taxpayers. One comment said the 
estimate was too low because it underestimated the impact on 
decentralized autonomous organizations, governance token holders, 
operators of web applications, and other similarly situated potential 
brokers. The estimated number of brokers in these final regulations was 
not increased based on these comments because the issues raised by 
these comments do not impact the number of brokers subject to the 
broker reporting requirements of these final regulations. The 
definition of a digital asset is not intended to apply to the types of 
virtual assets that exist only in a closed system and cannot be sold or 
exchanged outside that system for fiat currency; therefore, credit card 
points are not digital assets subject to reporting under these final 
regulations. The final regulations include substantive rules for 
computing the sale or other disposition of digital assets, but because 
taxpayers are already required to calculate and report their tax 
liability under existing law, these regulations do not impose an 
additional reporting requirement on these individuals. Finally, the 
Treasury Department and the IRS are not increasing the burden estimates 
based on comments about decentralized autonomous organizations or 
operators of web applications because the final regulations apply only 
to digital asset industry participants that take possession of the 
digital assets being sold by their customers, namely operators of 
custodial digital asset trading platforms, certain digital asset hosted 
wallet providers, certain PDAPs, and digital asset kiosks, and to 
certain real estate persons that are already subject to the broker 
reporting rules.
    The Treasury Department and the IRS estimate that approximately 900 
to 9,700 brokers, with a mid-point of 5,300, will be impacted by these 
final regulations. The lower bound of this estimate was derived using 
Form 1099 issuer data through 2022 and statistics on the number of 
exchanges from CoinMarketCap.com. Because the Form 1099 issuer data and 
statistics from CoinMarketCap do not distinguish between centralized 
and decentralized exchanges, this estimate likely overestimates the 
number of brokers that will be impacted by these final regulations. The 
upper bound of this estimate is based on IRS data for brokers with 
nonzero revenue who may deal in digital assets, specifically the number 
of issuers with North American Classification System (NAICS) codes for 
Securities Brokerage (52312), Commodity Contracts Dealing (52313) and 
Commodity Contracts Brokerage (52314).
    The proposed regulations estimated the average time to complete 
these Forms for each customer as between 7.5 minutes and 10.5 minutes, 
with a mid-point of 9 minutes (or 0.15 hours). Some comments said the 
9-minute average time to complete these Forms for each customer is too 
low, with one comment stating it underestimated time to complete by at 
least two orders of magnitude. Another comment said considering the 
complexity and specificity of the proposed reporting, including the 
requirement to report the time of transactions, the average time should 
be 15 minutes. The final regulations remove the requirement to report 
the time of the transaction. The final regulations also remove the 
obligation to report transaction ID and digital asset addresses. 
Additionally, the final regulations include a de minimis rule for PDAPs 
and an optional alternative reporting method for sales of certain NFTs 
and qualifying stablecoins to allow for aggregate reporting instead of 
transaction reporting, with a de minimis annual threshold below which 
no reporting is required, which the Treasury Department and the IRS 
anticipate will further reduce the reporting burden. Given the final 
regulations more streamlined reporting requirements, the Treasury 
Department and the IRS have concluded that the original estimate for 
the average time to complete these Forms was reasonable and retain the 
estimated average time to complete these Forms for each customer of 
between 7.5 minutes and 10.5 minutes, with a mid-point of 9 minutes (or 
0.15 hours).
    The proposed regulations estimated that 13 to 16 million customers 
will be impacted by these proposed regulations. Some comments asserted 
that the estimated number of customers was too low. One comment said 
the estimate was too low because it assumes that

[[Page 56541]]

each of the affected taxpayers would generate a single Form 1099-DA, 
but that this is incorrect because brokers generally are required to 
submit separate reports for each sale by each customer. That comment 
also said that if substitute annual Forms 1099 and payee statements 
were permissible, the average affected taxpayer likely would generate 
between 40 to 50 information returns per year. That comment also 
asserted that the estimate of 14.5 million customers is too low because 
40 to 50 million Americans currently own digital assets and 75 million 
may transact in digital assets this year. Some comments said the 
estimated number of customers should be 8 billion based on a statement 
from a former IRS official.
    The Treasury Department and the IRS have not updated the estimated 
number of customers impacted by these final regulations based on these 
comments. The burden estimate is based on the number of taxpayers who 
will receive Forms 1099-DA rather than the number of Forms 1099-DA that 
each taxpayer receives because the primary broker burden is related to 
the system design and implementation required by these final 
regulations, including the requirements to confirm or obtain customer 
identification information. The burden associated with each additional 
Form 1099-DA required per customer is expected to be marginal compared 
with the cost of implementing the reporting system. While comments 
indicated more taxpayers own and transact in digital assets than 
estimated in the proposed regulations, the Treasury Department and the 
IRS have concluded that information included on information returns 
filed with the IRS and tax returns signed under penalties of perjury is 
the most accurate information currently available for the purpose of 
estimating the number of affected taxpayers. The Treasury Department 
and the IRS estimate the number of customers impacted by these final 
regulations will be between 13 million and 16 million with a midpoint 
of 14,500,000. The estimate is based on the number of taxpayers who 
received one or more Forms 1099 reporting digital asset activity in tax 
year 2021, plus the number of taxpayers who responded yes to the 
digital asset question on their Form 1040 for tax year 2021.
    The proposed regulations used a $63.53 per hour estimate to 
monetize the burden. The proposed regulations used wage and 
compensation data from the Bureau of Labor Statistics (BLS) that 
capture the wage, benefit, and overhead costs of a typical tax preparer 
to estimate the average broker's monetized burden. Some comments said 
that the monetized burden in the proposed regulations was too low. One 
comment said the wage and compensation rate used in the proposed 
regulations was too low because these compliance costs capture the cost 
of a typical tax preparer and not the atypical digital asset-specific 
tax and legal expertise needed to comply with these rules. Another 
comment said the wage and compensation rate was underestimated because 
of the higher labor cost per hour given the specialized nature of the 
reporting, the volume of data and cross-functional effort required and 
similar factors. The Treasury Department and the IRS do not accept the 
comments that the monetization rate is too low and have concluded that 
the methodology to determine the rate is correct given the information 
available about broker reporting costs. The final regulations use an 
average monetization rate of $65.49. This updated estimate is based on 
survey data collected from filers of similar information returns with 
NAICS codes for Securities Brokerage (52312), Commodity Contracts 
Dealing (52313) and Commodity Contracts Brokerage (52314), adjusted for 
inflation. A lower bound is set at the Federal minimum wage plus 
employment taxes. The upper bound is set using rates from the BLS 
Occupational Employment Statistics (OES) and the BLS Employer Costs for 
Employee Compensation from the National Compensation Survey. 
Specifically, the estimate uses the 90th percentile for accountants and 
auditors from the OES and the ratio of total compensation to wages and 
salaries from the private industry workers (management, professional, 
and related occupations) to account for fringe benefits.
    The proposed regulations estimated that initial start-up costs 
would be between three to eight times annual costs. Some comments said 
these costs were underestimated because many brokers are newer 
companies with limited funding and resources. Other comments stated the 
start-up costs of compliance would hurt innovation. Another comment 
said the multiple applied was too low and that using a multiplier for 
start-up costs between five to ten times annual costs would yield a 
more reasonable estimate of the start-up costs for such a complex 
reporting regime and would more closely align with prior outcomes for 
similar regimes that are currently subject to reporting. Because start-
up costs are difficult to measure, the Treasury Department and the IRS 
use a multiplier of annual costs to estimate the start-up costs. To 
further acknowledge the difficulty of estimating these cases, the 
Treasury Department and the IRS have accepted the comment to revise the 
burden estimate to reflect that start-up costs would be between five 
and ten times annual costs.
    In summary, the Treasury Department and the IRS estimate that 13 to 
16 million customers will be impacted by these final regulations (mid-
point of 14.5 million customers). A reasonable burden estimate for the 
average time to complete these forms for each customer is 9 minutes 
(0.15 hours). The Treasury Department and the IRS estimate that 
approximately 900 to 9,700 brokers will be impacted by these final 
regulations (mid-point of 5,300 brokers). The Treasury Department and 
the IRS estimate the average time burden per broker will be 
approximately 425 hours. The Treasury Department and the IRS use an 
estimate that the cost of compliance will be $65.49 per hour, so the 
total monetized burden is estimated at $28,000 per broker.
    Additionally, start-up costs are estimated to be between five and 
ten times annual costs. Given the expected per-firm annual burden 
estimates of 425 hours and $28,000, the Treasury Department and the IRS 
estimate per-firm start-up burdens as between 2,125 to 4,250 hours and 
$140,000 to $280,000 of aggregate monetized burden. Using the mid-
points, start-up total estimated aggregate burden hours is 3,188 hours 
and total estimated monetized burden is $210,000 per firm.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget. On 
April 22, 2024, the IRS released and invited comments on the draft Form 
1099-DA. The draft Form 1099-DA is available on https://www.irs.gov. 
Also on April 22, 2024, the IRS published in the Federal Register (89 
FR 29433) a Notice and request for comments on the collection of 
information requirements related to the broker regulations with a 60-
day comment period. There will be an additional 30-day comment period 
beginning on the date a second Notice and request for comments on the 
collection of information requirements related to the broker 
regulations is published in the Federal Register. The OMB Control 
Number for the Form 1099-S is 1545-0997. The Form 1099-S will be 
updated for real estate reporting, which applies to transactions 
occurring on or after January 1, 2026.
    Books or records relating to a collection of information must be

[[Page 56542]]

retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires 
agencies to ``prepare and make available for public comment an initial 
regulatory flexibility analysis,'' which will ``describe the impact of 
the rule on small entities.'' 5 U.S.C. 603(a). Unless an agency 
determines that a proposal will not have a significant economic impact 
on a substantial number of small entities, section 603 of the RFA 
requires the agency to present a final regulatory flexibility analysis 
(FRFA) of the final regulations. The Treasury Department and the IRS 
have not determined whether these final regulations will likely have a 
significant economic impact on a substantial number of small entities. 
This determination requires further study. Because there is a 
possibility of significant economic impact on a substantial number of 
small entities, a FRFA is provided in these final regulations.
    The expected number of impacted issuers of information returns 
under these final regulations is between 900 to 9,700 brokers (mid-
point of 5,300). Small Business Administration regulations provide 
small business size standards by NAICS Industry. See 13 CFR 121.201. 
The NAICS includes virtual currency exchange services in the NAICS code 
for Commodity Contracts Dealing (52313). According to the Small 
Business Administration regulations, the maximum annual receipts for a 
concern and its affiliates to be considered small in this NAICS code is 
$41.5 million. Based on tax return data, only 200 of the 9,700 firms 
identified as impacted issuers in the upper bound estimate exceed the 
upper bound estimate exceed the $41.5 million threshold. This implies 
there could be 700 to 9,500 impacted small business issuers under the 
Small Business Administration's small business size standards.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business, 
and no comments were received.
A. Need for and Objectives of the Rule
    Information reporting is essential to the integrity of the tax 
system. The IRS estimated in its 2019 tax gap analysis that net 
misreporting as a percent of income for income with little to no third 
party information reporting is 55 percent. In comparison, misreporting 
for income with some information reporting, such as capital gains, is 
17 percent, and for income with substantial information reporting, such 
as dividend and interest income, is just five percent.
    Prior to these final regulations, many transactions involving 
digital assets were outside the scope of information reporting rules. 
Digital assets are treated as property for Federal income tax purposes. 
The regulations under section 6045 require brokers to file information 
returns for customers that sell certain types of property providing 
gross proceeds and, in some cases, adjusted basis. However, the 
existing regulations do not specify digital assets as a type of 
property for which information reporting is required. Section 6045 also 
requires information returns for real estate transactions, but the 
existing regulations do not require reporting of amounts received in 
digital assets. Section 6050W requires information reporting by payment 
settlement entities on certain payments made with respect to payment 
card and third-party network transactions. However, the existing 
regulations are silent as to whether certain exchanges involving 
digital assets are reportable payments under section 6050W.
    Information reporting by brokers and real estate reporting persons 
under section 6045 with respect to certain digital asset dispositions 
and digital asset payments received by real estate transferors will 
lead to higher levels of taxpayer compliance because the income earned 
by taxpayers engaging in transactions involving digital assets will be 
made more transparent to both the IRS and taxpayers. Clear information 
reporting rules that require reporting of gross proceeds and, in some 
cases, adjusted basis for taxpayers who engage in digital asset 
transactions will help the IRS identify taxpayers who have engaged in 
these transactions, and thereby help to reduce the overall tax gap. 
These final regulations are also expected to facilitate the preparation 
of tax returns (and reduce the number of inadvertent errors or 
intentional misstatements shown on those returns) by and for taxpayers 
who engage in digital asset transactions.
B. Affected Small Entities
    As discussed above, we anticipate 9,500 of the 9,700 (or 98 
percent) impacted issuers in the upper bound estimate could be small 
businesses.
1. Impact of the Rules
    As previously stated in the Paperwork Reduction Act section of this 
preamble, the Form 1099-DA prescribed by the Secretary for reporting 
sales of digital assets pursuant to final Sec.  1.6045-1(d) of these 
final regulations is expected to create an average estimated per 
customer burden on brokers of between 7.5 and 10.5 minutes, with a mid-
point of 9 minutes (or 0.15 hours). In addition, the form is expected 
to create an average estimated per firm start-up aggregated burden of 
between 2,125 to 4,250 hours in start-up costs to build processes to 
comply with the information reporting requirements. The revised Form 
1099-S prescribed by the Secretary for reporting gross proceeds from 
the payment of digital assets paid to real estate transferors as 
consideration in a real estate transaction pursuant to final Sec.  
1.6045-4(i) of these final regulations is not expected to change 
overall costs to complete the revised form. Because we expect that 
filers of revised Form 1099-S will already be filers of the form, we do 
not expect them to incur a material increase in start-up costs 
associated with the revised form.
    Although small businesses may engage tax reporting services to 
complete, file, and furnish information returns to avoid the start-up 
costs associated with building an internal information reporting system 
for sales of digital assets, it remains difficult to predict whether 
the economies of scale efficiencies of using these services will offset 
the somewhat more burdensome ongoing costs associated with using third 
party contractors.
2. Alternatives Considered for Small Businesses
    The Treasury Department and the IRS considered alternatives to 
these final regulations that would have created an exception to 
reporting, or a delayed applicability date, for small businesses but 
decided against such alternatives for several reasons. As discussed 
above, we anticipate that 9,500 of the 9,700 (or 98 percent) impacted 
issuers in the upper bound estimate could be small businesses. First, 
one purpose of these regulations is to eliminate the overall tax gap. 
Any exception or delay to the information reporting rules for small 
business brokers, which may comprise the vast majority of impacted 
issuers, would reduce the effectiveness of these final regulations. In 
addition, such an exception or delay could have the unintended effect 
of incentivizing taxpayers to move their business to excepted small 
businesses, thus thwarting IRS efforts to identify

[[Page 56543]]

taxpayers engaged in digital asset transactions. Additionally, because 
the information reported on statements furnished to customers will 
likely be an aid to tax return preparation by those customers, small 
business brokers will be able to offer their customers the same amount 
of useful information as their larger competitors. Finally, to the 
extent investors in digital asset transactions are themselves small 
businesses, these final regulations will help these businesses with 
their own tax preparation efforts.
3. Duplicate, Overlapping, or Relevant Federal Rules
    These final regulations do not overlap or conflict with any 
relevant Federal rules. As discussed above, the multiple broker rule 
ensures, in certain instances, that duplicative reporting is not 
required.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by State, local, or Tribal governments, or by 
the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This final rule does not have 
federalism implications, does not impose substantial direct compliance 
costs on State and local governments, and does not preempt State law 
within the meaning of the Executive order.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a major rule as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this document are published in the Internal Revenue Bulletin 
and are available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at https://www.irs.gov.

Drafting Information

    The principal authors of these regulations are Roseann Cutrone, 
Office of the Associate Chief Counsel (Procedure and Administration) 
and Alexa Dubert, Office of the Associate Chief Counsel (Income Tax and 
Accounting). However, other personnel from the Treasury Department and 
the IRS, including Jessica Chase, Office of the Associate Chief Counsel 
(Procedure and Administration), Kyle Walker, Office of the Associate 
Chief Counsel (Income Tax and Accounting), John Sweeney and Alan 
Williams, Office of Associate Chief Counsel (International), and Pamela 
Lew, Office of Associate Chief Counsel (Financial Institutions and 
Products), participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 31, and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.1001-1 is amended by adding a sentence at the end of 
paragraph (a) to read as follows:


Sec.  1.1001-1  Computation of gain or loss.

    (a) * * * For rules determining the amount realized for purposes of 
computing the gain or loss upon the sale, exchange, or other 
disposition of digital assets, as defined in Sec.  1.6045-1(a)(19), 
other than a digital asset not required to be reported as a digital 
asset pursuant to Sec.  1.6045-1(c)(8)(ii), (iii), or (iv), see Sec.  
1.1001-7.
* * * * *

0
Par. 3. Section 1.1001-7 is added to read as follows:


Sec.  1.1001-7  Computation of gain or loss for digital assets.

    (a) In general. This section provides rules to determine the amount 
realized for purposes of computing the gain or loss upon the sale, 
exchange, or other disposition of digital assets, as defined in Sec.  
1.6045-1(a)(19) other than a digital asset not required to be reported 
as a digital asset pursuant to Sec.  1.6045-1(c)(8)(ii), (iii), or 
(iv).
    (b) Amount realized in a sale, exchange, or other disposition of 
digital assets for cash, other property, or services--(1) Computation 
of amount realized--(i) In general. If digital assets are sold or 
otherwise disposed of for cash, other property differing materially in 
kind or in extent, or services, the amount realized is the excess of:
    (A) The sum of:
    (1) Any cash received;
    (2) The fair market value of any property received or, in the case 
of a debt instrument described in paragraph (b)(1)(iv) of this section, 
the amount determined under paragraph (b)(1)(iv) of this section; and
    (3) The fair market value of any services received; reduced by
    (B) The amount of digital asset transaction costs, as defined in 
paragraph (b)(2)(i) of this section, allocable to the sale or 
disposition of the transferred digital asset, as determined under 
paragraph (b)(2)(ii) of this section.
    (ii) Digital assets used to pay digital asset transaction costs. If 
digital assets are used or withheld to pay digital asset transaction 
costs, as defined in paragraph (b)(2)(i) of this section, such use or 
withholding is a disposition of the digital assets for services.
    (iii) Application of general rule to certain sales, exchanges, or 
other dispositions of digital assets. The following paragraphs 
(b)(1)(iii)(A) through (C) of this section apply the rules of this 
section to certain sales, exchanges, or other dispositions of digital 
assets.
    (A) Sales or other dispositions of digital assets for cash. The 
amount realized from the sale of digital assets for cash is the sum of 
the amount of cash received plus the fair market value of services 
received as described in paragraph (b)(1)(ii) of this section,

[[Page 56544]]

reduced by the amount of digital asset transaction costs allocable to 
the disposition of the transferred digital assets, as determined under 
paragraph (b)(2)(ii) of this section.
    (B) Exchanges or other dispositions of digital assets for services, 
or certain property. The amount realized on the exchange or other 
disposition of digital assets for services or property differing 
materially in kind or in extent, other than digital assets or debt 
instruments described in paragraph (b)(1)(iv) of this section, is the 
sum of the fair market value of such property and services received 
(including services received as described in paragraph (b)(1)(ii) of 
this section), reduced by the amount of digital asset transaction costs 
allocable to the disposition of the transferred digital assets, as 
determined under paragraph (b)(2)(ii) of this section.
    (C) Exchanges of digital assets. The amount realized on the 
exchange of one digital asset for another digital asset differing 
materially in kind or in extent is the sum of the fair market value of 
the digital asset received plus the fair market value of services 
received as described in paragraph (b)(1)(ii) of this section, reduced 
by the amount of digital asset transaction costs allocable to the 
disposition of the transferred digital asset, as determined under 
paragraph (b)(2)(ii) of this section.
    (iv) Debt instrument issued in exchange for digital assets. For 
purposes of this section, if a debt instrument is issued in exchange 
for digital assets and the debt instrument is subject to Sec.  1.1001-
1(g), the amount attributable to the debt instrument is determined 
under Sec.  1.1001-1(g) (in general, the issue price of the debt 
instrument).
    (2) Digital asset transaction costs--(i) Definition. The term 
digital asset transaction costs means the amounts paid in cash or 
property (including digital assets) to effect the sale, disposition or 
acquisition of a digital asset. Digital asset transaction costs include 
transaction fees, transfer taxes, and commissions.
    (ii) Allocation of digital asset transaction costs. This paragraph 
(b)(2)(ii) provides the rules for allocating digital asset transaction 
costs to the sale or disposition of a digital asset. Accordingly, any 
other allocation or specific assignment of digital asset transaction 
costs is disregarded.
    (A) In general. Except as provided in paragraph (b)(2)(ii)(B) of 
this section, the total digital asset transaction costs paid by the 
taxpayer in connection with the sale or disposition of digital assets 
are allocable to the sale or disposition of the digital assets.
    (B) Special rule for allocation of certain cascading digital asset 
transaction costs. This paragraph (b)(2)(ii)(B) provides a special rule 
in the case of a transaction described in paragraph (b)(1)(iii)(C) of 
this section (original transaction) and for which digital assets are 
withheld from digital assets acquired in the original transaction to 
pay the digital asset transaction costs to effect the original 
transaction. The total digital asset transaction costs paid by the 
taxpayer to effect both the original transaction and any disposition of 
the withheld digital assets are allocable exclusively to the 
disposition of digital assets in the original transaction.
    (3) Time for determining fair market value of digital assets. 
Generally, the fair market value of a digital asset is determined as of 
the date and time of the sale or disposition of the digital asset.
    (4) Special rule when the fair market value of property or services 
cannot be determined. If the fair market value of the property 
(including digital assets) or services received in exchange for digital 
assets cannot be determined with reasonable accuracy, the fair market 
value of such property or services must be determined by reference to 
the fair market value of the digital assets transferred as of the date 
and time of the exchange. This paragraph (b)(4), however, does not 
apply to a debt instrument described in paragraph (b)(1)(iv) of this 
section.
    (5) Examples. The following examples illustrate the application of 
paragraphs (b)(1) through (3) of this section. Unless the facts 
specifically state otherwise, the transactions described in the 
following examples occur after the applicability date set forth in 
paragraph (c) of this section. For purposes of the examples under this 
paragraph (b)(5), assume that TP is a digital asset investor, and each 
unit of digital asset A, B, and C is materially different in kind or in 
extent from the other units. See Sec.  1.1012-1(h)(4) for examples 
illustrating the determination of basis of digital assets.

    (i) Example 1: Exchange of digital assets for services--(A) 
Facts. TP owns a total of 20 units of digital asset A, and each unit 
has an adjusted basis of $0.50. X, an unrelated person, agrees to 
perform cleaning services for TP in exchange for 10 units of digital 
asset A, which together have a fair market value of $10. The fair 
market value of the services performed by X also equals $10. X then 
performs the services, and TP transfers 10 units of digital asset A 
to X. Additionally, TP pays $1 in cash of transaction fee to dispose 
of digital asset A.
    (B) Analysis. Under paragraph (b)(1) of this section, TP has a 
disposition of 10 units of digital asset A for services received. 
Under paragraphs (b)(2)(i) and (b)(2)(ii)(A) of this section, TP has 
digital asset transaction costs of $1, which must be allocated to 
the disposition of digital asset A. Under paragraph (b)(1)(i) of 
this section, TP's amount realized on the disposition of the units 
of digital asset A is $9, which is the fair market value of the 
services received, $10, reduced by the digital asset transaction 
costs allocated to the disposition of digital asset A, $1. TP 
recognizes a gain of $4 on the exchange ($9 amount realized reduced 
by $5 adjusted basis in 10 units).
    (ii) Example 2: Digital asset transaction costs paid in cash in 
an exchange of digital assets--(A) Facts. TP owns a total of 10 
units of digital asset A, and each unit has an adjusted basis of 
$0.50. TP uses BEX, an unrelated third party, to effect the exchange 
of 10 units of digital asset A for 20 units of digital asset B. At 
the time of the exchange, each unit of digital asset A has a fair 
market value of $2 and each unit of digital asset B has a fair 
market value of $1. BEX charges $2 per transaction, which BEX 
requires its customers to pay in cash. At the time of the 
transaction, TP pays BEX $2 in cash.
    (B) Analysis. Under paragraph (b)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (b)(2)(ii)(A) 
of this section, TP must allocate such costs ($2) to the disposition 
of the 10 units of digital asset A. Under paragraphs (b)(1)(i) and 
(b)(3) of this section, TP's amount realized from the exchange is 
$18, which is the fair market value of the 20 units of digital asset 
B received ($20) as of the date and time of the transaction, reduced 
by the digital asset transaction costs allocated to the disposition 
of digital asset A ($2). TP recognizes a gain of $13 on the exchange 
($18 amount realized reduced by $5 adjusted basis in the 10 units of 
digital asset A).
    (iii) Example 3: Digital asset transaction costs paid with other 
digital assets--(A) Facts. The facts are the same as in paragraph 
(b)(5)(ii)(A) of this section (the facts in Example 2), except that 
BEX requires its customers to pay transaction fees using units of 
digital asset C. TP has an adjusted basis in each unit of digital 
asset C of $0.50. TP transfers 2 units of digital asset C to BEX to 
effect the exchange of digital asset A for digital asset B. TP also 
pays to BEX an additional unit of digital asset C for services 
rendered by BEX to effect the disposition of digital asset C for 
payment of the transaction costs. The fair market value of each unit 
of digital asset C is $1.
    (B) Analysis. TP disposes of 3 units of digital asset C for 
services described in paragraph (b)(1)(ii) of this section. 
Therefore, under paragraph (b)(2)(i) of this section, TP has digital 
asset transaction costs of $3. Under paragraph (b)(2)(ii)(A) of this 
section, TP must allocate $2 of such costs to the disposition of the 
10 units of digital asset A. TP must also allocate $1 of such costs 
to the disposition of the 3 units of digital asset C. None of the 
digital asset transaction costs are allocable to the acquired units 
of digital asset B. Under paragraphs (b)(1)(i) and (b)(3) of this 
section, TP's amount realized on the disposition of digital asset A 
is $18, which is the excess of the fair market value of the 20 units 
of digital asset B received ($20) as

[[Page 56545]]

of the date and time of the transaction over the allocated digital 
asset transaction costs ($2). Also, under paragraphs (b)(1)(i) and 
(b)(3) of this section, TP's amount realized on the disposition of 
the 3 units of digital asset C is $2, which is the excess of the 
gross proceeds determined as of the date and time of the transaction 
over the allocated digital asset transaction costs of $1. TP 
recognizes a gain of $13 on the disposition of 10 units of digital 
asset A ($18 amount realized over $5 adjusted basis) and a gain of 
$0.50 on the disposition of the 3 units of digital asset C ($2 
amount realized over $1.50 adjusted basis).
    (iv) Example 4: Digital asset transaction costs withheld from 
the transferred digital assets in an exchange of digital assets--(A) 
Facts. The facts are the same as in paragraph (b)(5)(ii)(A) of this 
section (the facts in Example 2), except that BEX requires its 
payment be withheld from the units of the digital asset transferred. 
At the time of the transaction, BEX withholds 1 unit of digital 
asset A. TP exchanges the remaining 9 units of digital asset A for 
18 units of digital asset B.
    (B) Analysis. The withholding of 1 unit of digital asset A is a 
disposition of a digital asset for services within the meaning of 
paragraph (b)(1)(ii) of this section. Under paragraph (b)(2)(i) of 
this section, TP has digital asset transaction costs of $2. Under 
paragraph (b)(2)(ii)(A) of this section, TP must allocate such costs 
to the disposition of the 10 units of digital asset A. Under 
paragraphs (b)(1)(i) and (b)(3) of this section, TP's amount 
realized on the 10 units of digital asset A is $18, which is the 
excess of the fair market value of the 18 units of digital asset B 
received ($18) and the fair market value of services received ($2) 
as of the date and time of the transaction over the allocated 
digital asset transaction costs ($2). TP recognizes a gain on the 10 
units of digital asset A transferred of $13 ($18 amount realized 
reduced by $5 adjusted basis in the 10 units).
    (v) Example 5: Digital asset transaction fees withheld from the 
acquired digital assets in an exchange of digital assets--(A) Facts. 
The facts are the same as in paragraph (b)(5)(iv)(A) of this section 
(the facts in Example 4), except that BEX requires its payment be 
withheld from the units of the digital asset acquired. At the time 
of the transaction, BEX withholds 3 units of digital asset B, 2 
units of which effect the exchange of digital asset A for digital 
asset B and 1 unit of which effects the disposition of digital asset 
B for payment of the transaction fees. TP does not make an 
identification to BEX identifying other units of B as the units 
disposed.
    (B) Analysis. The withholding of 3 units of digital asset B is a 
disposition of digital assets for services within the meaning of 
paragraph (b)(1)(ii) of this section. Under paragraph (b)(2)(i) of 
this section, TP has digital asset transaction costs of $3. Under 
paragraph (b)(2)(ii)(B) of this section, TP must allocate such costs 
to the disposition of the 10 units of digital asset A in the 
original transaction. Under paragraphs (b)(1)(i) and (b)(3) of this 
section, TP's amount realized on the 10 units of digital asset A is 
$17, which is the excess of the fair market value of the 20 units of 
digital asset B received ($20) as of the date and time of the 
transaction over the allocated digital asset transaction costs ($3). 
TP's amount realized on the disposition of the 3 units of digital 
asset B used to pay digital asset transaction costs is $3, which is 
the fair market value of services received at the time of the 
transaction. TP recognizes a gain on the 10 units of digital asset A 
transferred of $12 ($17 amount realized reduced by $5 adjusted basis 
in the 10 units). TP recognizes $0 in gain or loss on the 3 units of 
digital asset B withheld ($3 amount realized reduced by $3 (adjusted 
basis in the 3 units)). See Sec.  1.1012-1(j)(3)(iii) for the 
special rule for identifying the basis and holding period of the 3 
units withheld.

    (c) Applicability date. This section applies to all sales, 
exchanges, and dispositions of digital assets on or after January 1, 
2025.

0
Par. 4. Section 1.1012-1 is amended by adding paragraphs (h) through 
(j) to read as follows:


Sec.  1.1012-1  Basis of property.

* * * * *
    (h) Determination of basis of digital assets--(1) Overview and 
general rule. This paragraph (h) provides rules to determine the basis 
of digital assets, as defined in Sec.  1.6045-1(a)(19) other than a 
digital asset not required to be reported as a digital asset pursuant 
to Sec.  1.6045-1(c)(8)(ii), (iii), or (iv), received in a purchase for 
cash, a transfer in connection with the performance of services, an 
exchange for digital assets or other property differing materially in 
kind or in extent, an exchange for a debt instrument described in 
paragraph (h)(1)(v) of this section, or in a part sale and part gift 
transfer described in paragraph (h)(1)(vi) of this section. Except as 
provided in paragraph (h)(1)(ii), (v), and (vi) of this section, the 
basis of digital assets received in a purchase or exchange is generally 
equal to the cost thereof at the date and time of the purchase or 
exchange, plus any allocable digital asset transaction costs as 
determined under paragraph (h)(2)(ii) of this section.
    (i) Basis of digital assets purchased for cash. The basis of 
digital assets purchased for cash is the amount of cash used to 
purchase the digital assets plus any allocable digital asset 
transaction costs as determined under paragraph (h)(2)(ii)(A) of this 
section.
    (ii) Basis of digital assets received in connection with the 
performance of services. For rules regarding digital assets received in 
connection with the performance of services, see Sec. Sec.  1.61-
2(d)(2) and 1.83-4(b).
    (iii) Basis of digital assets received in exchange for property 
other than digital assets. The basis of digital assets received in 
exchange for property differing materially in kind or in extent, other 
than digital assets or debt instruments described in paragraph 
(h)(1)(v) of this section, is the cost as described in paragraph (h)(3) 
of this section of the digital assets received plus any allocable 
digital asset transaction costs as determined under paragraph 
(h)(2)(ii)(A) of this section.
    (iv) Basis of digital assets received in exchange for other digital 
assets. The basis of digital assets received in an exchange for other 
digital assets differing materially in kind or in extent is the cost as 
described in paragraph (h)(3) of this section of the digital assets 
received.
    (v) Basis of digital assets received in exchange for the issuance 
of a debt instrument. If a debt instrument is issued in exchange for 
digital assets, the cost of the digital assets attributable to the debt 
instrument is the amount determined under paragraph (g) of this 
section, plus any allocable digital asset transaction costs as 
determined under paragraph (h)(2)(ii)(A) of this section.
    (vi) Basis of digital assets received in a part sale and part gift 
transfer. To the extent digital assets are received in a transfer, 
which is in part a sale and in part a gift, see Sec.  1.1012-2.
    (2) Digital asset transaction costs--(i) Definition. The term 
digital asset transaction costs under this paragraph (h) has the same 
meaning as in Sec.  1.1001-7(b)(2)(i).
    (ii) Allocation of digital asset transaction costs. This paragraph 
(h)(2)(ii) provides the rules for allocating digital asset transaction 
costs, as defined in paragraph (h)(2)(i) of this section, for 
transactions described in paragraph (h)(1) of this section. Any other 
allocation or specific assignment of digital asset transaction costs is 
disregarded.
    (A) Allocation of digital asset transaction costs on a purchase or 
exchange for digital assets. Except as provided in paragraphs 
(h)(2)(ii)(B) and (C) of this section, the total digital asset 
transaction costs paid by the taxpayer in connection with an 
acquisition of digital assets are allocable to the digital assets 
received.
    (B) Special rule for the allocation of digital asset transaction 
costs paid to effect an exchange of digital assets for other digital 
assets. Except as provided in paragraph (h)(2)(ii)(C) of this section, 
the total digital asset transaction costs paid by the taxpayer, to 
effect an exchange described in paragraph (h)(1)(iv) of this section 
are allocable exclusively to the disposition of the transferred digital 
assets.

[[Page 56546]]

    (C) Special rule for allocating certain cascading digital asset 
transaction costs. This paragraph (h)(2)(ii)(C) provides a special rule 
for an exchange described in paragraph (h)(1)(iv) of this section 
(original transaction) and for which digital assets are withheld from 
digital assets acquired in the original transaction to pay the digital 
asset transaction costs to effect the original transaction. The total 
digital asset transaction costs paid by the taxpayer, to effect both 
the original transaction and any disposition of the withheld digital 
assets, are allocable exclusively to the disposition of digital assets 
in the original transaction.
    (3) Determining the cost of the digital assets received. In the 
case of an exchange described in either paragraph (h)(1)(iii) or (iv) 
of this section, the cost of the digital assets received is the same as 
the fair market value used in determining the amount realized on the 
sale or disposition of the transferred property for purposes of section 
1001 of the Code. Generally, the cost of a digital asset received is 
determined at the date and time of the exchange. The special rule in 
Sec.  1.1001-7(b)(4) also applies in this section for purposes of 
determining the fair market value of a received digital asset when it 
cannot be determined with reasonable accuracy.
    (4) Examples. The following examples illustrate the application of 
paragraphs (h)(1) through (3) of this section. Unless the facts 
specifically state otherwise, the transactions described in the 
following examples occur after the applicability date set forth in 
paragraph (h)(5) of this section. For purposes of the examples under 
this paragraph (h)(4), assume that TP is a digital asset investor, and 
that digital assets A, B, and C are materially different in kind or in 
extent from each other. See Sec.  1.1001-7(b)(5) for examples 
illustrating the determination of the amount realized and gain or loss 
in a sale or disposition of a digital asset for cash, other property 
differing materially in kind or in extent, or services.

    (i) Example 1: Transaction fee paid in cash--(A) Facts. TP uses 
BEX, an unrelated third party, to exchange 10 units of digital asset 
A for 20 units of digital asset B. At the time of the exchange, a 
unit of digital asset A has a fair market value of $2, and a unit of 
digital asset B has a fair market value of $1. BEX charges TP a 
transaction fee of $2, which TP pays to BEX in cash at the time of 
the exchange.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) 
of this section, TP allocates the digital asset transaction costs 
($2) to the disposition of the 10 units of digital asset A. Under 
paragraphs (h)(1)(iv) and (h)(3) of this section, TP's basis in the 
20 units of digital asset B received is $20, which is the sum of the 
fair market value of the 20 units of digital asset B received ($20).
    (ii) Example 2: Transaction fee paid in other property--(A) 
Facts. The facts are the same as in paragraph (h)(4)(i)(A) of this 
section (the facts in Example 1), except that BEX requires its 
customers to pay transaction fees using units of digital asset C. TP 
pays the transaction fees using 2 units of digital asset C that TP 
holds. At the time TP pays the transaction fees, each unit of 
digital asset C has a fair market value of $1. TP acquires 20 units 
of digital asset B with a fair market value of $20 in the exchange.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) 
of this section, TP must allocate the digital asset transaction 
costs ($2) to the disposition of the 10 units of digital asset A. 
Under paragraphs (h)(1)(iv) and (h)(3) of this section, TP's basis 
in the 20 units of digital asset B is $20, which is the sum of the 
fair market value of the 20 units of digital asset B received ($20).
    (iii) Example 3: Digital asset transaction costs withheld from 
the transferred digital assets--(A) Facts. The facts are the same as 
in paragraph (h)(4)(i)(A) of this section (the facts in Example 1), 
except that BEX withholds 1 unit of digital asset A in payment of 
the transaction fees and TP receives 18 units of digital asset B.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) 
of this section, TP must allocate the digital asset transaction 
costs ($2) to the disposition of the 10 units of digital asset A. 
Under paragraphs (h)(1)(iv) and (h)(3) of this section, TP's total 
basis in the digital asset B units is $18, which is the sum of the 
fair market value of the 18 units of digital asset B received ($18).

    (5) Applicability date. This paragraph (h) is applicable to all 
acquisitions and dispositions of digital assets on or after January 1, 
2025.
    (i) [Reserved]
    (j) Sale, disposition, or transfer of digital assets. Paragraphs 
(j)(1) and (2) of this section apply to digital assets not held in the 
custody of a broker, such as digital assets that are held in an 
unhosted wallet. Paragraph (j)(3) of this section applies to digital 
assets held in the custody of a broker. For the definitions of the 
terms wallet, hosted wallet, unhosted wallet, and held in a wallet or 
account, as used in this paragraph (j), see Sec.  1.6045-1(a)(25)(i) 
through (iv). For the definition of the term broker, see Sec.  1.6045-
1(a)(1). For the definition of the term digital asset, see Sec.  
1.6045-1(a)(19); however, a digital asset not required to be reported 
as a digital asset pursuant to Sec.  1.6045-1(c)(8)(ii), (iii), or (iv) 
is not subject to the rules of this section.
    (1) Digital assets not held in the custody of a broker. If a 
taxpayer sells, disposes of, or transfers less than all units of the 
same digital asset not held in the custody of the broker, such as in a 
single unhosted wallet or in a hosted wallet provided by a person other 
than a broker, the basis and holding period of the units sold, disposed 
of, or transferred are determined by making a specific identification 
of the units in the wallet that are sold, disposed of, or transferred, 
as provided in paragraph (j)(2) of this section. If a specific 
identification is not made, the basis and holding period of the units 
sold, disposed of, or transferred are determined by treating the units 
not held in the custody of a broker as sold, disposed of, or 
transferred in order of time from the earliest date on which units of 
the same digital asset not held in the custody of a broker were 
acquired by the taxpayer. For purposes of the preceding sentence, the 
date any units were transferred into the taxpayer's wallet is 
disregarded.
    (2) Specific identification of digital assets not held in the 
custody of a broker. A specific identification of the units of a 
digital asset sold, disposed of, or transferred is made if, no later 
than the date and time of the sale, disposition, or transfer, the 
taxpayer identifies on its books and records the particular units to be 
sold, disposed of, or transferred by reference to any identifier, such 
as purchase date and time or the purchase price for the unit, that is 
sufficient to identify the units sold, disposed of, or transferred. A 
specific identification can be made only if adequate records are 
maintained for the unit of a specific digital asset not held in the 
custody of a broker to establish that a unit sold, disposed of, or 
transferred is removed from the wallet.
    (3) Digital assets held in the custody of a broker. This paragraph 
(j)(3) applies to digital assets held in the custody of a broker.
    (i) Unit of a digital asset sold, disposed of, or transferred. 
Except as provided in paragraph (j)(3)(iii) of this section, where 
multiple units of the same digital asset are held in the custody of a 
broker, as defined in Sec.  1.6045-1(a)(1), and the taxpayer does not 
provide the broker with an adequate identification of which units are 
sold, disposed of, or transferred by the date and time of the sale, 
disposition, or transfer, as provided in paragraph (j)(3)(ii) of this 
section, the basis and holding period of the units sold, disposed of, 
or transferred are determined by treating the units held in the custody 
of the broker as sold, disposed of, or transferred in order of time 
from the earliest date on which units of the same digital asset held in 
the custody of a broker were acquired by the taxpayer. For purposes of 
the

[[Page 56547]]

preceding sentence, the date any units were transferred into the 
custody of the broker is disregarded.
    (ii) Adequate identification of units held in the custody of a 
broker. Except as provided in paragraph (j)(3)(iii) of this section, 
where multiple units of the same digital asset are held in the custody 
of a broker, as defined in Sec.  1.6045-1(a)(1), an adequate 
identification occurs if, no later than the date and time of the sale, 
disposition, or transfer, the taxpayer specifies to the broker having 
custody of the digital assets the particular units of the digital asset 
to be sold, disposed of, or transferred by reference to any identifier, 
such as purchase date and time or purchase price, that the broker 
designates as sufficiently specific to identify the units sold, 
disposed of, or transferred. The taxpayer is responsible for 
maintaining records to substantiate the identification. A standing 
order or instruction for the specific identification of digital assets 
is treated as an adequate identification made at the time of sale, 
disposition, or transfer. In addition, a taxpayer's election to use 
average basis for a covered security for which average basis reporting 
is permitted and that is also a digital asset is also an adequate 
identification. In the case of a broker offering only one method of 
making a specific identification, such method is treated as a standing 
order or instruction.
    (iii) Special rule for the identification of certain units 
withheld. Notwithstanding paragraph (j)(3)(i) or (ii) of this section, 
in the case of a transaction described in paragraph (h)(1)(iv) of this 
section (digital assets exchanged for different digital assets) and for 
which the broker withholds units of the same digital asset received for 
either the broker's backup withholding obligations under section 3406 
of the Code, or for payment of services described in Sec.  1.1001-
7(b)(1)(ii) (digital asset transaction costs), the taxpayer is deemed 
to have made an adequate identification, within the meaning of 
paragraph (j)(3)(ii) of this section, for such withheld units 
regardless of any other adequate identification within the meaning of 
paragraph (j)(3)(ii) of this section designating other units of the 
same digital asset as the units sold, disposed of, or transferred.
    (4) Method for specifically identifying units of a digital asset. A 
method of specifically identifying the units of a digital asset sold, 
disposed of, or transferred under this paragraph (j), for example, by 
the earliest acquired, the latest acquired, or the highest basis, is 
not a method of accounting. Therefore, a change in the method of 
specifically identifying the digital asset sold, disposed of, or 
transferred, for example, from the earliest acquired to the latest 
acquired, is not a change in method of accounting to which sections 446 
and 481 of the Code apply.
    (5) Examples. The following examples illustrate the application of 
paragraphs (j)(1) through (j)(3) of this section. Unless the facts 
specifically state otherwise, the transactions described in the 
following examples occur after the applicability date set forth in 
paragraph (j)(6) of this section. For purposes of the examples under 
this paragraph (j)(5), assume that TP is a digital asset investor and 
that the units of digital assets in the examples are the only digital 
assets owned by TP.

    (i) Example 1: Identification of digital assets not held in the 
custody of a broker--(A) Facts. On September 1, Year 2, TP transfers 
two lots of digital asset DE to a new digital asset address 
generated and controlled by an unhosted wallet, as defined in Sec.  
1.6045-1(a)(25)(iii). The first lot transferred into TP's wallet 
consists of 10 units of digital asset DE, with a purchase date of 
January 1, Year 1, and a basis of $2 per unit. The second lot 
transferred into TP's wallet consists of 20 units of digital asset 
DE, with a purchase date of January 1, Year 2, and a basis of $5 per 
unit. On September 2, Year 2, when the DE units have a fair market 
value of $10 per unit, TP purchases $100 worth of consumer goods 
from Merchant M. To make payment, TP transfers 10 units of digital 
asset DE from TP's wallet to CPP, a processor of digital asset 
payments as defined in Sec.  1.6045-1(a)(22), that then pays $100 to 
M, in a transaction treated as a sale by TP of the 10 units of 
digital asset DE. Prior to making the transfer to CPP, TP keeps a 
record that the 10 units of DE sold in this transaction were from 
the second lot of units transferred into TP's wallet.
    (B) Analysis. Under the facts in paragraph (j)(5)(i)(A) of this 
section, TP's notation in its records on the date of sale, prior to 
the time of the sale, specifying that the 10 units sold were from 
the 20 units TP acquired on January 1, Year 2, is a specific 
identification within the meaning of paragraph (j)(2) of this 
section. TP's notation is sufficient to identify the 10 units of 
digital asset DE sold. Accordingly, TP has identified the units 
disposed of for purposes of determining the basis ($5 per unit) and 
holding period (one year or less) of the units sold in order to 
purchase the merchandise.
    (ii) Example 2: Identification of digital assets not held in the 
custody of a broker--(A) Facts. The facts are the same as in 
paragraph (j)(5)(i)(A) of this section (the facts in Example 1), 
except in making the transfer to CPP, TP did not keep a record at or 
prior to the time of the sale of the specific 10 units of digital 
asset DE that TP intended to sell.
    (B) Analysis. TP did not make a specific identification within 
the meaning of paragraph (j)(2) of this section for the 10 units of 
digital asset DE that were sold. Pursuant to the ordering rule 
provided in paragraph (j)(1) of this section, the units disposed of 
are determined by treating the units held in the unhosted wallet as 
disposed of in order of time from the earliest date on which units 
of the same digital asset held in the unhosted wallet were acquired 
by the taxpayer. Accordingly, TP must treat the 10 units sold as the 
10 units with a purchase date of January 1, Year 1, and a basis of 
$2 per unit, transferred into the wallet.
    (iii) Example 3: Identification of digital assets held in the 
custody of a broker--(A) Facts. On August 1, Year 1, TP opens a 
custodial account at CRX, a broker within the meaning of Sec.  
1.6045-1(a)(1), and purchases through CRX 10 units of digital asset 
DE for $9 per unit. On January 1, Year 2, TP opens a custodial 
account at BEX, an unrelated broker, and purchases through BEX 20 
units of digital asset DE for $5 per unit. On August 1, Year 3, TP 
transfers the digital assets TP holds with CRX into TP's custodial 
account with BEX. BEX has a policy that purchase or transfer date 
and time, if necessary, is a sufficiently specific identifier for 
customers to determine the units sold, disposed of, or transferred. 
On September 1, Year 3, TP directs BEX to sell 10 units of digital 
asset DE for $10 per unit and specifies that BEX sell the units that 
were purchased on January 1, Year 2. BEX effects the sale.
    (B) Analysis. No later than the date and time of the sale, TP 
specified to BEX the particular units of digital assets to be sold. 
Accordingly, under paragraph (j)(3)(ii) of this section, TP provided 
an adequate identification of the 10 units of digital asset DE sold. 
Accordingly, the 10 units of digital asset DE that TP sold are the 
10 units that TP purchased on January 1, Year 2.
    (iv) Example 4: Identification of digital assets held in the 
custody of a broker--(A) Facts. The facts are the same as in 
paragraph (j)(5)(iii)(A) of this section (the facts in Example 3) 
except that TP directs BEX to sell 10 units of digital asset DE but 
does not make any identification of which units to sell. 
Additionally, TP does not provide purchase date information to BEX 
with respect to the units transferred into TP's account with BEX.
    (B) Analysis. Because TP did not specify to BEX no later than 
the date and time of the sale the particular units of digital assets 
to be sold, TP did not make an adequate identification within the 
meaning of paragraph (j)(3)(ii) of this section. Thus, the ordering 
rule provided in paragraph (j)(3)(i) of this section applies to 
determine the units of digital asset DE sold. Pursuant to this rule, 
the units sold must be determined by treating the units held in the 
custody of the broker as disposed of in order of time from the 
earliest date on which units of the same digital asset held in the 
custody of a broker were acquired by the taxpayer. The 10 units of 
digital asset DE sold must be attributed to the 10 units of digital 
asset DE acquired on August 1, Year 1, which are the earliest units 
of digital asset DE acquired by TP that are held in TP's account 
with BEX. In addition, because TP did not provide to BEX customer-
provided acquisition information as defined in Sec.  1.6045-
1(d)(2)(ii)(B)(4) with respect to the units transferred into TP's 
account with BEX (or adopt a standing order to follow the ordering 
rule applicable to BEX under

[[Page 56548]]

Sec.  1.6045-1(d)(2)(ii)(B)(2)), the units determined as sold by BEX 
under Sec.  1.6045-1(d)(2)(ii)(B)(1) and that BEX will report as 
sold under Sec.  1.6045-1 are not the same units that TP must treat 
as sold under this section. See Sec.  1.6045-1(d)(2)(vii)(C) 
(Example 3).
    (v) Example 5: Identification of the digital asset used to pay 
certain digital asset transaction costs--(A) Facts. On January 1, 
Year 1, TP purchases 10 units of digital asset AB and 30 units of 
digital asset CD in a custodial account with DRX, a broker within 
the meaning of Sec.  1.6045-1(a)(1). DRX has a policy that purchase 
or transfer date and time, if necessary, is a sufficiently specific 
identifier by which its customers may identify the units sold, 
disposed of, or transferred. On June 30, Year 2, TP directs DRX to 
purchase 10 additional units of digital asset AB with 10 units of 
digital asset CD. DRX withholds one unit of the digital asset AB 
received for transaction fees. TP does not make any identification 
of the 1 unit of digital asset AB withheld by DRX. TP engages in no 
other transactions.
    (B) Analysis. DRX's withholding of 1 unit of digital asset AB 
from the 10 units acquired by TP is a disposition by TP of the 1 
unit as of June 30, Year 2. See Sec. Sec.  1.1001-7 and 1.1012-1(h) 
for determining the amount realized and basis of the disposed unit, 
respectively. Despite TP not making an adequate identification, 
within the meaning of paragraph (j)(3)(ii) of this section to DRX of 
the 1 unit withheld, under the special rule of paragraph (j)(3)(iii) 
of this section, the withheld unit of AB must be attributed to the 
units of AB acquired on June 30, Year 2 and held in TP's account 
with DRX.
    (vi) Example 6: Identification of the digital asset used to pay 
certain digital asset transaction costs--(A) Facts. The facts are 
the same as in paragraph (j)(5)(v)(A) of this section (the facts in 
Example 5) except that TP has a standing order with BEX to treat the 
earliest unit purchased in TP's account as the unit sold, disposed 
of, or transferred.
    (B) Analysis. The transaction is an exchange of digital assets 
for different digital assets and for which the broker withholds 
units of the same digital asset received in order to pay digital 
asset transaction costs. Accordingly, although TP's standing order 
to treat the earliest unit purchased in TP's account (that is, the 
units purchased by TP on January 1, Year 1) as the units sold is an 
adequate identification under paragraph (j)(3)(ii) of this section, 
TP is deemed to have made an adequate identification for such 
withheld units pursuant to paragraph (j)(3)(iii) of this section 
regardless of TP's adequate identification designating other units 
as the units sold. Thus, the results are the same as provided in 
paragraph (j)(5)(v)(B) of this section (the analysis in Example 5).

    (6) Applicability date. This paragraph (j) is applicable to all 
acquisitions and dispositions of digital assets on or after January 1, 
2025.

0
Par. 5. Section 1.6045-0 is added to read as follows:


Sec.  1.6045-0  Table of contents.

    In order to facilitate the use of Sec.  1.6045-1, this section 
lists the paragraphs contained in Sec.  1.6045-1.

Sec.  1.6045-1 Returns of information of brokers and barter exchanges.

    (a) Definitions.
    (1) Broker.
    (2) Customer.
    (i) In general.
    (ii) Special rules for payment transactions involving digital 
assets.
    (3) Security.
    (4) Barter exchange.
    (5) Commodity.
    (6) Regulated futures contract.
    (7) Forward contract.
    (8) Closing transaction.
    (9) Sale.
    (i) In general.
    (ii) Sales with respect to digital assets.
    (A) In general.
    (B) Dispositions of digital assets for certain property.
    (C) Dispositions of digital assets for certain services.
    (D) Special rule for sales effected by processors of digital 
asset payments.
    (10) Effect.
    (i) In general.
    (ii) Actions relating to certain options and forward contracts.
    (11) Foreign currency.
    (12) Cash.
    (13) Person.
    (14) Specified security.
    (15) Covered security.
    (i) In general.
    (ii) Acquired in an account.
    (iii) Corporate actions and other events.
    (iv) Exceptions.
    (16) Noncovered security.
    (17) Debt instrument, bond, debt obligation, and obligation.
    (18) Securities futures contract.
    (19) Digital asset.
    (i) In general.
    (ii) No inference.
    (20) Digital asset address.
    (21) Digital asset middleman.
    (i) In general.
    (ii) [Reserved]
    (iii) Facilitative service.
    (A) [Reserved]
    (B) Special rule involving sales of digital assets under 
paragraphs (a)(9)(ii)(B) through (D) of this section.
    (22) Processor of digital asset payments.
    (23) Stored-value card.
    (24) Transaction identification.
    (25) Wallet, hosted wallet, unhosted wallet, and held in a 
wallet or account.
    (i) Wallet.
    (ii) Hosted wallet.
    (iii) Unhosted wallet.
    (iv) Held in a wallet or account.
    (b) Examples.
    (c) Reporting by brokers.
    (1) Requirement of reporting.
    (2) Sales required to be reported.
    (3) Exceptions.
    (i) Sales effected for exempt recipients.
    (A) In general.
    (B) Exempt recipient defined.
    (C) Exemption certificate.
    (1) In general.
    (2) Limitation for corporate customers.
    (3) Limitation for U.S. digital asset brokers.
    (ii) Excepted sales.
    (iii) Multiple brokers.
    (A) In general.
    (B) Special rule for sales of digital assets.
    (iv) Cash on delivery transactions.
    (v) Fiduciaries and partnerships.
    (vi) Money market funds.
    (A) In general.
    (B) Effective/applicability date.
    (vii) Obligor payments on certain obligations.
    (viii) Foreign currency.
    (ix) Fractional share.
    (x) Certain retirements.
    (xi) Short sales.
    (A) In general.
    (B) Short sale closed by delivery of a noncovered security.
    (C) Short sale obligation transferred to another account.
    (xii) Cross reference.
    (xiii) Short-term obligations issued on or after January 1, 
2014.
    (xiv) Certain redemptions.
    (4) Examples.
    (5) Form of reporting for regulated futures contracts.
    (i) In general.
    (ii) Determination of profit or loss from foreign currency 
contracts.
    (iii) Examples.
    (6) Reporting periods and filing groups.
    (i) Reporting period.
    (A) In general.
    (B) Election.
    (ii) Filing group.
    (A) In general.
    (B) Election.
    (iii) Example.
    (7) Exception for certain sales of agricultural commodities and 
commodity certificates.
    (i) Agricultural commodities.
    (ii) Commodity Credit Corporation certificates.
    (iii) Sales involving designated warehouses.
    (iv) Definitions.
    (A) Agricultural commodity.
    (B) Spot sale.
    (C) Forward sale.
    (D) Designated warehouse.
    (8) Special coordination rules for reporting digital assets that 
are dual classification assets.
    (i) General rule for reporting dual classification assets as 
digital assets.
    (ii) Reporting of dual classification assets that constitute 
contracts covered by section 1256(b) of the Code.
    (iii) Reporting of dual classification assets cleared or settled 
on a limited-access regulated network.
    (A) General rule.
    (B) Limited-access regulated network.
    (iv) Reporting of dual classification assets that are interests 
in money market funds.
    (v) Example: Digital asset securities.
    (d) Information required.
    (1) In general.
    (2) Transactional reporting.
    (i) Required information.

[[Page 56549]]

    (A) General rule for sales described in paragraph (a)(9)(i) of 
this section.
    (B) Required information for digital asset transactions.
    (C) Exception for certain sales effected by processors of 
digital asset payments.
    (D) Acquisition information for sales of certain digital assets.
    (ii) Specific identification of specified securities.
    (A) In general.
    (B) Identification of digital assets sold, disposed of, or 
transferred.
    (1) No identification of units by customer.
    (2) Adequate Identification of units by customer.
    (3) Special rule for the identification of certain units 
withheld from a transaction.
    (4) Customer-provided acquisition information for digital 
assets.
    (iii) Penalty relief for reporting information not subject to 
reporting.
    (A) Noncovered securities.
    (B) Gross proceeds from digital assets sold before applicability 
date.
    (iv) Information from other parties and other accounts.
    (A) Transfer and issuer statements.
    (v) Failure to receive a complete transfer statement for 
securities.
    (vi) Reporting by other parties after a sale of securities.
    (A) Transfer statements.
    (B) Issuer statements.
    (C) Exception.
    (vii) Examples.
    (3) Sales between interest payment dates.
    (4) Sale date.
    (i) In general.
    (ii) Special rules for digital asset sales.
    (5) Gross proceeds.
    (i) In general.
    (ii) Sales of digital assets.
    (A) Determining gross proceeds.
    (1) Determining fair market value.
    (2) Consideration value not readily ascertainable.
    (3) Reasonable valuation method for digital assets.
    (B) Digital asset data aggregator.
    (iii) Digital asset transactions effected by processors of 
digital asset payments.
    (iv) Definition and allocation of digital asset transaction 
costs.
    (A) Definition.
    (B) General allocation rule.
    (C) Special rule for allocation of certain cascading digital 
asset transaction costs.
    (v) Examples.
    (6) Adjusted basis.
    (i) In general.
    (ii) Initial basis.
    (A) Cost basis for specified securities acquired for cash.
    (B) Basis of transferred securities.
    (1) In general.
    (2) Securities acquired by gift.
    (C) Digital assets acquired in exchange for property.
    (1) In general.
    (2) Allocation of digital asset transaction costs.
    (iii) Adjustments for wash sales.
    (A) Securities in the same account or wallet.
    (1) In general.
    (2) Special rules for covered securities that are also digital 
assets.
    (B) Covered securities in different accounts or wallets.
    (C) Effect of election under section 475(f)(1).
    (D) Reporting at or near the time of sale.
    (iv) Certain adjustments not taken into account.
    (v) Average basis method adjustments.
    (vi) Regulated investment company and real estate investment 
trust adjustments.
    (vii) Treatment of de minimis errors.
    (viii) Examples.
    (ix) Applicability date.
    (x) Examples.
    (7) Long-term or short-term gain or loss.
    (i) In general.
    (ii) Adjustments for wash sales.
    (A) Securities in the same account or wallet.
    (1) In general.
    (2) Special rules for covered securities that are also digital 
assets.
    (B) Covered securities in different accounts or wallets.
    (C) Effect of election under section 475(f)(1).
    (D) Reporting at or near the time of sale.
    (iii) Constructive sale and mark-to-market adjustments.
    (iv) Regulated investment company and real estate investment 
trust adjustments.
    (v) No adjustments for hedging transactions or offsetting 
positions.
    (8) Conversion into United States dollars of amounts paid or 
received in foreign currency.
    (i) Conversion rules.
    (ii) Effect of identification under Sec.  1.988-5(a), (b), or 
(c) when the taxpayer effects a sale and a hedge through the same 
broker.
    (iii) Example.
    (9) Coordination with the reporting rules for widely held fixed 
investment trusts under Sec.  1.671-5.
    (10) Optional reporting methods for qualifying stablecoins and 
specified nonfungible tokens.
    (i) Optional reporting method for qualifying stablecoins.
    (A) In general.
    (B) Aggregate reporting method for designated sales of 
qualifying stablecoins.
    (C) Designated sale of a qualifying stablecoin.
    (D) Examples.
    (ii) Qualifying stablecoin.
    (A) Designed to track certain other currencies.
    (B) Stabilization mechanism.
    (C) Accepted as payment.
    (D) Examples.
    (iii) Optional reporting method for specified nonfungible 
tokens.
    (A) In general.
    (B) Reporting method for specified nonfungible tokens.
    (C) Examples.
    (iv) Specified nonfungible token.
    (A) Indivisible.
    (B) Unique.
    (C) Excluded property.
    (D) Examples.
    (v) Joint accounts.
    (11) Collection and retention of additional information with 
respect to the sale of a digital asset.
    (e) Reporting of barter exchanges.
    (1) Requirement of reporting.
    (2) Exchanges required to be reported.
    (i) In general.
    (ii) Exemption.
    (iii) Coordination rules for exchanges of digital assets made 
through barter exchanges.
    (f) Information required.
    (1) In general.
    (2) Transactional reporting.
    (i) In general.
    (ii) Exception for corporate member or client.
    (iii) Definition.
    (3) Exchange date.
    (4) Amount received.
    (5) Meaning of terms.
    (6) Reporting period.
    (g) Exempt foreign persons.
    (1) Brokers.
    (2) Barter exchanges.
    (3) Applicable rules.
    (i) Joint owners.
    (ii) Special rules for determining who the customer is.
    (iii) Place of effecting sale.
    (A) Sale outside the United States.
    (B) Sale inside the United States.
    (iv) Special rules where the customer is a foreign intermediary 
or certain U.S. branches.
    (4) Rules for sales of digital assets.
    (i) Definitions.
    (A) U.S. digital asset broker.
    (B) [Reserved]
    (ii) Rules for U.S. digital asset brokers.
    (A) Place of effecting sale.
    (B) Determination of foreign status.
    (iii) Rules for CFC digital asset brokers not conducting 
activities as money services businesses.
    (iv) Rules for non-U.S. digital asset brokers not conducting 
activities as money services businesses.
    (A) [Reserved]
    (B) Sale treated as effected at an office inside the United 
States.
    (1) [Reserved]
    (2) U.S. indicia.
    (C) Consequences of treatment as sale effected at an office 
inside the United States.
    (v) [Reserved]
    (vi) Rules applicable to brokers that obtain or are required to 
obtain documentation for a customer and presumption rules.
    (A) In general.
    (1) Documentation of foreign status.
    (2) Presumption rules.
    (i) In general.
    (ii) Presumption rule specific to U.S. digital asset brokers.
    (iii) [Reserved]
    (3) Grace period to collect valid documentation in the case of 
indicia of a foreign customer.
    (4) Blocked income.
    (B) Reliance on beneficial ownership withholding certificates to 
determine foreign status.
    (1) Collection of information other than U.S. place of birth.
    (i) In general.
    (ii) [Reserved]
    (2) Collection of information showing U.S. place of birth.
    (C) [Reserved]
    (D) Joint owners.

[[Page 56550]]

    (E) Special rules for customer that is a foreign intermediary, a 
flow-through entity, or certain U.S. branches.
    (1) Foreign intermediaries in general.
    (i) Presumption rule specific to U.S. digital asset brokers.
    (ii) [Reserved]
    (2) Foreign flow-through entities.
    (3) U.S. branches that are not beneficial owners.
    (F) Transition rule for obtaining documentation to treat a 
customer as an exempt foreign person.
    (vii) Barter exchanges.
    (5) Examples.
    (h) Identity of customer.
    (1) In general.
    (2) Examples.
    (i) [Reserved]
    (j) Time and place for filing; cross-references to penalty and 
magnetic media filing requirements.
    (k) Requirement and time for furnishing statement; cross-
reference to penalty.
    (1) General requirements.
    (2) Time for furnishing statements.
    (3) Consolidated reporting.
    (4) Cross-reference to penalty.
    (l) Use of magnetic media or electronic form.
    (m) Additional rules for option transactions.
    (1) In general.
    (2) Scope.
    (i) In general.
    (ii) Delayed effective date for certain options.
    (iii) Compensatory option.
    (3) Option subject to section 1256.
    (4) Option not subject to section 1256.
    (i) Physical settlement.
    (ii) Cash settlement.
    (iii) Rules for warrants and stock rights acquired in a section 
305 distribution.
    (iv) Examples.
    (5) Multiple options documented in a single contract.
    (6) Determination of index status.
    (n) Reporting for debt instrument transactions.
    (1) In general.
    (2) Debt instruments subject to January 1, 2014, reporting.
    (i) In general.
    (ii) Exceptions.
    (iii) Remote or incidental.
    (iv) Penalty rate.
    (3) Debt instruments subject to January 1, 2016, reporting.
    (4) Holder elections.
    (i) Election to amortize bond premium.
    (ii) Election to currently include accrued market discount.
    (iii) Election to accrue market discount based on a constant 
yield.
    (iv) Election to treat all interest as OID.
    (v) Election to translate interest income and expense at the 
spot rate.
    (5) Broker assumptions and customer notice to brokers.
    (i) Broker assumptions if the customer does not notify the 
broker.
    (ii) Effect of customer notification of an election or 
revocation.
    (A) Election to amortize bond premium.
    (B) Other debt elections.
    (iii) Electronic notification.
    (6) Reporting of accrued market discount.
    (i) Sale.
    (ii) Current inclusion election.
    (7) Adjusted basis.
    (i) Original issue discount.
    (ii) Amortizable bond premium.
    (A) Taxable bond.
    (B) Tax-exempt bonds.
    (iii) Acquisition premium.
    (iv) Market discount.
    (v) Principal and certain other payments.
    (8) Accrual period.
    (9) Premium on convertible bond.
    (10) Effect of broker assumptions on customer.
    (11) Additional rules for certain holder elections.
    (i) In general.
    (A) Election to treat all interest as OID.
    (B) Election to accrue market discount based on a constant 
yield.
    (ii) [Reserved]
    (12) Certain debt instruments treated as noncovered securities.
    (i) In general.
    (ii) Effective/applicability date.
    (o) [Reserved]
    (p) Electronic filing.
    (q) Applicability dates.
    (r) Cross-references.


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Par. 6. Section 1.6045-1 is amended by:
0
1. Revising and republishing paragraphs (a), (b), (c)(3) and (4), and 
(c)(5)(i);
0
2. Adding paragraph (c)(8);
0
3. Revising and republishing paragraph (d)(2) and revising paragraphs 
(d)(4) and (5);
0
4. Revising and republishing paragraphs (d)(6)(i) and (ii), 
(d)(6)(iii)(A) and (B), and (d)(6)(v);
0
5. Adding paragraph (d)(6)(x);
0
6. Revising and republishing paragraphs (d)(7)(i), (d)(7)(ii)(A) and 
(B), and (d)(9);
0
7. Adding paragraphs (d)(10) and (11) and (e)(2)(iii);
0
8. Revising and republishing paragraph (g);
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9. Revising paragraphs (j) and (m)(1);
0
10. Adding paragraph (m)(2)(ii)(C);
0
11. Revising and republishing paragraphs (n)(6)(i) and (q); and
0
12. Adding paragraph (r).
    The revisions, republications, and additions read as follows:


Sec.  1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.6045-2 and 1.6045-4.
    (1) Broker. The term broker means any person (other than a person 
who is required to report a transaction under section 6043 of the 
Code), 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. A broker includes an obligor that regularly issues and 
retires its own debt obligations, a corporation that regularly redeems 
its own stock, or a person that regularly offers to redeem digital 
assets that were created or issued by that person. A broker also 
includes a real estate reporting person under Sec.  1.6045-4(e) who 
(without regard to any exceptions provided by Sec.  1.6045-4(c) and 
(d)) would be required to make an information return with respect to a 
real estate transaction under Sec.  1.6045-4(a). However, with respect 
to a sale (including a redemption or retirement) effected at an office 
outside the United States under paragraph (g)(3)(iii) of this section 
(relating to sales other than sales of digital assets), a broker 
includes only a person described as a U.S. payor or U.S. middleman in 
Sec.  1.6049-5(c)(5). In the case of a sale of a digital asset, a 
broker includes only a U.S. digital asset broker as defined in 
paragraph (g)(4)(i)(A)(1) of this section. In addition, a broker does 
not include an international organization described in Sec.  1.6049-
4(c)(1)(ii)(G) that redeems or retires an obligation of which it is the 
issuer.
    (2) Customer--(i) In general. The term customer means, with respect 
to a sale effected by a broker, the person (other than such broker) 
that makes the sale, if the broker acts as--
    (A) An agent for such person in the sale;
    (B) A principal in the sale;
    (C) The participant in the sale responsible for paying to such 
person or crediting to such person's account the gross proceeds on the 
sale; or
    (D) A digital asset middleman, as defined in paragraph (a)(21) of 
this section, that effects the sale of a digital asset for such person.
    (ii) Special rules for payment transactions involving digital 
assets. In addition to the persons defined as customers in paragraph 
(a)(2)(i) of this section, the term customer includes:
    (A) The person who transfers digital assets in a sale described in 
paragraph (a)(9)(ii)(D) of this section to a processor of digital asset 
payments that has an agreement or other arrangement with such person 
for the provision of digital asset payment services that provides that 
the processor of digital asset payments may verify such person's 
identity or otherwise comply with anti-money laundering (AML) program 
requirements under 31 CFR part 1010, or any other AML program 
requirements, as are applicable to that processor of digital asset 
payments. For purposes of the previous sentence, an agreement or other 
arrangement includes any arrangement under which,

[[Page 56551]]

as part of customary onboarding procedures, such person is treated as 
having agreed to general terms and conditions.
    (B) The person who transfers digital assets or directs the transfer 
of digital assets--
    (1) In exchange for property of a type the later sale of which, if 
effected by such broker, would constitute a sale of that property under 
paragraph (a)(9) of this section; or
    (2) In exchange for the acquisition of services performed by such 
broker; and
    (C) In the case of a real estate reporting person under Sec.  
1.6045-4(e) with respect to a real estate transaction as defined in 
Sec.  1.6045-4(b)(1), the person who transfers digital assets or 
directs the transfer of digital assets to the transferor of real estate 
(or the seller's nominee or agent) to acquire such real estate.
    (3) Security. The term security means:
    (i) A share of stock in a corporation (foreign or domestic);
    (ii) An interest in a trust;
    (iii) An interest in a partnership;
    (iv) A debt obligation;
    (v) An interest in or right to purchase any of the foregoing in 
connection with the issuance thereof from the issuer or an agent of the 
issuer or from an underwriter that purchases any of the foregoing from 
the issuer;
    (vi) An interest in a security described in paragraph (a)(3)(i) or 
(iv) of this section (but not including executory contracts that 
require delivery of such type of security);
    (vii) An option described in paragraph (m)(2) of this section; or
    (viii) A securities futures contract.
    (4) Barter exchange. The term barter exchange means any person with 
members or clients that contract either with each other or with such 
person to trade or barter property or services either directly or 
through such person. The term does not include arrangements that 
provide solely for the informal exchange of similar services on a 
noncommercial basis.
    (5) Commodity. The term commodity means:
    (i) Any type of personal property or an interest therein (other 
than securities as defined in paragraph (a)(3) of this section), the 
trading of regulated futures contracts in which has been approved by or 
has been certified to the Commodity Futures Trading Commission (see 17 
CFR 40.3 or 40.2);
    (ii) Lead, palm oil, rapeseed, tea, tin, or an interest in any of 
the foregoing; or
    (iii) Any other personal property or an interest therein that is of 
a type the Secretary determines is to be treated as a commodity under 
this section, from and after the date specified in a notice of such 
determination published in the Federal Register.
    (6) Regulated futures contract. The term regulated futures contract 
means a regulated futures contract within the meaning of section 
1256(b) of the Code.
    (7) Forward contract. The term forward contract means:
    (i) An executory contract that requires delivery of a commodity in 
exchange for cash and which contract is not a regulated futures 
contract;
    (ii) An executory contract that requires delivery of personal 
property or an interest therein in exchange for cash, or a cash 
settlement contract, if such executory contract or cash settlement 
contract is of a type the Secretary determines is to be treated as a 
forward contract under this section, from and after the date specified 
in a notice of such determination published in the Federal Register; or
    (iii) An executory contract that--
    (A) Requires delivery of a digital asset in exchange for cash, 
stored-value cards, a different digital asset, or any other property or 
services described in paragraph (a)(9)(ii)(B) or (C) of this section; 
and
    (B) Is not a regulated futures contract.
    (8) Closing transaction. The term closing transaction means a 
lapse, expiration, settlement, abandonment, or other termination of a 
position. For purposes of the preceding sentence, a position includes a 
right or an obligation under a forward contract, a regulated futures 
contract, a securities futures contract, or an option.
    (9) Sale--(i) In general. The term sale means any disposition of 
securities, commodities, options, regulated futures contracts, 
securities futures contracts, or forward contracts, and includes 
redemptions of stock, retirements of debt instruments (including a 
partial retirement attributable to a principal payment received on or 
after January 1, 2014), and enterings into short sales, but only to the 
extent any of these actions are conducted for cash. In the case of an 
option, a regulated futures contract, a securities futures contract, or 
a forward contract, a sale includes any closing transaction. When a 
closing transaction for a contract described in section 1256(b)(1)(A) 
involves making or taking delivery, there are two sales, one resulting 
in profit or loss on the contract, and a separate sale on the delivery. 
When a closing transaction for a contract described in section 
988(c)(5) of the Code involves making delivery, there are two sales, 
one resulting in profit or loss on the contract, and a separate sale on 
the delivery. For purposes of the preceding sentence, a broker may 
assume that any customer's functional currency is the U.S. dollar. When 
a closing transaction in a forward contract involves making or taking 
delivery, the broker may treat the delivery as a sale without 
separating the profit or loss on the contract from the profit or loss 
on the delivery, except that taking delivery for U.S. dollars is not a 
sale. The term sale does not include entering into a contract that 
requires delivery of personal property or an interest therein, the 
initial grant or purchase of an option, or the exercise of a purchased 
call option for physical delivery (except for a contract described in 
section 988(c)(5)). For purposes of this section only, a constructive 
sale under section 1259 of the Code and a mark to fair market value 
under section 475 or 1296 of the Code are not sales.
    (ii) Sales with respect to digital assets--(A) In general. In 
addition to the specific rules provided in paragraphs (a)(9)(ii)(B) 
through (D) of this section, the term sale also includes:
    (1) Any disposition of a digital asset in exchange for cash or 
stored-value cards;
    (2) Any disposition of a digital asset in exchange for a different 
digital asset; and
    (3) The delivery of a digital asset pursuant to the settlement of a 
forward contract, option, regulated futures contract, any similar 
instrument, or any other executory contract which would be treated as a 
sale of a digital asset under this paragraph (a)(9)(ii) if the contract 
had not been executory. In the case of a transaction involving a 
contract described in the previous sentence, see paragraph (a)(9)(i) of 
this section for rules applicable to determining whether a sale has 
occurred and how to report the making or taking delivery of the 
underlying asset.
    (B) Dispositions of digital assets for certain property. Solely in 
the case of a broker that is a real estate reporting person defined in 
Sec.  1.6045-4(e) with respect to real property or is in the business 
of effecting sales of property for others, which sales when effected 
would constitute sales under paragraph (a)(9)(i) of this section, the 
term sale also includes any disposition of a digital asset in exchange 
for such property.
    (C) Dispositions of digital assets for certain services. The term 
sale also includes any disposition of a digital asset in consideration 
for any services provided by a broker that is a real estate reporting 
person defined in Sec.  1.6045-4(e) with respect to real property or a 
broker that is in the business of effecting sales of property described 
in paragraph (a)(9)(i), paragraphs (a)(9)(ii)(A) and (B), or paragraph 
(a)(9)(ii)(D) of this section.

[[Page 56552]]

    (D) Special rule for certain sales effected by processors of 
digital asset payments. In the case of a processor of digital asset 
payments as defined in paragraph (a)(22) of this section, the term sale 
also includes the payment by one party of a digital asset to a 
processor of digital asset payments in return for the payment of that 
digital asset, cash, or a different digital asset to a second party. If 
any sale of digital assets described in this paragraph (a)(9)(ii)(D) 
would also be subject to reporting under one of the definitions of sale 
described in paragraphs (a)(9)(ii)(A) through (C) of this section as a 
sale effected by a broker other than as a processor of digital asset 
payments, the broker must treat the sale solely as a sale under such 
other paragraph and not as a sale under this paragraph (a)(9)(ii)(D).
    (10) Effect--(i) In general. The term effect means, with respect to 
a sale, to act as--
    (A) An agent for a party in the sale wherein the nature of the 
agency is such that the agent ordinarily would know the gross proceeds 
from the sale;
    (B) In the case of a broker described in the second sentence of 
paragraph (a)(1) of this section, a person that is an obligor retiring 
its own debt obligations, a corporation redeeming its own stock, or an 
issuer of digital assets redeeming those digital assets;
    (C) A principal that is a dealer in such sale; or
    (D) A digital asset middleman as defined in paragraph (a)(21) of 
this section for a party in a sale of digital assets.
    (ii) Actions relating to certain options and forward contracts. For 
purposes of paragraph (a)(10)(i) of this section, acting as an agent, 
principal, or digital asset middleman with respect to grants or 
purchases of options, exercises of call options, or enterings into 
contracts that require delivery of personal property or an interest 
therein is not of itself effecting a sale. A broker that has on its 
books a forward contract under which delivery is made effects such 
delivery.
    (11) Foreign currency. The term foreign currency means currency of 
a foreign country.
    (12) Cash. The term cash means United States dollars or any 
convertible foreign currency that is issued by a government or a 
central bank, whether in physical or digital form.
    (13) Person. The term person includes any governmental unit and any 
agency or instrumentality thereof.
    (14) Specified security. The term specified security means:
    (i) Any share of stock (or any interest treated as stock, 
including, for example, an American Depositary Receipt) in an entity 
organized as, or treated for Federal tax purposes as, a corporation, 
either foreign or domestic (provided that, solely for purposes of this 
paragraph (a)(14)(i), a security classified as stock by the issuer is 
treated as stock, and if the issuer has not classified the security, 
the security is not treated as stock unless the broker knows that the 
security is reasonably classified as stock under general Federal tax 
principles);
    (ii) Any debt instrument described in paragraph (a)(17) of this 
section, other than a debt instrument subject to section 1272(a)(6) of 
the Code (certain interests in or mortgages held by a real estate 
mortgage investment conduit (REMIC), certain other debt instruments 
with payments subject to acceleration, and pools of debt instruments 
the yield on which may be affected by prepayments) or a short-term 
obligation described in section 1272(a)(2)(C);
    (iii) Any option described in paragraph (m)(2) of this section;
    (iv) Any securities futures contract;
    (v) Any digital asset as defined in paragraph (a)(19) of this 
section; or
    (vi) Any forward contract described in paragraph (a)(7)(iii) of 
this section requiring the delivery of a digital asset.
    (15) Covered security. The term covered security means a specified 
security described in this paragraph (a)(15).
    (i) In general. Except as provided in paragraph (a)(15)(iv) of this 
section, the following specified securities are covered securities:
    (A) A specified security described in paragraph (a)(14)(i) of this 
section acquired for cash in an account on or after January 1, 2011, 
except stock for which the average basis method is available under 
Sec.  1.1012-1(e).
    (B) Stock for which the average basis method is available under 
Sec.  1.1012-1(e) acquired for cash in an account on or after January 
1, 2012.
    (C) A specified security described in paragraphs (a)(14)(ii) and 
(n)(2)(i) of this section (not including the debt instruments described 
in paragraph (n)(2)(ii) of this section) acquired for cash in an 
account on or after January 1, 2014.
    (D) A specified security described in paragraphs (a)(14)(ii) and 
(n)(3) of this section acquired for cash in an account on or after 
January 1, 2016.
    (E) Except for an option described in paragraph (m)(2)(ii)(C) of 
this section (relating to an option on a digital asset), an option 
described in paragraph (a)(14)(iii) of this section granted or acquired 
for cash in an account on or after January 1, 2014.
    (F) A securities futures contract described in paragraph 
(a)(14)(iv) of this section entered into in an account on or after 
January 1, 2014.
    (G) A specified security transferred to an account if the broker or 
other custodian of the account receives a transfer statement (as 
described in Sec.  1.6045A-1) reporting the security as a covered 
security.
    (H) An option on a digital asset described in paragraphs 
(a)(14)(iii) and (m)(2)(ii)(C) of this section (other than an option 
described in paragraph (a)(14)(v) of this section) granted or acquired 
in an account on or after January 1, 2026.
    (I) [Reserved]
    (J) A specified security described in paragraph (a)(14)(v) of this 
section that is acquired in a customer's account by a broker providing 
custodial services for such specified security on or after January 1, 
2026, in exchange for cash, stored-value cards, different digital 
assets, or any other property or services described in paragraph 
(a)(9)(ii)(B) or (C) of this section, respectively.
    (K) A specified security described in paragraph (a)(14)(vi) of this 
section, not described in paragraph (a)(14)(v) of this section, that is 
entered into or acquired in an account on or after January 1, 2026.
    (ii) Acquired in an account. For purposes of this paragraph 
(a)(15), a security is considered acquired in a customer's account at a 
broker or custodian if the security is acquired by the customer's 
broker or custodian or acquired by another broker and delivered to the 
customer's broker or custodian. Acquiring a security in an account 
includes granting an option and entering into a forward contract or 
short sale.
    (iii) Corporate actions and other events. For purposes of this 
paragraph (a)(15), a security acquired due to a stock dividend, stock 
split, reorganization, redemption, stock conversion, recapitalization, 
corporate division, or other similar action is considered acquired for 
cash in an account.
    (iv) Exceptions. Notwithstanding paragraph (a)(15)(i) of this 
section, the following specified securities are not covered securities:
    (A) Stock acquired in 2011 that is transferred to a dividend 
reinvestment plan (as described in Sec.  1.1012-1(e)(6)) in 2011. 
However, a covered security acquired in 2011 that is transferred to a 
dividend reinvestment plan after 2011 remains a covered security.
    (B) A specified security, other than a specified security described 
in paragraph (a)(14)(v) or (vi) of this section, acquired through an 
event described in paragraph (a)(15)(iii) of this

[[Page 56553]]

section if the basis of the acquired security is determined from the 
basis of a noncovered security.
    (C) A specified security that is excepted at the time of its 
acquisition from reporting under paragraph (c)(3) or (g) of this 
section. However, a broker cannot treat a specified security as 
acquired by an exempt foreign person under paragraph (g)(1)(i) or 
paragraphs (g)(4)(ii) through (v) of this section at the time of 
acquisition if, at that time, the broker knows or should have known 
(including by reason of information that the broker is required to 
collect under section 1471 or 1472 of the Code) that the customer is 
not a foreign person.
    (D) A security for which reporting under this section is required 
by Sec.  1.6049-5(d)(3)(ii) (certain securities owned by a foreign 
intermediary or flow-through entity).
    (E) Digital assets in a sale required to be reported under 
paragraph (g)(4)(vi)(E) of this section by a broker making a payment of 
gross proceeds from the sale to a foreign intermediary, flow-through 
entity, or U.S. branch.
    (16) Noncovered security. The term noncovered security means any 
specified security that is not a covered security.
    (17) Debt instrument, bond, debt obligation, and obligation. For 
purposes of this section, the terms debt instrument, bond, debt 
obligation, and obligation mean a debt instrument as defined in Sec.  
1.1275-1(d) and any instrument or position that is treated as a debt 
instrument under a specific provision of the Code (for example, a 
regular interest in a REMIC as defined in section 860G(a)(1) of the 
Code and Sec.  1.860G-1). Solely for purposes of this section, a 
security classified as debt by the issuer is treated as debt. If the 
issuer has not classified the security, the security is not treated as 
debt unless the broker knows that the security is reasonably classified 
as debt under general Federal tax principles or that the instrument or 
position is treated as a debt instrument under a specific provision of 
the Code.
    (18) Securities futures contract. For purposes of this section, the 
term securities futures contract means a contract described in section 
1234B(c) of the Code whose underlying asset is described in paragraph 
(a)(14)(i) of this section and which is entered into on or after 
January 1, 2014.
    (19) Digital asset--(i) In general. For purposes of this section, 
the term digital asset means any digital representation of value that 
is recorded on a cryptographically secured distributed ledger (or any 
similar technology), without regard to whether each individual 
transaction involving that digital asset is actually recorded on that 
ledger, and that is not cash as defined in paragraph (a)(12) of this 
section.
    (ii) No inference. Nothing in this paragraph (a)(19) or elsewhere 
in this section may be construed to mean that a digital asset is or is 
not properly classified as a security, commodity, option, securities 
futures contract, regulated futures contract, or forward contract for 
any other purpose of the Code.
    (20) Digital asset address. For purposes of this section, the term 
digital asset address means the unique set of alphanumeric characters, 
in some cases referred to as a quick response or QR Code, that is 
generated by the wallet into which the digital asset will be 
transferred.
    (21) Digital asset middleman--(i) In general. The term digital 
asset middleman means any person who provides a facilitative service as 
described in paragraph (a)(21)(iii) of this section with respect to a 
sale of digital assets.
    (ii) [Reserved]
    (iii) Facilitative service. (A) [Reserved]
    (B) Special rule involving sales of digital assets under paragraphs 
(a)(9)(ii)(B) through (D) of this section. A facilitative service 
means:
    (1) The acceptance or processing of digital assets as payment for 
property of a type which when sold would constitute a sale under 
paragraph (a)(9)(i) of this section by a broker that is in the business 
of effecting sales of such property.
    (2) Any service performed by a real estate reporting person as 
defined in Sec.  1.6045-4(e) with respect to a real estate transaction 
in which digital assets are paid by the real estate buyer in full or 
partial consideration for the real estate, provided the real estate 
reporting person has actual knowledge or ordinarily would know that 
digital assets were used by the real estate buyer to make payment to 
the real estate seller. For purposes of this paragraph 
(a)(21)(iii)(B)(2), a real estate reporting person is considered to 
have actual knowledge that digital assets were used by the real estate 
buyer to make payment if the terms of the real estate contract provide 
for payment using digital assets.
    (3) The acceptance or processing of digital assets as payment for 
any service provided by a broker described in paragraph (a)(1) of this 
section determined without regard to any sales under paragraph 
(a)(9)(ii)(C) of this section that are effected by such broker.
    (4) Any payment service performed by a processor of digital asset 
payments described in paragraph (a)(22) of this section, provided the 
processor of digital asset payments has actual knowledge or ordinarily 
would know the nature of the transaction and the gross proceeds 
therefrom.
    (5) 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.
    (22) Processor of digital asset payments. For purposes of this 
section, the term processor of digital asset payments means a person 
who in the ordinary course of a trade or business stands ready to 
effect sales of digital assets as defined in paragraph (a)(9)(ii)(D) of 
this section by regularly facilitating payments from one party to a 
second party by receiving digital assets from the first party and 
paying those digital assets, cash, or different digital assets to the 
second party.
    (23) Stored-value card. For purposes of this section, the term 
stored-value card means a card, including any gift card, with a prepaid 
value in U.S. dollars, any convertible foreign currency, or any digital 
asset, without regard to whether the card is in physical or digital 
form.
    (24) Transaction identification. For purposes of this section, the 
term transaction identification, or transaction ID, means the unique 
set of alphanumeric identification characters that a digital asset 
distributed ledger associates with a transaction involving the transfer 
of a digital asset from one digital asset address to another. The term 
transaction ID includes terms such as a TxID or transaction hash.
    (25) Wallet, hosted wallet, unhosted wallet, and held in a wallet 
or account--(i) Wallet. A wallet is a means of storing, electronically 
or otherwise, a user's private keys to digital assets held by or for 
the user.
    (ii) Hosted wallet. A hosted wallet is a custodial service that 
electronically stores the private keys to digital assets held on behalf 
of others.
    (iii) Unhosted wallet. An unhosted wallet is a non-custodial means 
of storing, electronically or otherwise, a user's private keys to 
digital assets held by or for the user. Unhosted wallets, sometimes 
referred to as self-hosted or self-custodial wallets, can be provided 
through software that is connected to the internet (a hot wallet) or 
through hardware or physical media that is disconnected from the 
internet (a cold wallet).
    (iv) Held in a wallet or account. A digital asset is referred to in 
this section as held in a wallet or account if the wallet, whether 
hosted or unhosted, or

[[Page 56554]]

account stores the private keys necessary to transfer control of the 
digital asset. A digital asset associated with a digital asset address 
that is generated by a wallet, and a digital asset associated with a 
sub-ledger account of a wallet, are similarly referred to as held in a 
wallet. References to variations of held in a wallet or account, such 
as held at a broker, held with a broker, held by the user of a wallet, 
held on behalf of another, acquired in a wallet or account, or 
transferred into a wallet or account, each have a similar meaning.
    (b) Examples. The following examples illustrate the definitions in 
paragraph (a) of this section.

    (1) Example 1. The following persons generally are brokers 
within the meaning of paragraph (a)(1) of this section--
    (i) A mutual fund, an underwriter of the mutual fund, or an 
agent for the mutual fund, any of which stands ready to redeem or 
repurchase shares in such mutual fund.
    (ii) A professional custodian (such as a bank) that regularly 
arranges sales for custodial accounts pursuant to instructions from 
the owner of the property.
    (iii) A depositary trust or other person who regularly acts as 
an escrow agent in corporate acquisitions, if the nature of the 
activities of the agent is such that the agent ordinarily would know 
the gross proceeds from sales.
    (iv) A stock transfer agent for a corporation, which agent 
records transfers of stock in such corporation, if the nature of the 
activities of the agent is such that the agent ordinarily would know 
the gross proceeds from sales.
    (v) A dividend reinvestment agent for a corporation that stands 
ready to purchase or redeem shares.
    (vi) A person who in the ordinary course of a trade or business 
provides users with hosted wallet services to the extent such person 
stands ready to effect the sale of digital assets on behalf of its 
customers, including by acting as an agent for a party in the sale 
wherein the nature of the agency is as described in paragraph 
(a)(10)(i)(A) of this section.
    (vii) A processor of digital asset payments as described in 
paragraph (a)(22) of this section.
    (viii) A person who in the ordinary course of a trade or 
business either owns or operates one or more physical electronic 
terminals or kiosks that stand ready to effect the sale of digital 
assets for cash, stored-value cards, or different digital assets, 
regardless of whether the other person is the disposer or the 
acquirer of the digital assets in such an exchange.
    (ix) [Reserved]
    (x) A person who in the ordinary course of a trade or business 
stands ready at a physical location to effect sales of digital 
assets on behalf of others.
    (xi) [Reserved]
    (2) Example 2. The following persons are not brokers within the 
meaning of paragraph (a)(1) of this section in the absence of 
additional facts that indicate the person is a broker--
    (i) A stock transfer agent for a corporation, which agent daily 
records transfers of stock in such corporation, if the nature of the 
activities of the agent is such that the agent ordinarily would not 
know the gross proceeds from sales.
    (ii) A person (such as a stock exchange) that merely provides 
facilities in which others effect sales.
    (iii) An escrow agent or nominee if such agency is not in the 
ordinary course of a trade or business.
    (iv) An escrow agent, otherwise a broker, which agent effects no 
sales other than such transactions as are incidental to the purpose 
of the escrow (such as sales to collect on collateral).
    (v) A floor broker on a commodities exchange, which broker 
maintains no records with respect to the terms of sales.
    (vi) A corporation that issues and retires long-term debt on an 
irregular basis.
    (vii) A clearing organization.
    (viii) A merchant who is not otherwise required to make a return 
of information under section 6045 of the Code and who regularly 
sells goods or other property (other than digital assets) or 
services in return for digital assets.
    (ix) A person solely engaged in the business of validating 
distributed ledger transactions, through proof-of-work, proof-of-
stake, or any other similar consensus mechanism, without providing 
other functions or services.
    (x) A person solely engaged in the business of selling hardware 
or licensing software, the sole function of which is to permit a 
person to control private keys which are used for accessing digital 
assets on a distributed ledger, without providing other functions or 
services.
    (3) Example 3: Barter exchange. A, B, and C belong to a carpool 
in which they commute to and from work. Every third day, each member 
of the carpool provides transportation for the other two members. 
Because the carpool arrangement provides solely for the informal 
exchange of similar services on a noncommercial basis, the carpool 
is not a barter exchange within the meaning of paragraph (a)(4) of 
this section.
    (4) Example 4: Barter exchange. X is an organization whose 
members include retail merchants, wholesale merchants, and persons 
in the trade or business of performing services. X's members 
exchange property and services among themselves using credits on the 
books of X as a medium of exchange. Each exchange through X is 
reflected on the books of X by crediting the account of the member 
providing property or services and debiting the account of the 
member receiving such property or services. X also provides 
information to its members concerning property and services 
available for exchange through X. X charges its members a commission 
on each transaction in which credits on its books are used as a 
medium of exchange. X is a barter exchange within the meaning of 
paragraph (a)(4) of this section.
    (5) Example 5: Commodity, forward contract. A warehouse receipt 
is an interest in personal property for purposes of paragraph (a) of 
this section. Consequently, a warehouse receipt for a quantity of 
lead is a commodity under paragraph (a)(5)(ii) of this section. 
Similarly, an executory contract that requires delivery of a 
warehouse receipt for a quantity of lead is a forward contract under 
paragraph (a)(7)(ii) of this section.
    (6) Example 6: Customer. The only customers of a depositary 
trust acting as an escrow agent in corporate acquisitions, which 
trust is a broker, are shareholders to whom the trust makes payments 
or shareholders for whom the trust is acting as an agent.
    (7) Example 7: Customer. The only customers of a stock transfer 
agent, which agent is a broker, are shareholders to whom the agent 
makes payments or shareholders for whom the agent is acting as an 
agent.
    (8) Example 8: Customer. D, an individual not otherwise exempt 
from reporting, is the holder of an obligation issued by P, a 
corporation. R, a broker, acting as an agent for P, retires such 
obligation held by D. Such obligor payments from R represent obligor 
payments by P. D, the person to whom the gross proceeds are paid or 
credited by R, is the customer of R.
    (9) Example 9: Covered security. E, an individual not otherwise 
exempt from reporting, maintains an account with S, a broker. On 
June 1, 2012, E instructs S to purchase stock that is a specified 
security for cash. S places an order to purchase the stock with T, 
another broker. E does not maintain an account with T. T executes 
the purchase. Custody of the purchased stock is transferred to E's 
account at S. Under paragraph (a)(15)(ii) of this section, the stock 
is considered acquired for cash in E's account at S. Because the 
stock is acquired on or after January 1, 2012, under paragraph 
(a)(15)(i) of this section, it is a covered security.
    (10) Example 10: Covered security. F, an individual not 
otherwise exempt from reporting, is granted 100 shares of stock in 
F's employer by F's employer. Because F does not acquire the stock 
for cash or through a transfer to an account with a transfer 
statement (as described in Sec.  1.6045A-1), under paragraph (a)(15) 
of this section, the stock is not a covered security.
    (11) Example 11: Covered security. G, an individual not 
otherwise exempt from reporting, owns 400 shares of stock in Q, a 
corporation, in an account with U, a broker. Of the 400 shares, 100 
are covered securities and 300 are noncovered securities. Q takes a 
corporate action to split its stock in a 2-for-1 split. After the 
stock split, G owns 800 shares of stock. Because the adjusted basis 
of 600 of the 800 shares that G owns is determined from the basis of 
noncovered securities, under paragraphs (a)(15)(iii) and 
(a)(15)(iv)(B) of this section, these 600 shares are not covered 
securities and the remaining 200 shares are covered securities.
    (12) Example 12: Processor of digital asset payments, sale, and 
customer--(i) Facts. Company Z is an online merchant that accepts 
digital asset DE as a form of payment for the merchandise it sells. 
The merchandise Z sells does not include digital assets. Z does not 
provide any other service that could be considered as standing ready 
to effect sales of digital assets or any other property subject to 
reporting under section 6045. CPP is in the

[[Page 56555]]

business of facilitating payments made by users of digital assets to 
merchants with which CPP has an account. CPP also has contractual 
arrangements with users of digital assets for the provision of 
digital asset payment services that provide that CPP may verify such 
user's identity pursuant to AML program requirements. Z contracts 
with CPP to help Z's customers to make payments to Z using digital 
assets. Under Z's agreement with CPP, when purchasers of merchandise 
initiate payment on Z's website using DE, they are directed to CPP's 
website to complete the payment part of the transaction. CPP is a 
third party settlement organization, as defined in Sec.  1.6050W-
1(c)(2), with respect to the payments it makes to Z. Customer R 
seeks to purchase merchandise from Z that is priced at $6,000 (which 
is 6,000 units of DE). After R initiates a purchase, R is directed 
to CPP's website where R is directed to enter into an agreement with 
CPP, which as part of CPP's customary onboarding procedures 
developed pursuant to AML program requirements, requires R to submit 
information to CPP to verify R's identity. Thereafter, R is 
instructed to transfer 6,000 units of DE to a digital asset address 
controlled by CPP. CPP then pays $6,000 in cash to Z, who in turn 
processes R's order.
    (ii) Analysis. CPP is a processor of digital asset payments 
within the meaning of paragraph (a)(22) of this section because CPP, 
in the ordinary course of its business, regularly effects sales of 
digital assets as defined in paragraph (a)(9)(ii)(D) of this section 
by receiving digital assets from one party and paying those digital 
assets, cash, or different digital assets to a second party. Based 
on CPP's contractual relationship with Z, CPP has actual knowledge 
that R's payment was a payment transaction and the amount of gross 
proceeds R received as a result. Accordingly, CPP's services are 
facilitative services under paragraph (a)(21)(iii)(B) of this 
section and CPP is acting as a digital asset middleman under 
paragraph (a)(21) of this section to effect R's sale of digital 
assets under paragraph (a)(10)(i)(D) of this section. R's payment of 
6,000 units of DE to CPP in return for the payment of $6,000 cash to 
Z is a sale of digital assets under paragraph (a)(9)(ii)(D) of this 
section. Additionally, because CPP has an arrangement with R for the 
provision of digital asset payment services that provides that CPP 
may verify R's identity pursuant to AML program requirements, R is 
CPP's customer under paragraph (a)(2)(ii)(A) of this section. 
Finally, CPP is also required to report the payment to Z under Sec.  
1.6050W-1(a) because the payment is a third party network 
transaction under Sec.  1.6050W-1(c). The answer would be the same 
if CPP paid Z the 6,000 units of DE or another digital asset instead 
of cash.
    (13) Example 13: Broker. The facts are the same as in paragraph 
(b)(12)(i) of this section (the facts in Example 12), except that Z 
accepts digital asset DE from its purchasers directly without the 
services of CPP or any other processor of digital asset payments. To 
pay for the merchandise R purchases on Z's website, R is directed by 
Z to transfer 15 units of DE directly to Z's digital asset address. 
Z is not a broker under the definition of paragraph (a)(1) of this 
section because Z does not stand ready as part of its trade or 
business to effect sales as defined in paragraph (a)(9) of this 
section made by others. That is, the sales that Z is in the business 
of conducting are of property that is not subject to reporting under 
section 6045.
    (14) Example 14: Processor of digital asset payments--(i) Facts. 
Customer S purchases goods that are not digital assets with 10 units 
of digital asset DE from Merchant M using a digital asset DE credit 
card issued by Bank BK. BK has a contractual arrangement with 
customers using BK's credit cards that provides that BK may verify 
such customer identification information pursuant to AML program 
requirements. In addition, as part of BK's customary onboarding 
procedures, BK requires credit card applicants to submit information 
to BK to verify their identity. M is one of a network of unrelated 
persons that has agreed to accept digital asset DE credit cards 
issued by BK as payment for purchase transactions under an agreement 
that provides standards and mechanisms for settling the transaction 
between a merchant acquiring bank and the persons who accept the 
cards. Bank MAB is the merchant acquiring entity with the 
contractual obligation to make payments to M for goods provided to S 
in this transaction. To make payment for S's purchase of goods from 
M, S transfers 10 units of digital asset DE to BK. BK pays the 10 
units of DE, less its processing fee, to Bank MAB, which amount Bank 
MAB pays, less its processing fee, to M.
    (ii) Analysis. BK is a processor of digital asset payments as 
defined in paragraph (a)(22) of this section because BK, in the 
ordinary course of its business, regularly effects sales of digital 
assets as defined in paragraph (a)(9)(ii)(D) of this section by 
receiving digital assets from one party and paying those digital 
assets, cash, or different digital assets to a second party. Bank BK 
has actual knowledge that payment made by S is a payment transaction 
and also knows S's gross proceeds therefrom. Accordingly, BK's 
services are facilitative services under paragraph (a)(21)(iii)(B) 
of this section and BK is acting as a digital asset middleman under 
paragraph (a)(21) of this section to effect sales of digital assets 
under paragraph (a)(10)(i)(D) of this section. S's payment of 10 
units of DE to BK for the payment of those units, less BK's 
processing fee, to Bank MAB is a sale by S of digital assets under 
paragraph (a)(9)(ii)(D) of this section. Additionally, because S 
transferred digital assets to BK in a sale described in paragraph 
(a)(9)(ii)(D) of this section and because BK has an arrangement with 
S for the provision of digital asset payment services that provides 
that BK may verify S's identity, S is BK's customer under paragraph 
(a)(2)(ii)(A) of this section.
    (15) Example 15: Digital asset middleman and effect--(i) Facts. 
SBK is in the business of effecting sales of stock and other 
securities on behalf of customers. To open an account with SBK, each 
customer must provide SBK with its name, address, and tax 
identification number. SBK accepts 20 units of digital asset DE from 
Customer P as payment for 10 shares of AB stock. Additionally, P 
pays SBK an additional 1 unit of digital asset DE as a commission 
for SBK's services.
    (ii) Analysis. SBK's acceptance of 20 units of DE as payment for 
the AB stock is a facilitative service under paragraph 
(a)(21)(iii)(B) of this section because the payment is for property 
(the AB stock) that when sold would constitute a sale under 
paragraph (a)(9)(i) of this section by a broker that is in the 
business of effecting sales of stock and other securities. SBK's 
acceptance of 1 unit of DE as payment for SBK's commission is also a 
facilitative service under paragraph (a)(21)(iii)(B) of this section 
because SBK is a broker under paragraph (a)(1) of this section with 
respect to a sale of stock under paragraph (a)(9)(i) of this 
section. Accordingly, SBK is acting as a digital asset middleman to 
effect P's sale of 10 units of DE in return for the AB stock and P's 
sale of 1 unit of DE as payment for SBK's commission under 
paragraphs (a)(10)(i)(D) and (a)(21) of this section.
    (16) Example 16: Digital asset middleman and effect--(i) Facts. 
J, an unmarried individual not otherwise exempt from reporting, 
enters into a contractual agreement with B, an individual not 
otherwise exempt from reporting, to exchange J's principal 
residence, Blackacre, which has a fair market value of $225,000 for 
units of digital asset DE with a value of $225,000. Prior to 
closing, J provides closing agent CA, who is a real estate reporting 
person under Sec.  1.6045-4(e), with the certifications required 
under Sec.  1.6045-4(c)(2)(iv) (to exempt the transaction from 
reporting under Sec.  1.6045-4(a) due to Blackacre being J's 
principal residence). Prior to closing, B transfers the digital 
assets directly from B's wallet to J's wallet, and J certifies to 
the closing agent (CA) that J received the digital assets required 
to be paid under the contract.
    (ii) Analysis. CA is performing services as a real estate 
reporting person with respect to a real estate transaction in which 
the real estate buyer (B) pays digital assets in full or partial 
consideration for the real estate. In addition, CA has actual 
knowledge that payment made to B included digital assets because the 
terms of the real estate contract provide for such payment. 
Accordingly, the closing services provided by CA are facilitative 
services under paragraph (a)(21)(iii)(B)(2) of this section, and CA 
is acting as a digital asset middleman under paragraph (a)(21) of 
this section to effect B's sale of 1,000 DE units under paragraph 
(a)(10)(i)(D) of this section. These conclusions are not impacted by 
whether or not CA is required to report the sale of the real estate 
by J under Sec.  1.6045-4(a).
    (17) Example 17: Digital asset and cash--(i) Facts. Y is a 
privately held corporation that issues DL, a digital representation 
of value designed to track the value of the U.S. dollar. DL is 
backed in part or in full by U.S. dollars held by Y, and Y offers to 
redeem units of DL for U.S. dollars at par at any time. Transactions 
involving DL utilize cryptography to secure transactions that are 
digitally recorded on a cryptographically secured distributed ledger 
called the DL blockchain. CRX is a digital asset broker that also 
provides hosted wallet services for its customers seeking to make 
trades of digital assets using CRX. R is a customer of CRX. R 
exchanges 100 units of DL for $100 in cash

[[Page 56556]]

from CRX. CRX does not record this transaction on the DL blockchain, 
but instead records the transaction on CRX's own centralized private 
ledger.
    (ii) Analysis. DL is not cash under paragraph (a)(12) of this 
section because it is not issued by a government or central bank. DL 
is a digital asset under paragraph (a)(19) of this section because 
it is a digital representation of value that is recorded on a 
cryptographically secured distributed ledger. The fact that CRX 
recorded R's transaction on its own private ledger and not on the DL 
blockchain does not change this conclusion.
    (18) Example 18: Broker and effect--(i) Facts. Individual J is 
an artist in the business of creating and selling nonfungible tokens 
that reference J's digital artwork. To find buyers and to execute 
these transactions, J uses the services of P2X, an unrelated digital 
asset marketplace that provides a service for nonfungible token 
sellers to find buyers and automatically executing contracts in 
return for a transaction fee. J does not perform any other services 
with respect to these transactions. Using P2X's platform, buyer K 
purchases J's newly created nonfungible token (DA-J) for 1,000 units 
of digital asset DE. Using the interface provided by P2X, J and K 
execute their exchange using an automatically executing contract, 
which automatically transfers DA-J to K and K's payment of DE units 
to J.
    (ii) Analysis. Although J is a principal in the exchange of DA-J 
for 1,000 units of DE, J is not acting as an obligor retiring its 
own debt obligations, a corporation redeeming its own stock, or an 
issuer of digital assets that is redeeming those digital assets, as 
described in paragraph (a)(10)(i)(B) of this section. Because J 
created DA-J as part of J's business of creating and selling 
specified nonfungible tokens, J is also not acting in these 
transactions as a dealer as described in paragraph (a)(10)(i)(C) of 
this section, as an agent for another party as described in 
paragraph (a)(10)(i)(A) of this section, or as a digital asset 
middleman described in paragraph (a)(10)(i)(D) of this section. 
Accordingly, J is not a broker under paragraph (a)(1) of this 
section because J does not effect sales of digital assets on behalf 
of others under the definition of effect under paragraph (a)(10)(i) 
of this section.
    (19) Example 19: Broker, sale, and effect--(i) Facts. HWP is a 
person that regularly provides hosted wallet services for customers. 
HWP does not operate a digital asset trading platform, but at the 
direction of its customers regularly executes customer exchange 
orders using the services of digital asset trading platforms. 
Individual L maintains digital assets with HWP. L places an order 
with HWP to exchange 10 units of digital asset DE held by L with HWP 
for 100 units of digital asset RN. To execute the order, HWP places 
the order with PRX, a person, as defined in section 7701(a)(1) of 
the Code, that operates a digital asset trading platform. HWP debits 
L's account for the disposed DE units and credits L's account for 
the RN units received in exchange.
    (ii) Analysis. The exchange of L's DE units for RN units is a 
sale under paragraph (a)(9)(ii)(A)(2) of this section. HWP acts as 
an agent for L in this sale, and the nature of this agency is such 
that HWP ordinarily would know the gross proceeds from the sale. 
Accordingly, HWP has effected the sale under paragraph (a)(10)(i)(A) 
of this section. Additionally, HWP is a broker under paragraph 
(a)(1) of this section because in the ordinary course of its trade 
or business, HWP stands ready to effect sales to be made by others. 
If PRX is also a broker, see the multiple broker rule in paragraph 
(c)(3)(iii)(B) of this section.
    (20) Example 20: Digital asset and security. M owns 10 ownership 
units of a fund organized as a trust described in Sec.  301.7701-
4(c) of this chapter that was formed to invest in digital assets. 
M's units are held in a securities brokerage account and are not 
recorded using cryptographically secured distributed ledger 
technology. Although the underlying investments are comprised of one 
or more digital assets, M's investment is in ownership units of a 
trust, and the units are not themselves digital assets under 
paragraph (a)(19) of this section because transactions involving 
these units are not secured using cryptography and are not digitally 
recorded on a distributed ledger, such as a blockchain. The answer 
would be the same if the fund is organized as a C corporation or 
partnership.
    (21) Example 21: Forward contract, closing transaction, and 
sale--(i) Facts. On February 24, Year 1, J contracts with broker CRX 
to sell J's 10 units of digital asset DE to CRX at an agreed upon 
price, with delivery under the contract to occur at 4 p.m. on March 
10, Year 1. Pursuant to this agreement, J delivers the 10 units of 
DE to CRX, and CRX pays J the agreed upon price in cash.
    (ii) Analysis. Under paragraph (a)(7)(iii) of this section, the 
contract between J and CRX is a forward contract. J's delivery of 
digital asset DE pursuant to the forward contract is a closing 
transaction described in paragraph (a)(8) of this section that is 
treated as a sale of the underlying digital asset DE under paragraph 
(a)(9)(ii)(A)(3) of this section. Pursuant to the rules of 
paragraphs (a)(9)(i) and (a)(9)(ii)(A)(3) of this section, CRX may 
treat the delivery of DE as a sale without separating the profit or 
loss on the forward contract from the profit or loss on the 
delivery.
    (22) Example 22: Digital asset--(i) Facts. On February 7, Year 
1, J purchases a regulated futures contract on digital asset DE 
through futures commission merchant FCM. The contract is not 
recorded using cryptographically secured distributed ledger 
technology. The contract expires on the last Friday in June, Year 1. 
On May 1, Year 1, J enters into an offsetting closing transaction 
with respect to the regulated futures contract.
    (ii) Analysis. Although the regulated futures contract's 
underlying assets are comprised of digital assets, J's investment is 
in the regulated futures contract, which is not a digital asset 
under paragraph (a)(19) of this section because transactions 
involving the contract are not secured using cryptography and are 
not digitally recorded using cryptographically secured distributed 
ledger technology, such as a blockchain. When J disposes of the 
contract, the transaction is a sale of a regulated futures contract 
covered by paragraph (a)(9)(i) of this section.
    (23) Example 23: Closing transaction and sale--(i) Facts. On 
January 15, Year 1, J purchases digital asset DE through Broker. On 
March 1, Year 1, J sells a regulated futures contract on DE through 
Broker. The contract expires on the last Friday in June, Year 1. On 
the last Friday in June, Year 1, J delivers the DE in settlement of 
the regulated futures contract.
    (ii) Analysis. J's delivery of the DE pursuant to the regulated 
futures contract is a closing transaction described in paragraph 
(a)(8) of this section that is treated as a sale of the regulated 
futures contract under paragraph (a)(9)(i) of this section. In 
addition, under paragraph (a)(9)(ii)(A)(3) of this section, J's 
delivery of digital asset DE pursuant to the settlement of the 
regulated futures contract is a sale of the underlying digital asset 
DE.

    (c) * * *
    (3) Exceptions--(i) Sales effected for exempt recipients--(A) In 
general. No return of information is required with respect to a sale 
effected for a customer that is an exempt recipient under paragraph 
(c)(3)(i)(B) of this section.
    (B) Exempt recipient defined. The term exempt recipient means--
    (1) A corporation as defined in section 7701(a)(3), whether 
domestic or foreign, except that this exclusion does not apply to sales 
of covered securities acquired on or after January 1, 2012, by an S 
corporation as defined in section 1361(a);
    (2) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (3) The United States or a State, the District of Columbia, the 
Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana 
Islands, the U.S. Virgin Islands, or American Samoa, a political 
subdivision of any of the foregoing, a wholly owned agency or 
instrumentality of any one or more of the foregoing, or a pool or 
partnership composed exclusively of any of the foregoing;
    (4) A foreign government, a political subdivision thereof, an 
international organization, or any wholly owned agency or 
instrumentality of the foregoing;
    (5) A foreign central bank of issue as defined in Sec.  1.895-
1(b)(1) (i.e., a bank that is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency);
    (6) A dealer in securities or commodities registered as such under 
the laws of the United States or a State;
    (7) A futures commission merchant registered as such with the 
Commodity Futures Trading Commission;
    (8) A real estate investment trust (as defined in section 856);
    (9) An entity registered at all times during the taxable year under 
the

[[Page 56557]]

Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.);
    (10) A common trust fund (as defined in section 584(a));
    (11) A financial institution such as a bank, mutual savings bank, 
savings and loan association, building and loan association, 
cooperative bank, homestead association, credit union, industrial loan 
association or bank, or other similar organization; or
    (12) A U.S. digital asset broker as defined in paragraph 
(g)(4)(i)(A)(1) of this section other than an investment adviser 
registered either under the Investment Advisers Act of 1940 (15 U.S.C. 
80b-1, et seq.) or with a state securities regulator and that 
investment adviser is not otherwise an exempt recipient in one or more 
of paragraphs (c)(3)(i)(B)(1) through (11) of this section.
    (C) Exemption certificate--(1) In general. Except as provided in 
paragraph (c)(3)(i)(C)(2) or (3) of this section, a broker may treat a 
person described in paragraph (c)(3)(i)(B) of this section as an exempt 
recipient based on a properly completed exemption certificate (as 
provided in Sec.  31.3406(h)-3 of this chapter); the broker's actual 
knowledge that the customer is a person described in paragraph 
(c)(3)(i)(B) of this section; or the applicable indicators described in 
Sec.  1.6049-4(c)(1)(ii)(A) through (M). A broker may require an exempt 
recipient to file a properly completed exemption certificate and may 
treat an exempt recipient that fails to do so as a recipient that is 
not exempt.
    (2) Limitation for corporate customers. For sales of covered 
securities acquired on or after January 1, 2012, a broker may not treat 
a customer as an exempt recipient described in paragraph 
(c)(3)(i)(B)(1) of this section based on the indicators of corporate 
status described in Sec.  1.6049-4(c)(1)(ii)(A). However, for sales of 
all securities and for sales of digital assets, a broker may treat a 
customer as an exempt recipient if one of the following applies--
    (i) The name of the customer contains the term insurance company, 
indemnity company, reinsurance company, or assurance company.
    (ii) The name of the customer indicates that it is an entity listed 
as a per se corporation under Sec.  301.7701-2(b)(8)(i) of this 
chapter.
    (iii) The broker receives a properly completed exemption 
certificate (as provided in Sec.  31.3406(h)-3 of this chapter) that 
asserts that the customer is not an S corporation as defined in section 
1361(a).
    (iv) The broker receives a withholding certificate described in 
Sec.  1.1441-1(e)(2)(i) that includes a certification that the person 
whose name is on the certificate is a foreign corporation.
    (3) Limitation for U.S. digital asset brokers. For sales of digital 
assets, a broker may not treat a customer as an exempt recipient 
described in paragraph (c)(3)(i)(B)(12) of this section unless it 
obtains from that customer a certification on a properly completed 
exemption certificate (as provided in Sec.  31.3406(h)-3 of this 
chapter) that the customer is a U.S. digital asset broker described in 
paragraph (g)(4)(i)(A)(1) of this section.
    (ii) Excepted sales. No return of information is required with 
respect to a sale effected by a broker for a customer if the sale is an 
excepted sale. The inclusion in this paragraph (c)(3)(ii) of a digital 
asset transaction is not intended to create an inference that the 
transaction is a sale of a digital asset under paragraph (a)(9)(ii) of 
this section. For this purpose, a sale is an excepted sale if it is--
    (A) So designated by the Internal Revenue Service in a revenue 
ruling or revenue procedure (see Sec.  601.601(d)(2) of this chapter);
    (B) A sale with respect to which a return is not required by 
applying the rules of Sec.  1.6049-4(c)(4) (by substituting the term a 
sale subject to reporting under section 6045 for the term an interest 
payment);
    (C) A sale of digital asset units withheld by the broker from 
digital assets received by the customer in any underlying digital asset 
sale to pay for the customer's digital asset transaction costs;
    (D) A sale for cash of digital asset units withheld by the broker 
from digital assets received by the customer in a sale of digital 
assets for different digital assets (underlying sale) that is 
undertaken immediately after the underlying sale to satisfy the 
broker's obligation under section 3406 of the Code to deduct and 
withhold a tax with respect to the underlying sale;
    (E) A disposition of a digital asset representing loyalty program 
credits or loyalty program rewards offered by a provider of non-digital 
asset goods or services to its customers, in exchange for non-digital 
asset goods or services from the provider or other merchants 
participating with the developer as part of the program, provided that 
the digital asset is not capable of being transferred, exchanged, or 
otherwise used outside the cryptographically secured distributed ledger 
network of the loyalty program;
    (F) A disposition of a digital asset created and designed for use 
within a video game or network of video games in exchange for different 
digital assets also created and designed for use within that video game 
or video game network, provided the disposed of digital assets are not 
capable of being transferred, exchanged, or otherwise used outside of 
the video game or video game network;
    (G) Except in the case of digital assets cleared or settled on a 
limited-access regulated network as described in paragraph (c)(8)(iii) 
of this section, a disposition of a digital asset representing 
information with respect to payment instructions or the management of 
inventory that does not consist of digital assets, within a 
cryptographically secured distributed ledger (or network of 
interoperable distributed ledgers) that provides access only to users 
of such information provided the digital assets disposed of are not 
capable of being transferred, exchanged, or otherwise used outside such 
distributed ledger or network; or
    (H) A disposition of a digital asset offered by a seller of goods 
or provider of services to its customers that can be exchanged or 
redeemed only by those customers for goods or services provided by such 
seller or provider if the digital asset is not capable of being 
transferred, exchanged, or otherwise used outside the cryptographically 
secured distributed ledger network of the seller or provider and cannot 
be sold or exchanged for cash, stored-value cards, or qualifying 
stablecoins at a market rate inside the seller or provider's 
distributed ledger network.
    (iii) Multiple brokers--(A) In general. If a broker is instructed 
to initiate a sale by a person that is an exempt recipient described in 
paragraph (c)(3)(i)(B)(6), (7), or (11) of this section, no return of 
information is required with respect to the sale by that broker. In a 
redemption of stock or retirement of securities, only the broker 
responsible for paying the holder redeemed or retired, or crediting the 
gross proceeds on the sale to that holder's account, is required to 
report the sale.
    (B) Special rule for sales of digital assets. If more than one 
broker effects a sale of a digital asset on behalf of a customer, the 
broker responsible for first crediting the gross proceeds on the sale 
to the customer's wallet or account is required to report the sale. A 
broker that did not first credit the gross proceeds on the sale to the 
customer's wallet or account is not required to report the sale if 
prior to the sale that broker obtains a certification on a properly 
completed exemption certificate (as provided in Sec.  31.3406(h)-3 of 
this chapter) that the

[[Page 56558]]

broker first crediting the gross proceeds on the sale is a person 
described in paragraph (c)(3)(i)(B)(12) of this section.
    (iv) Cash on delivery transactions. In the case of a sale of 
securities through a cash on delivery account, a delivery versus 
payment account, or other similar account or transaction, only the 
broker that receives the gross proceeds from the sale against delivery 
of the securities sold is required to report the sale. If, however, the 
broker's customer is another broker (second-party broker) that is an 
exempt recipient, then only the second-party broker is required to 
report the sale.
    (v) Fiduciaries and partnerships. No return of information is 
required with respect to a sale effected by a custodian or trustee in 
its capacity as such or a redemption of a partnership interest by a 
partnership, provided the sale is otherwise reported by the custodian 
or trustee on a properly filed Form 1041, or the redemption is 
otherwise reported by the partnership on a properly filed Form 1065, 
and all Schedule K-1 reporting requirements are satisfied.
    (vi) Money market funds--(A) In general. No return of information 
is required with respect to a sale of shares in a regulated investment 
company that is permitted to hold itself out to investors as a money 
market fund under Rule 2a-7 under the Investment Company Act of 1940 
(17 CFR 270.2a-7).
    (B) Effective/applicability date. Paragraph (c)(3)(vi)(A) of this 
section applies to sales of shares in calendar years beginning on or 
after July 8, 2016. Taxpayers and brokers (as defined in Sec.  1.6045-
1(a)(1)), however, may rely on paragraph (c)(3)(vi)(A) of this section 
for sales of shares in calendar years beginning before July 8, 2016.
    (vii) Obligor payments on certain obligations. No return of 
information is required with respect to payments representing obligor 
payments on--
    (A) Nontransferable obligations (including savings bonds, savings 
accounts, checking accounts, and NOW accounts);
    (B) Obligations as to which the entire gross proceeds are reported 
by the broker on Form 1099 under provisions of the Internal Revenue 
Code other than section 6045 (including stripped coupons issued prior 
to July 1, 1982); or
    (C) Retirement of short-term obligations (i.e., obligations with a 
fixed maturity date not exceeding 1 year from the date of issue) that 
have original issue discount, as defined in section 1273(a)(1), with or 
without application of the de minimis rule. The preceding sentence does 
not apply to a debt instrument issued on or after January 1, 2014. For 
a short-term obligation issued on or after January 1, 2014, see 
paragraph (c)(3)(xiii) of this section.
    (D) Demand obligations that also are callable by the obligor and 
that have no premium or discount. The preceding sentence does not apply 
to a debt instrument issued on or after January 1, 2014.
    (viii) Foreign currency. No return of information is required with 
respect to a sale of foreign currency other than a sale pursuant to a 
forward contract or regulated futures contract that requires delivery 
of foreign currency.
    (ix) Fractional share. No return of information is required with 
respect to a sale of a fractional share of stock if the gross proceeds 
on the sale of the fractional share are less than $20.
    (x) Certain retirements. No return of information is required from 
an issuer or its agent with respect to the retirement of book entry or 
registered form obligations as to which the relevant books and records 
indicate that no interim transfers have occurred. The preceding 
sentence does not apply to a debt instrument issued on or after January 
1, 2014.
    (xi) Short sales--(A) In general. A broker may not make a return of 
information under this section for a short sale of a security entered 
into on or after January 1, 2011, until the year a customer delivers a 
security to satisfy the short sale obligation. The return must be made 
without regard to the constructive sale rule in section 1259 or to 
section 1233(h). In general, the broker must report on a single return 
the information required by paragraph (d)(2)(i)(A) of this section for 
the short sale except that the broker must report the date the short 
sale was closed in lieu of the sale date. In applying paragraph 
(d)(2)(i)(A) of this section, the broker must report the relevant 
information regarding the security sold to open the short sale and the 
adjusted basis of the security delivered to close the short sale and 
whether any gain or loss on the closing of the short sale is long-term 
or short-term (within the meaning of section 1222).
    (B) Short sale closed by delivery of a noncovered security. A 
broker is not required to report adjusted basis and whether any gain or 
loss on the closing of the short sale is long-term or short-term if the 
short sale is closed by delivery of a noncovered security and the 
return so indicates. A broker that chooses to report this information 
is not subject to penalties under section 6721 or 6722 for failure to 
report this information correctly if the broker indicates on the return 
that the short sale was closed by delivery of a noncovered security.
    (C) Short sale obligation transferred to another account. If a 
short sale obligation is satisfied by delivery of a security 
transferred into a customer's account accompanied by a transfer 
statement (as described in Sec.  1.6045A-1(b)(7)) indicating that the 
security was borrowed, the broker receiving custody of the security may 
not file a return of information under this section. The receiving 
broker must furnish a statement to the transferor that reports the 
amount of gross proceeds received from the short sale, the date of the 
sale, the quantity of shares, units, or amounts sold, and the Committee 
on Uniform Security Identification Procedures (CUSIP) number of the 
sold security (if applicable) or other security identifier number that 
the Secretary may designate by publication in the Federal Register or 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter). The statement to the transferor also must include the 
transfer date, the name and contact information of the receiving 
broker, the name and contact information of the transferor, and 
sufficient information to identify the customer. If the customer 
subsequently closes the short sale obligation in the transferor's 
account with non-borrowed securities, the transferor must make the 
return of information required by this section. In that event, the 
transferor must take into account the information furnished under this 
paragraph (c)(3)(xi)(C) on the return unless the transferor knows that 
the information furnished under this paragraph (c)(3)(xi)(C) is 
incorrect or incomplete. A failure to report correct information that 
arises solely from this reliance is deemed to be due to reasonable 
cause for purposes of penalties under sections 6721 and 6722. See Sec.  
301.6724-1(a)(1) of this chapter.
    (xii) Cross reference. For an exception for certain sales of 
agricultural commodities and certificates issued by the Commodity 
Credit Corporation after January 1, 1993, see paragraph (c)(7) of this 
section.
    (xiii) Short-term obligations issued on or after January 1, 2014. 
No return of information is required under this section with respect to 
a sale (including a retirement) of a short-term obligation, as 
described in section 1272(a)(2)(C), that is issued on or after January 
1, 2014.
    (xiv) Certain redemptions. No return of information is required 
under this section for payments made by a stock transfer agent (as 
described in Sec.  1.6045-1(b)(iv)) with respect to a redemption of 
stock of a corporation described in

[[Page 56559]]

section 1297(a) with respect to a shareholder in the corporation if--
    (A) The stock transfer agent obtains from the corporation a written 
certification signed by a person authorized to sign on behalf of the 
corporation, that states that the corporation is described in section 
1297(a) for each calendar year during which the stock transfer agent 
relies on the provisions of this paragraph (c)(3)(xiv), and the stock 
transfer agent has no reason to know that the written certification is 
unreliable or incorrect;
    (B) The stock transfer agent identifies, prior to payment, the 
corporation as a participating FFI (including a reporting Model 2 FFI) 
(as defined in Sec.  1.6049-4(f)(10) or (14), respectively), or 
reporting Model 1 FFI (as defined in Sec.  1.6049-4(f)(13)), in 
accordance with the requirements of Sec.  1.1471-3(d)(4) (substituting 
the terms stock transfer agent and corporation for the terms 
withholding agent and payee, respectively) and validates that status 
annually;
    (C) The stock transfer agent obtains a written certification 
representing that the corporation shall report the payment as part of 
its account holder reporting obligations under chapter 4 of the Code or 
an applicable IGA (as defined in Sec.  1.6049-4(f)(7)) and provided the 
stock transfer agent does not know that the corporation is not 
reporting the payment as required. The paying agent may rely on the 
written certification until there is a change in circumstances or the 
paying agent knows or has reason to know that the statement is 
unreliable or incorrect. A stock transfer agent that knows that the 
corporation is not reporting the payment as required under chapter 4 of 
the Code or an applicable IGA must report all payments reportable under 
this section that it makes during the year in which it obtains such 
knowledge; and
    (D) The stock transfer agent is not also acting in its capacity as 
a custodian, nominee, or other agent of the payee with respect to the 
payment.
    (4) Examples. The following examples illustrate the application of 
the rules in paragraph (c)(3) of this section:

    (i) Example 1. P, an individual who is not an exempt recipient, 
places an order with B, a person generally known in the investment 
community to be a federally registered broker/dealer, to effect a 
sale of P's stock in a publicly traded corporation. B, in turn, 
places an order to sell the stock with C, a second broker, who will 
execute the sale. B discloses to C the identity of the customer 
placing the order. C is not required to make a return of information 
with respect to the sale because C was instructed by B, an exempt 
recipient as defined in paragraph (c)(3)(i)(B)(6) of this section, 
to initiate the sale. B is required to make a return of information 
with respect to the sale because P is B's customer and is not an 
exempt recipient.
    (ii) Example 2. Assume the same facts as in paragraph (c)(4)(i) 
of this section (the facts in Example 1) except that B has an 
omnibus account with C so that B does not disclose to C whether the 
transaction is for a customer of B or for B's own account. C is not 
required to make a return of information with respect to the sale 
because C was instructed by B, an exempt recipient as defined in 
paragraph (c)(3)(i)(B)(6) of this section, to initiate the sale. B 
is required to make a return of information with respect to the sale 
because P is B's customer and is not an exempt recipient.
    (iii) Example 3. D, an individual who is not an exempt 
recipient, enters into a cash on delivery stock transaction by 
instructing K, a federally registered broker/dealer, to sell stock 
owned by D, and to deliver the proceeds to L, a custodian bank. 
Concurrently with the above instructions, D instructs L to deliver 
D's stock to K (or K's designee) against delivery of the proceeds 
from K. The records of both K and L with respect to this transaction 
show an account in the name of D. Pursuant to paragraph (h)(1) of 
this section, D is considered the customer of K and L. Under 
paragraph (c)(3)(iv) of this section, K is not required to make a 
return of information with respect to the sale because K will pay 
the gross proceeds to L against delivery of the securities sold. L 
is required to make a return of information with respect to the sale 
because D is L's customer and is not an exempt recipient.
    (iv) Example 4. Assume the same facts as in paragraph 
(c)(4)(iii) of this section (the facts in Example 3) except that E, 
a federally registered investment adviser, instructs K to sell stock 
owned by D and to deliver the proceeds to L. Concurrently with the 
above instructions, E instructs L to deliver D's stock to K (or K's 
designee) against delivery of the proceeds from K. The records of 
both K and L with respect to the transaction show an account in the 
name of D. Pursuant to paragraph (h)(1) of this section, D is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of 
this section, K is not required to make a return of information with 
respect to the sale because K will pay the gross proceeds to L 
against delivery of the securities sold. L is required to make a 
return of information with respect to the sale because D is L's 
customer and is not an exempt recipient.
    (v) Example 5. Assume the same facts as in paragraph (c)(4)(iv) 
of this section (the facts in Example 4) except that the records of 
both K and L with respect to the transaction show an account in the 
name of E. Pursuant to paragraph (h)(1) of this section, E is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of 
this section, K is not required to make a return of information with 
respect to the sale because K will pay the gross proceeds to L 
against delivery of the securities sold. L is required to make a 
return of information with respect to the sale because E is L's 
customer and is not an exempt recipient. E is required to make a 
return of information with respect to the sale because D is E's 
customer and is not an exempt recipient.
    (vi) Example 6. F, an individual who is not an exempt recipient, 
owns bonds that are held by G, a federally registered broker/dealer, 
in an account for F with G designated as nominee for F. Upon the 
retirement of the bonds, the gross proceeds are automatically 
credited to the account of F. G is required to make a return of 
information with respect to the retirement because G is the broker 
responsible for making payments of the gross proceeds to F.
    (vii) Example 7. On June 24, 2010, H, an individual who is not 
an exempt recipient, opens a short sale of stock in an account with 
M, a broker. Because the short sale is entered into before January 
1, 2011, paragraph (c)(3)(xi) of this section does not apply. Under 
paragraphs (c)(2) and (j) of this section, M must make a return of 
information for the year of the sale regardless of when the short 
sale is closed.
    (viii) Example 8--(A) Facts. On August 25, 2011, H opens a short 
sale of stock in an account with M, a broker. H closes the short 
sale with M on January 25, 2012, by purchasing stock of the same 
corporation in the account in which H opened the short sale and 
delivering the stock to satisfy H's short sale obligation. The stock 
H purchased is a covered security.
    (B) Analysis. Because the short sale is entered into on or after 
January 1, 2011, under paragraphs (c)(2) and (c)(3)(xi) of this 
section, the broker closing the short sale must make a return of 
information reporting the sale for the year in which the short sale 
is closed. Thus, M is required to report the sale for 2012. M must 
report on a single return the relevant information for the sold 
stock, the adjusted basis of the purchased stock, and whether any 
gain or loss on the closing of the short sale is long-term or short-
term (within the meaning of section 1222). Thus, M must report the 
information about the short sale opening and closing transactions on 
a single return for taxable year 2012.
    (ix) Example 9--(A) Facts. Assume the same facts as in paragraph 
(c)(4)(viii) of this section (the facts in Example 8) except that H 
also has an account with N, a broker, and satisfies the short sale 
obligation with M by borrowing stock of the same corporation from N 
and transferring custody of the borrowed stock from N to M. N 
indicates on the transfer statement that the transferred stock was 
borrowed in accordance with Sec.  1.6045A-1(b)(7).
    (B) Analysis with respect to M. Under paragraph (c)(3)(xi)(C) of 
this section, M may not file the return of information required 
under this section. M must furnish a statement to N that reports the 
gross proceeds from the short sale on August 25, 2011, the date of 
the sale, the quantity of shares sold, the CUSIP number or other 
security identifier number of the sold stock, the transfer date, the 
name and contact information of M and N, and information identifying 
H such as H's name and the account number from which H transferred 
the borrowed stock.
    (C) Analysis with respect to N. N must report the gross proceeds 
from the short sale, the date the short sale was closed, the

[[Page 56560]]

adjusted basis of the stock acquired to close the short sale, and 
whether any gain or loss on the closing of the short sale is long-
term or short-term (within the meaning of section 1222) on the 
return of information N is required to file under paragraph (c)(2) 
of this section when H closes the short sale in the account with N.
    (x) Example 10: Excepted sale of digital assets representing 
payment instructions--(A) Facts. BNK is a bank that uses a 
cryptographically secured distributed ledger technology system (DLT) 
that provides access only to other member banks to securely transfer 
payment instructions that are not securities or commodities 
described in paragraph (c)(8)(iii) of this section. These payment 
instructions are exchanged between member banks through the use of 
digital asset DX. Dispositions of DX do not give rise to sales of 
other digital assets within the cryptographically secured 
distributed ledger (or network of interoperable distributed ledgers) 
and are not capable of being transferred, exchanged, or otherwise 
used, outside the DLT system. BNK disposes of DX using the DLT 
system to make a payment instruction to another bank within the DLT 
system.
    (B) Analysis. BNK's disposition of DX using the DLT system to 
make a payment instruction to another bank within the DLT system is 
a disposition of a digital asset representing payment instructions 
that are not securities or commodities within a cryptographically 
secured distributed ledger that provides access only to users of 
such information. Because DX cannot be transferred, exchanged, or 
otherwise used, outside of DLT, and because the payment instructions 
are not dual classification assets under paragraph (c)(8)(iii) of 
this section, BNK's disposition of DX is an excepted sale under 
paragraph (c)(3)(ii)(G) of this section.
    (xi) Example 11: Excepted sale of digital assets representing a 
loyalty program--(A) Facts. S created a loyalty program as a 
marketing tool to incentivize customers to make purchases at S's 
store, which sells non-digital asset goods and services. Customers 
that join S's loyalty program receive 1 unit of digital asset LY at 
the end of each month for every $1 spent in S's store. Units of LY 
can only be disposed of within S's cryptographically secured 
distributed ledger (DLY) in exchange for goods or services provided 
by S or merchants, such as M, that have contractually agreed to 
provide goods or services to S's loyalty customers in exchange for a 
predetermined payment from S. Customer C is a participant in S's 
loyalty program and has earned 1,000 units of LY. C redeems 1,000 
units of LY in exchange for non-digital asset goods in M's store.
    (B) Analysis. Customer C's disposition of LY using the DLY 
system in exchange for non-digital asset goods in M's store is a 
disposition of a digital asset representing loyalty program credits 
in exchange for non-digital asset goods or services from M, a 
merchant participating with S's loyalty program. Because LY cannot 
be transferred, exchanged, or otherwise used outside of DLY, C's 
disposition of LY is an excepted sale under paragraph (c)(3)(ii)(E) 
of this section.
    (xii) Example 12: Multiple brokers--(A) Facts. L, an individual 
who is not an exempt recipient, maintains digital assets with HWP, a 
U.S. corporation that provides hosted wallet services. L also 
maintains an account at CRX, a U.S. corporation that operates a 
digital asset trading platform and that also provides custodial 
services for digital assets held by L. L places an order with HWP to 
exchange 10 units of digital asset DE for 100 units of digital asset 
RN. To effect the order, HWP places the order with CRX and 
communicates to CRX that the order is on behalf of L. Prior to 
initiating the transaction, CRX obtains a certification from HWP on 
a properly completed exemption certificate (as provided in Sec.  
31.3406(h)-3 of this chapter) that HWP is a U.S. digital asset 
broker described in paragraph (g)(4)(i)(A)(1) of this section. CRX 
completes the transaction and transfers the 100 units of RN to HWP. 
HWP, in turn, credits L's account with the 100 units of RN.
    (B) Analysis. HWP is the broker responsible for first crediting 
the gross proceeds on the sale to L's wallet. Accordingly, because 
CRX has obtained from HWP a certification on a properly completed 
exemption certificate (as provided in Sec.  31.3406(h)-3 of this 
chapter) that HWP is a U.S. digital asset broker described in 
paragraph (g)(4)(i)(A)(1) of this section, CRX is not required to 
make a return of information with respect to the sale of 100 units 
of RN effected on behalf of L under paragraph (c)(3)(iii)(B) of this 
section. In contrast, because HWP is the broker that credits the 100 
units of RN to L's account, HWP is required to make a return of 
information with respect to the sale.
    (xiii) Example 13: Multiple brokers--(A) Facts. The facts are 
the same as in paragraph (c)(4)(xii)(A) of this section (the facts 
in Example 12), except that CRX deposits the 100 units of RN into 
L's account with CRX after the transaction is effected by CRX. 
Thereafter, L transfers the 100 units of RN in L's account with CRX 
to L's account with HWP. Prior to the transaction, HWP obtained a 
certification from CRX on a properly completed exemption certificate 
(as provided in Sec.  31.3406(h)-3 of this chapter) that CRX is a 
U.S. digital asset broker described in paragraph (g)(4)(i)(A)(1) of 
this section.
    (B) Analysis. Under paragraph (c)(3)(iii)(B) of this section, 
despite being instructed by HWP to make the sale of 100 units of RN 
on behalf of L, CRX is required to make a return of information with 
respect to the sale effected on behalf of L because CRX is the 
broker that credits the 100 units of RN to L's account. In contrast, 
HWP is not required to make a return of information with respect to 
the sale effected on behalf of L because HWP obtained from CRX a 
certification on a properly completed exemption certificate (as 
provided in Sec.  31.3406(h)-3 of this chapter) that CRX is a U.S. 
digital asset broker described in paragraph (g)(4)(i)(A)(1) of this 
section.

    (5) * * *
    (i) In general. A broker effecting closing transactions in 
regulated futures contracts shall report information with respect to 
regulated futures contracts solely in the manner prescribed in this 
paragraph (c)(5). In the case of a sale that involves making delivery 
pursuant to a regulated futures contract, only the profit or loss on 
the contract is reported as a transaction with respect to regulated 
futures contracts under this paragraph (c)(5); such sales are, however, 
subject to reporting under paragraph (d)(2)(i)(A). The information 
required under this paragraph (c)(5) must be reported on a calendar 
year basis, unless the broker is advised in writing by an account's 
owner that the owner's taxable year is other than a calendar year and 
the broker elects to report with respect to regulated futures contracts 
in such account on the basis of the owner's taxable year. The following 
information must be reported as required by Form 1099-B, Proceeds From 
Broker and Barter Exchange Transactions, or any successor form, with 
respect to regulated futures contracts held in a customer's account:
    (A) The name, address, and taxpayer identification number of the 
customer.
    (B) The net realized profit or loss from all regulated futures 
contracts closed during the calendar year.
    (C) The net unrealized profit or loss in all open regulated futures 
contracts at the end of the preceding calendar year.
    (D) The net unrealized profit or loss in all open regulated futures 
contracts at the end of the calendar year.
    (E) The aggregate profit or loss from regulated futures contracts 
((b) + (d)-(c)).
    (F) Any other information required by Form 1099-B. See 17 CFR 1.33. 
For this purpose, the end of a year is the close of business of the 
last business day of such year. In reporting under this paragraph 
(c)(5), the broker shall make such adjustments for commissions that 
have actually been paid and for option premiums as are consistent with 
the books of the broker. No additional returns of information with 
respect to regulated futures contracts so reported are required.
* * * * *
    (8) Special coordination rules for reporting digital assets that 
are dual classification assets--(i) General rule for reporting dual 
classification assets as digital assets. Except in the case of a sale 
described in paragraph (c)(8)(ii), (iii), or (iv) of this section, for 
any sale of a digital asset under paragraph (a)(9)(ii) of this section 
that also constitutes a sale under paragraph (a)(9)(i) of this section, 
the broker must treat the transaction as set forth in paragraphs 
(c)(8)(i)(A) through (D). For purposes of this section, an asset 
described in this paragraph (c)(8)(i) is a dual classification asset.

[[Page 56561]]

    (A) The broker must report the sale only as a sale of a digital 
asset under paragraph (a)(9)(ii) of this section and not as a sale 
under paragraph (a)(9)(i) of this section.
    (B) The broker must treat the sale only as a sale of a specified 
security under paragraph (a)(14)(v) or (vi) of this section, as 
applicable, and not as a specified security under paragraph (a)(14)(i), 
(ii), (iii), or (iv) of this section.
    (C) The broker must apply the reporting rules set forth in 
paragraphs (d)(2)(i)(B) through (D) of this section, as applicable, for 
the information required to be reported for such sale.
    (D) For a sale of a dual classification asset that is treated as a 
tokenized security, the broker must report the information set forth in 
paragraph (c)(8)(i)(D)(3) of this section.
    (1) A tokenized security is a dual classification asset that:
    (i) Provides the holder with an interest in another asset that is a 
security described in paragraph (a)(3) of this section, other than a 
security that is also a digital asset; or
    (ii) Constitutes an asset the offer and sale of which was 
registered with the U.S. Securities and Exchange Commission, other than 
an asset treated as a security for securities law purposes solely as an 
investment contract.
    (2) For purposes of paragraph (c)(8)(i)(D)(1) of this section, a 
qualifying stablecoin is not treated as a tokenized security.
    (3) In the case of a sale of a tokenized security, the broker must 
report the information set forth in paragraph (d)(2)(i)(B)(6) of this 
section, as applicable. In the case of a tokenized security that is a 
specified security under paragraph (a)(14)(i), (ii), (iii), or (iv) of 
this section, the broker must also report the information set forth in 
paragraph (d)(2)(i)(D)(4) of this section.
    (ii) Reporting of dual classification assets that constitute 
contracts covered by section 1256(b) of the Code. For a sale of a 
digital asset on or after January 1, 2025, that is also a contract 
covered by section 1256(b), the broker must report the sale only under 
paragraph (c)(5) of this section including, as appropriate, the 
application of the rules in paragraph (m)(3) of this section.
    (iii) Reporting of dual classification assets cleared or settled on 
a limited-access regulated network--(A) General rule. The coordination 
rule of paragraph (c)(8)(i) of this section does not apply to any sale 
of a dual classification asset that is a digital asset solely because 
the sale of such asset is cleared or settled on a limited-access 
regulated network described in paragraph (c)(8)(iii)(B) of this 
section. In such case, the broker must report such sale only as a sale 
under paragraph (a)(9)(i) of this section and not as a sale under 
paragraph (a)(9)(ii) of this section and must treat the sale as a sale 
of a specified security under paragraph (a)(14)(i), (ii), (iii), or 
(iv) of this section, to the extent applicable, and not as a sale of a 
specified security under paragraph (a)(14)(v) or (vi) of this section. 
For all other purposes of this section including transfers, a dual 
classification asset that is a digital asset solely because it is 
cleared or settled on a limited-access regulated network is not treated 
as a digital asset and is not reportable as a digital asset. See 
paragraph (d)(2)(i)(A) of this section for the information required to 
be reported for such a sale.
    (B) Limited-access regulated network. For purposes of this section, 
a limited-access regulated network is described in paragraph 
(c)(8)(iii)(B)(1) or (2) of this section.
    (1) A cryptographically secured distributed ledger, or network of 
interoperable cryptographically secured distributed ledgers, that 
provides clearance or settlement services and that either:
    (i) Provides access only to persons described in one or more of 
paragraphs (c)(3)(i)(B)(6), (7), (10), or (11) of this section; or
    (ii) Is provided exclusively to its participants by an entity that 
has registered with the U.S. Securities and Exchange Commission as a 
clearing agency, or that has received an exemption order from the U.S. 
Securities and Exchange Commission as a clearing agency, under section 
17A of the Securities Exchange Act of 1934.
    (2) A cryptographically secured distributed ledger controlled by a 
single person described in one of paragraphs (c)(3)(i)(B)(6) through 
(11) of this section that permits the ledger to be used solely by 
itself and its affiliates, and therefore does not provide access to the 
ledger to third parties such as customers or investors, in order to 
clear or settle sales of assets.
    (iv) Reporting of dual classification assets that are interests in 
money market funds. The coordination rule of paragraph (c)(8)(i) of 
this section does not apply to any sale of a dual classification asset 
that is a share in a regulated investment company that is permitted to 
hold itself out to investors as a money market fund under Rule 2a-7 
under the Investment Company Act of 1940 (17 CFR 270.2a-7). In such 
case, the broker must treat such sale only as a sale under paragraph 
(a)(9)(i) of this section and not as a sale under paragraph (a)(9)(ii) 
of this section. See paragraph (c)(3)(vi) of this section, providing 
that no return of information is required for shares described in the 
first sentence of this paragraph (c)(8)(iv).
    (v) Example: Digital asset securities--(A) Facts. Brokers 
registered under the securities laws of the United States have formed a 
large network (broker network) that maintains accounts for customers 
seeking to purchase and sell stock. The broker network clears and 
settles sales of this stock using a cryptographically secured 
distributed ledger (DLN) that provides clearance or settlement services 
to the broker network. DLN may not be used by any person other than a 
registered broker in the broker network.
    (B) Analysis. DLN is a limited-access regulated network described 
in paragraph (c)(8)(iii)(B)(1)(i) of this section because it is a 
cryptographically secured distributed ledger that provides clearance or 
settlement services and that provides access only to brokers described 
in paragraph (c)(3)(i)(B)(6) of this section. Additionally, sales of 
stock cleared on DLN are sales of securities under paragraph (a)(9)(i) 
of this section and sales of digital assets under paragraph (a)(9)(ii) 
of this section. Accordingly, sales of stock cleared on DLN are 
described in paragraph (c)(8)(iii) of this section and the coordination 
rule of paragraph (c)(8)(i) of this section does not apply to these 
sales. Therefore, the sales of stock cleared on DLN are reported only 
under paragraph (a)(9)(i) of this section. See paragraph (d)(2)(i)(A) 
of this section for the method for reporting the information required 
to be reported for such a sale.
    (d) * * *
    (2) Transactional reporting--(i) Required information--(A) General 
rule for sales described in paragraph (a)(9)(i) of this section. Except 
as provided in paragraph (c)(5) of this section, for each sale 
described in paragraph (a)(9)(i) of this section for which a broker is 
required to make a return of information under this section, the broker 
must report on Form 1099-B, Proceeds From Broker and Barter Exchange 
Transactions, or any successor form, the name, address, and taxpayer 
identification number of the customer, the property sold, the Committee 
on Uniform Security Identification Procedures (CUSIP) number of the 
security sold (if applicable) or other security identifier number that 
the Secretary may designate by publication in the Federal Register or 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter), the adjusted basis of the security sold, whether any gain or 
loss with respect to the security sold is long-term or short-term 
(within the meaning

[[Page 56562]]

of section 1222 of the Code), the gross proceeds of the sale, the sale 
date, and other information required by the form in the manner and 
number of copies required by the form. In addition, for a sale of a 
covered security on or after January 1, 2014, a broker must report on 
Form 1099-B whether any gain or loss is ordinary. See paragraph (m) of 
this section for additional rules related to options and paragraph (n) 
of this section for additional rules related to debt instruments. See 
paragraph (c)(8) of this section for rules related to sales of 
securities or sales of commodities under paragraph (a)(9)(i) of this 
section that are also sales of digital assets under paragraph 
(a)(9)(ii) of this section.
    (B) Required information for digital asset transactions. Except in 
the case of a sale of a qualifying stablecoin or a specified 
nonfungible token for which the broker reports in the manner set forth 
in paragraph (d)(10) of this section and subject to the exception 
described in paragraph (d)(2)(i)(C) of this section for sales of 
digital assets described in paragraph (a)(9)(ii)(D) of this section 
(sales effected by processors of digital asset payments), for each sale 
of a digital asset described in paragraph (a)(9)(ii) of this section 
for which a broker is required to make a return of information under 
this section, the broker must report on Form 1099-DA, Digital Asset 
Proceeds From Broker Transactions, or any successor form, in the manner 
required by such form or instructions the following information:
    (1) The name, address, and taxpayer identification number of the 
customer;
    (2) The name and number of units of the digital asset sold;
    (3) The sale date;
    (4) The gross proceeds amount (after reduction for the allocable 
digital asset transaction costs as defined and allocated pursuant to 
paragraph (d)(5)(iv) of this section);
    (5) Whether the sale was for cash, stored-value cards, or in 
exchange for services or other property;
    (6) In the case of a sale that is reported as a digital asset sale 
pursuant to the rule in paragraph (c)(8)(i) of this section and is 
described as a tokenized security in paragraph (c)(8)(i)(D) of this 
section, the broker must also report to the extent required by Form 
1099-DA or instructions: the CUSIP number of the security sold (if 
applicable) or other security identifier number that the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter); any 
information required under paragraph (m) of this section (related to 
options); any information required under paragraph (n) of this section 
(related to debt instruments); and any other information required by 
the form or instructions;
    (7) For each such sale of a digital asset that was held by the 
broker in a hosted wallet on behalf of a customer and was previously 
transferred into an account at the broker (transferred-in digital 
asset), the broker must also report the date of such transfer in and 
the number of units transferred in by the customer;
    (8) Whether the broker took into account customer-provided 
acquisition information from the customer or the customer's agent as 
described in paragraph (d)(2)(ii)(B)(4) of this section when 
determining the identification of the units sold (without regard to 
whether the broker's determination with respect to the particular unit 
sold was derived from the broker's own records or from that 
information); and
    (9) Any other information required by the form or instructions.
    (C) Exception for certain sales effected by processors of digital 
asset payments. A broker is not required to report any information 
required by paragraph (d)(2)(i)(B) of this section with respect to a 
sale of a digital asset described in paragraph (a)(9)(ii)(D) of this 
section (sales effected by processors of digital asset payments) by a 
customer if the gross proceeds (after reduction for the allocable 
digital asset transaction costs) from all such sales of digital assets 
effected by that broker for the year by the customer do not exceed 
$600. Gross proceeds from sales of qualifying stablecoins or specified 
nonfungible tokens that are reported in the manner set forth in 
paragraph (d)(10) of this section are not included in determining if 
this $600 threshold has been met. For the rules applicable for 
determining who the customer is for purposes of calculating this $600 
threshold in the case of a joint account, see paragraph (d)(10)(v) of 
this section.
    (D) Acquisition information for sales of certain digital assets. 
Except in the case of a sale of a qualifying stablecoin or a specified 
nonfungible token for which the broker reports in the manner set forth 
in paragraph (d)(10) of this section, for each sale described in 
paragraph (a)(9)(ii) of this section on or after January 1, 2026, of a 
covered security defined in paragraph (a)(15)(i)(H), (J), or (K) of 
this section that was acquired by the broker for the customer and held 
in the customer's account, for which a broker is required to make a 
return of information under paragraph (d)(2)(i)(B) of this section, the 
broker must also report the following information:
    (1) The adjusted basis of the covered security sold calculated in 
accordance with paragraph (d)(6) of this section;
    (2) The date such covered security was purchased, and whether any 
gain or loss with respect to the covered security sold is long-term or 
short-term in accordance with paragraph (d)(7) of this section;
    (3) For purpose of determining the information required in 
paragraphs (d)(2)(i)(D)(1) through (2) in the case of an option and any 
asset delivered in settlement of an option, the broker must apply any 
applicable rules set forth in paragraph (m) of this section; and
    (4) In the case of a sale that is reported as a digital asset sale 
pursuant to the rule in paragraph (c)(8)(i) of this section and is 
described as a tokenized security in paragraph (c)(8)(i)(D) of this 
section, see paragraphs (d)(6)(iii)(A)(2) and (d)(7)(ii)(A)(2) of this 
section regarding the basis and holding period adjustments required for 
wash sales, paragraph (d)(6)(v) of this section for rules regarding the 
application of the average basis method, paragraph (m) of this section 
for rules related to options, paragraph (n) of this section for rules 
related to debt instruments, and any other information required by the 
form or instructions.
    (ii) Specific identification of specified securities--(A) In 
general. Except as provided in Sec.  1.1012-1(e)(7)(ii), for a 
specified security described in paragraph (a)(14)(i) of this section 
sold on or after January 1, 2011, or for a specified security described 
in paragraph (a)(14)(ii) of this section sold on or after January 1, 
2014, a broker must report a sale of less than the entire position in 
an account of a specified security that was acquired on different dates 
or at different prices consistently with a customer's adequate and 
timely identification of the security to be sold. See Sec.  1.1012-
1(c). If the customer does not provide an adequate and timely 
identification for the sale, the broker must first report the sale of 
securities in the account for which the broker does not know the 
acquisition or purchase date followed by the earliest securities 
purchased or acquired, whether covered securities or noncovered 
securities.
    (B) Identification of digital assets sold, disposed of, or 
transferred. For a specified security described in paragraph (a)(14)(v) 
of this section, a broker must determine the unit sold, disposed of, or 
transferred, if less than the entire position in an account of such 
specified security that was acquired on different dates or at different 
prices, consistently with the adequate identification of the digital 
asset to be sold, disposed of, or transferred.

[[Page 56563]]

    (1) No identification of units by customer. In the case of multiple 
units of the same digital asset that are held by a broker for a 
customer, if the customer does not provide the broker with an adequate 
identification of which units of a digital asset are sold, disposed of, 
or transferred by the date and time of the sale, disposition, or 
transfer, and the broker does not have adequate transfer-in date 
records and does not have or take into account customer-provided 
acquisition information as defined by paragraph (d)(2)(ii)(B)(4) of 
this section, then the broker must first report the sale, disposition, 
or transfer of units that were not acquired by the broker for the 
customer. After the disposition of all such units of digital assets, 
the broker must treat units as sold, disposed of, or transferred in 
order of time from the earliest date on which units of the same digital 
asset were acquired by the customer. See paragraph (d)(2)(ii)(B)(4) of 
this section for circumstances under which a broker may use information 
provided by the customer or the customer's agent to determine when 
units of a digital asset were acquired by the customer. If the broker 
does not receive customer-provided acquisition information with respect 
to digital assets that were transferred into the customer's account or 
otherwise does not take such information into account, the broker must 
treat those units as acquired as of the date and time of the transfer.
    (2) Adequate identification of units by customer. Except as 
provided in paragraph (d)(2)(ii)(B)(3) of this section, when multiple 
units of the same digital asset are left in the custody of the broker, 
an adequate identification occurs if, no later than the date and time 
of the sale, disposition, or transfer, the customer specifies to the 
broker the particular units of the digital asset to be sold, disposed 
of, or transferred by reference to any identifier that the broker 
designates as sufficiently specific to determine the units sold, 
disposed of, or transferred. For example, a customer's reference to the 
purchase date and time of the units to be sold may be designated by the 
broker as sufficiently specific to determine the units sold, disposed 
of, or transferred if no other unidentified units were purchased at 
that same purchase date and time or purchase price. To the extent 
permitted by paragraph (d)(2)(ii)(B)(4) of this section, a broker may 
take into account customer-provided acquisition information with 
respect to transferred-in digital assets for purposes of enabling a 
customer to make a sufficiently specific reference. A standing order or 
instruction for the specific identification of digital assets is 
treated as an adequate identification made at the date and time of 
sale, disposition, or transfer. In the case of a broker that offers 
only one method of making a specific identification, such method is 
treated as a standing order or instruction within the meaning of the 
prior sentence.
    (3) Special rule for the identification of certain units withheld 
from a transaction. Notwithstanding paragraphs (d)(2)(ii)(B)(1) and (2) 
of this section, in the case of a sale of digital assets in exchange 
for other digital assets differing materially in kind or in extent and 
for which the broker withholds units of the digital assets received for 
either the broker's obligation to deduct and withhold a tax under 
section 3406, or for payment of the customer's digital asset 
transaction costs as defined in paragraph (d)(5)(iv)(A) of this 
section, the customer is deemed to have made an adequate 
identification, within the meaning of paragraph (d)(2)(ii)(B)(2) of 
this section, for such withheld units as from the units received in the 
underlying transaction regardless of any other adequate identification 
within the meaning of paragraph (d)(2)(ii)(B)(2) of this section 
designating other units of the same digital asset as the units sold, 
disposed of, or transferred.
    (4) Customer-provided acquisition information for digital assets. 
For purposes of identifying which units are sold, disposed of, or 
transferred under paragraph (d)(2)(ii)(A) of this section, a broker is 
permitted, but not required, to take into account customer-provided 
acquisition information. For purposes of this section, customer-
provided acquisition information means reasonably reliable information, 
such as the date and time of acquisition of units of a digital asset, 
provided by a customer or the customer's agent to the broker no later 
than the date and time of a sale, disposition, or transfer. Reasonably 
reliable information includes purchase or trade confirmations at other 
brokers or immutable data on a public distributed ledger. Solely for 
purposes of penalties under sections 6721 and 6722, a broker that takes 
into account customer-provided acquisition information for purposes of 
identifying which units are sold, disposed of, or transferred is deemed 
to have relied upon this information in good faith if the broker 
neither knows nor has reason to know that the information is incorrect. 
See Sec.  301.6724-1(c)(6) of this chapter.
    (iii) Penalty relief for reporting information not subject to 
reporting--(A) Noncovered securities. A broker is not required to 
report adjusted basis and the character of any gain or loss for the 
sale of a noncovered security if the return identifies the sale as a 
sale of a noncovered security. A broker that chooses to report this 
information for a noncovered security is not subject to penalties under 
section 6721 or 6722 of the Code for failure to report this information 
correctly if the return identifies the sale as a sale of a noncovered 
security. For purposes of this paragraph (d)(2)(iii)(A), a broker must 
treat a security for which a broker makes the single-account election 
described in Sec.  1.1012-1(e)(11)(i) as a covered security.
    (B) Gross proceeds from digital assets sold before applicability 
date. A broker is not required to report the gross proceeds from the 
sale of a digital asset as described in paragraph (a)(9)(ii) of this 
section if the sale is effected prior to January 1, 2025. A broker that 
chooses to report this information on either the Form 1099-B, or when 
available the Form 1099-DA, pursuant to paragraph (d)(2)(i)(B) of this 
section is not subject to penalties under section 6721 or 6722 for 
failure to report this information correctly. See paragraph 
(d)(2)(iii)(A) of this section for the reporting of adjusted basis and 
the character of any gain or loss for the sale of a noncovered security 
that is a digital asset.
    (iv) Information from other parties and other accounts--(A) 
Transfer and issuer statements. When reporting a sale of a covered 
security, a broker must take into account all information, other than 
the classification of the security (such as stock), furnished on a 
transfer statement (as described in Sec.  1.6045A-1) and all 
information furnished or deemed furnished on an issuer statement (as 
described in Sec.  1.6045B-1) unless the statement is incomplete or the 
broker has actual knowledge that it is incorrect. A broker may treat a 
customer as a minority shareholder when taking the information on an 
issuer statement into account unless the broker knows that the customer 
is a majority shareholder and the issuer statement reports the action's 
effect on the basis of majority shareholders. A failure to report 
correct information that arises solely from reliance on information 
furnished on a transfer statement or issuer statement is deemed to be 
due to reasonable cause for purposes of penalties under sections 6721 
and 6722. See Sec.  301.6724-1(a)(1) of this chapter.
    (B) Other information with respect to securities. Except in the 
case of a covered security that is described in paragraph 
(a)(15)(i)(H), (J), or (K) of this

[[Page 56564]]

section, a broker is permitted, but not required, to take into account 
information about a covered security other than what is furnished on a 
transfer statement or issuer statement, including any information the 
broker has about securities held by the same customer in other accounts 
with the broker. For purposes of penalties under sections 6721 and 
6722, a broker that takes into account information with respect to 
securities described in the previous sentence that is received from a 
customer or third party other than information furnished on a transfer 
statement or issuer statement is deemed to have relied upon this 
information in good faith if the broker neither knows nor has reason to 
know that the information is incorrect. See Sec.  301.6724-1(c)(6) of 
this chapter.
    (v) Failure to receive a complete transfer statement for 
securities. A broker that has not received a complete transfer 
statement as required under Sec.  1.6045A-1(a)(3) for a transfer of a 
specified security described in paragraphs (a)(14)(i) through (iv) of 
this section must request a complete statement from the applicable 
person effecting the transfer unless, under Sec.  1.6045A-1(a), the 
transferor has no duty to furnish a transfer statement for the 
transfer. The broker is only required to make this request once. If the 
broker does not receive a complete transfer statement after requesting 
it, the broker may treat the security as a noncovered security upon its 
subsequent sale or transfer. A transfer statement for a covered 
security is complete if, in the view of the receiving broker, it 
provides sufficient information to comply with this section when 
reporting the sale of the security. A transfer statement for a 
noncovered security is complete if it indicates that the security is a 
noncovered security.
    (vi) Reporting by other parties after a sale of securities--(A) 
Transfer statements. If a broker receives a transfer statement 
indicating that a security is a covered security after the broker 
reports the sale of the security, the broker must file a corrected 
return within thirty days of receiving the statement unless the broker 
reported the required information on the original return consistently 
with the transfer statement.
    (B) Issuer statements. If a broker receives or is deemed to receive 
an issuer statement after the broker reports the sale of a covered 
security, the broker must file a corrected return within thirty days of 
receiving the issuer statement unless the broker reported the required 
information on the original return consistently with the issuer 
statement.
    (C) Exception. A broker is not required to file a corrected return 
under this paragraph (d)(2)(vi) if the broker receives the transfer 
statement or issuer statement more than three years after the broker 
filed the return.
    (vii) Examples. The following examples illustrate the rules of this 
paragraph (d)(2). Unless otherwise indicated, all events and 
transactions described in paragraphs (d)(2)(vii)(C) and (D) of this 
section (Examples 3 and 4) occur on or after January 1, 2026.

    (A) Example 1--(1) Facts. On February 22, 2012, K sells 100 
shares of stock of C, a corporation, at a loss in an account held 
with F, a broker. On March 15, 2012, K purchases 100 shares of C 
stock for cash in an account with G, a different broker. Because K 
acquires the stock purchased on March 15, 2012, for cash in an 
account after January 1, 2012, under paragraph (a)(15) of this 
section, the stock is a covered security. K asks G to increase K's 
adjusted basis in the stock to account for the application of the 
wash sale rules under section 1091 to the loss transaction in the 
account held with F.
    (2) Analysis. Under paragraph (d)(2)(iv)(B) of this section, G 
is not required to take into account the information provided by K 
when subsequently reporting the adjusted basis and whether any gain 
or loss on the sale is long-term or short-term. If G chooses to take 
this information into account, under paragraph (d)(2)(iv)(B) of this 
section, G is deemed to have relied upon the information received 
from K in good faith for purposes of penalties under sections 6721 
and 6722 if G neither knows nor has reason to know that the 
information provided by K is incorrect.
    (B) Example 2--(1) Facts. L purchases shares of stock of a 
single corporation in an account with F, a broker, on April 17, 
1969, April 17, 2012, April 17, 2013, and April 17, 2014. In January 
2015, L sells all the stock.
    (2) Analysis. Under paragraph (d)(2)(i)(A) of this section, F 
must separately report the gross proceeds and adjusted basis 
attributable to the stock purchased in 2014, for which the gain or 
loss on the sale is short-term, and the combined gross proceeds and 
adjusted basis attributable to the stock purchased in 2012 and 2013, 
for which the gain or loss on the sale is long-term. Under paragraph 
(d)(2)(iii)(A) of this section, F must also separately report the 
gross proceeds attributable to the stock purchased in 1969 as the 
sale of noncovered securities in order to avoid treatment of this 
sale as the sale of covered securities.
    (C) Example 3: Ordering rule--(1) Facts. On August 1, Year 1, TP 
opens a hosted wallet account at CRX, a digital asset broker that 
owns and operates a digital asset trading platform, and purchases 
within the account 10 units of digital asset DE for $9 per unit. On 
January 1, Year 2, TP opens a hosted wallet account at BEX, another 
digital asset broker that owns and operates a digital asset trading 
platform, and purchases within this account 20 units of digital 
asset DE for $5 per unit. On August 1, Year 3, TP transfers the 
digital asset units held in TP's hosted wallet account with CRX into 
TP's hosted wallet account with BEX. On September 1, Year 3, TP 
directs BEX to sell 10 units of DE but does not specify which units 
are to be sold and does not provide to BEX purchase date and time 
information with respect to the DE units transferred into TP's 
account with BEX. BEX has adequate transfer-in date records with 
respect to TP's transfer of the 10 units of DE on August 1, Year 3. 
BEX effects the sale on TP's behalf for $10 per unit.
    (2) Analysis. TP did not make an adequate identification of the 
units to be sold in a sale of DE units that was less than TP's 
entire position in digital asset DE. Therefore, BEX must treat the 
units of digital asset DE sold according to the ordering rule 
provided in paragraph (d)(2)(ii)(B) of this section. Pursuant to 
that rule, because BEX has adequate transfer-in date records with 
respect to TP's transfer of the 10 units of DE on August 1, Year 3, 
and because TP did not give BEX customer-provided acquisition 
information as defined by paragraph (d)(2)(ii)(B)(4) of this section 
with respect to the units transferred into TP's account at BEX, the 
units sold must be attributed to the earliest units of digital asset 
DE acquired by TP. Additionally, because TP did not give BEX 
customer-provided acquisition information, BEX must treat those 
units as acquired as of the date and time of the transfer (August 1, 
Year 3). Accordingly, the 10 units sold must be attributed to 10 of 
the 20 DE units purchased by TP on January 1, Year 2, in the BEX 
account because based on the information known to BEX these units 
were purchased prior to the date (August 1, Year 3) when TP 
transferred the other units purchased at CRX into the account. The 
DE units are digital assets that were acquired on or after January 
1, 2026, for TP by a broker (BEX) providing custodial services, and, 
thus, constitute covered securities under paragraph (a)(15)(i)(J) of 
this section. Accordingly, in addition to the gross proceeds and 
other information required to be reported under paragraph 
(d)(2)(i)(B) of this section, BEX must also report the adjusted 
basis of the DE units sold, the date the DE units were purchased, 
and whether any gain or loss with respect to the DE units sold is 
long-term or short-term as required by paragraph (d)(2)(i)(D) of 
this section. Finally, because TP did not give BEX customer-provided 
acquisition information, TP will be required to treat different 
units as sold under the rules provided by Sec.  1.1012-1(j)(3) from 
those units that BEX treats as sold under this section unless TP 
adopts a standing order to follow the ordering rule result required 
by BEX. See Sec.  1.1012-1(j)(5)(iv) (Example 4).
    (D) Example 4: Ordering rule--(1) Facts. The facts are the same 
as in paragraph (d)(2)(vii)(C)(1) of this section (the facts in 
Example 3), except on September 1, Year 3, TP's agent (CRX) provides 
BEX with purchase confirmations showing that the 10 units TP 
transferred into TP's account at BEX were purchased on August 1, 
Year 1. BEX neither knows nor has reason to know that the 
information supplied by CRX is incorrect and chooses to take this 
information into account for purposes of identifying which of the 
TP's units are sold, disposed of, or transferred.
    (2) Analysis. Because TP did not make an adequate identification 
of the units to be sold

[[Page 56565]]

in a sale of DE units that was less than TP's entire position in 
digital asset DE, BEX must treat the units of digital asset DE sold 
as the earliest units of digital asset DE acquired by TP. The 
purchase confirmations (showing a purchase date of August 1, Year 1) 
for the 10 units that were transferred into TP's account at BEX 
constitute customer-provided acquisition information under paragraph 
(d)(2)(ii)(B)(4) of this section, which BEX is permitted, but not 
required, to take into account. Accordingly, BEX is permitted to 
treat the 10 units sold by TP as the 10 DE units TP purchased on 
August 1, Year 1 (and transferred into BEX's account on August 1, 
Year 3), because these were the earliest units of digital asset DE 
acquired by TP. The DE units are digital assets that were acquired 
on or after January 1, 2026, for TP by a broker (CRX) providing 
custodial services, and, thus, constitute covered securities under 
paragraph (a)(15)(i)(J) of this section. However, because these 
covered securities were not acquired and thereafter held by the 
selling broker (BEX), BEX is not required to report the acquisition 
information required by paragraph (d)(2)(i)(D) of this section. 
Finally, because TP provided the purchase information with respect 
to the transferred in units to BEX, the units determined as sold by 
BEX are the same units that TP must treat as sold under Sec.  
1.1012-1(j)(3)(i). See Sec.  1.1012-1(j)(5)(iv) (Example 4).

* * * * *
    (4) Sale date--(i) In general. For sales of property that are 
reportable under this section other than digital assets, a broker must 
report a sale as occurring on the date the sale is entered on the books 
of the broker.
    (ii) Special rules for digital asset sales. For sales of digital 
assets that are effected when digitally recorded using 
cryptographically secured distributed ledger technology, such as a 
blockchain or similar technology, the broker must report the date of 
sale as the date when the transactions are recorded on the ledger. For 
sales of digital assets that are effected by a broker and recorded in 
the broker's books and records (commonly referred to as an off-chain 
transaction) and not directly on a distributed ledger or similar 
technology, the broker must report the date of sale as the date when 
the transactions are recorded on its books and records without regard 
to the date that the transactions may be later recorded on the 
distributed ledger or similar technology.
    (5) Gross proceeds--(i) In general. Except as otherwise provided in 
paragraph (d)(5)(ii) of this section with respect to digital asset 
sales, for purposes of this section, gross proceeds on a sale are the 
total amount paid to the customer or credited to the customer's account 
as a result of the sale reduced by the amount of any qualified stated 
interest reported under paragraph (d)(3) of this section and increased 
by any amount not paid or credited by reason of repayment of margin 
loans. In the case of a closing transaction (other than a closing 
transaction related to an option) that results in a loss, gross 
proceeds are the amount debited from the customer's account. For sales 
before January 1, 2014, a broker may, but is not required to, reduce 
gross proceeds by the amount of commissions and transfer taxes, 
provided the treatment chosen is consistent with the books of the 
broker. For sales on or after January 1, 2014, a broker must reduce 
gross proceeds by the amount of commissions and transfer taxes related 
to the sale of the security. For securities sold pursuant to the 
exercise of an option granted or acquired before January 1, 2014, a 
broker may, but is not required to, take the option premiums into 
account in determining the gross proceeds of the securities sold, 
provided the treatment chosen is consistent with the books of the 
broker. For securities sold pursuant to the exercise of an option 
granted or acquired on or after January 1, 2014, or for the treatment 
of an option granted or acquired on or after January 1, 2014, see 
paragraph (m) of this section. A broker must report the gross proceeds 
of identical stock (within the meaning of Sec.  1.1012-1(e)(4)) by 
averaging the proceeds of each share if the stock is sold at separate 
times on the same calendar day in executing a single trade order and 
the broker executing the trade provides a single confirmation to the 
customer that reports an aggregate total price or an average price per 
share. However, a broker may not average the proceeds if the customer 
notifies the broker in writing of an intent to determine the proceeds 
of the stock by the actual proceeds per share and the broker receives 
the notification by January 15 of the calendar year following the year 
of the sale. A broker may extend the January 15 deadline but not beyond 
the due date for filing the return required under this section.
    (ii) Sales of digital assets. The rules contained in paragraphs 
(d)(5)(ii)(A) and (B) of this section apply solely for purposes of this 
section.
    (A) Determining gross proceeds. Except as otherwise provided in 
this section, gross proceeds from the sale of a digital asset are equal 
to the sum of the total cash paid to the customer or credited to the 
customer's account from the sale plus the fair market value of any 
property or services received (including services giving rise to 
digital asset transaction costs), reduced by the amount of digital 
asset transaction costs, as defined and allocated under paragraph 
(d)(5)(iv) of this section. In the case of a debt instrument issued in 
exchange for the digital asset and subject to Sec.  1.1001-1(g), the 
amount realized attributable to the debt instrument is determined under 
Sec.  1.1001-7(b)(1)(iv) rather than by reference to the fair market 
value of the debt instrument. See paragraph (d)(5)(iv)(C) of this 
section for a special rule setting forth how cascading digital asset 
transaction costs are to be allocated in certain exchanges of one 
digital asset for a different digital asset.
    (1) Determining fair market value. Fair market value is measured at 
the date and time the transaction was effected. Except as provided in 
the next sentence, in determining the fair market value of services or 
property received or credited in exchange for a digital asset, the 
broker must use a reasonable valuation method that looks to 
contemporaneous evidence of value, such as the purchase price of the 
services, goods or other property, the exchange rate, and the U.S. 
dollar valuation applied by the broker to effect the exchange. In 
determining the fair market value of services giving rise to digital 
asset transaction costs, the broker must look to the fair market value 
of the digital assets used to pay for such transaction costs. In 
determining the fair market value of a digital asset, the broker may 
perform its own valuations or rely on valuations performed by a digital 
asset data aggregator as defined in paragraph (d)(5)(ii)(B) of this 
section, provided such valuations apply a reasonable valuation method 
for digital assets as described in paragraph (d)(5)(ii)(A)(3) of this 
section.
    (2) Consideration value not readily ascertainable. When valuing 
services or property (including digital assets) received in exchange 
for a digital asset, the value of what is received should ordinarily be 
identical to the value of the digital asset exchanged. If there is a 
disparity between the value of services or property received and the 
value of the digital asset exchanged, the gross proceeds received by 
the customer is the fair market value at the date and time the 
transaction was effected of the services or property, including digital 
assets, received. If the broker or digital asset data aggregator, in 
the case of digital assets, reasonably determines that the fair market 
value of the services or property received cannot be determined with 
reasonable accuracy, the fair market value of the received services or 
property must be determined by reference to the fair market value of 
the transferred digital asset at the time of the exchange. See Sec.  
1.1001-7(b)(4). If the broker or digital asset data aggregator, in the 
case of a digital asset, reasonably determines that neither the

[[Page 56566]]

value of the received services or property nor the value of the 
transferred digital asset can be determined with reasonable accuracy, 
the broker must report that the received services or property has an 
undeterminable value.
    (3) Reasonable valuation method for digital assets. A reasonable 
valuation method for digital assets is a method that considers and 
appropriately weighs the pricing, trading volumes, market 
capitalization and other factors relevant to the valuation of digital 
assets traded through digital asset trading platforms. A valuation 
method is not a reasonable valuation method for digital assets if it, 
for example, gives an underweight effect to exchange prices lying near 
the median price value, an overweight effect to digital asset trading 
platforms having low trading volume, or otherwise inappropriately 
weighs factors associated with a price that would make that price an 
unreliable indicator of value.
    (B) Digital asset data aggregator. A digital asset data aggregator 
is an information service provider that provides valuations of digital 
assets based on any reasonable valuation method.
    (iii) Digital asset transactions effected by processors of digital 
asset payments. The amount of gross proceeds under paragraph (d)(5)(ii) 
of this section received by a party who sells a digital asset under 
paragraph (a)(9)(ii)(D) of this section (effected by a processor of 
digital asset payments) is equal to: the sum of the amount paid in 
cash, and the fair market value of the amount paid in digital assets by 
that processor to a second party, plus any digital asset transaction 
costs and other fees charged to the second party that are withheld 
(whether withheld from the digital assets transferred by the first 
party or withheld from the amount due to the second party); and reduced 
by the amount of digital asset transaction costs paid by or withheld 
from the first party, as defined and allocated under the rules of 
paragraph (d)(5)(iv) of this section.
    (iv) Definition and allocation of digital asset transaction costs--
(A) Definition. The term digital asset transaction costs means the 
amount paid in cash or property (including digital assets) to effect 
the sale, disposition, or acquisition of a digital asset. Digital asset 
transaction costs include transaction fees, transfer taxes, and 
commissions.
    (B) General allocation rule. Except as provided in paragraph 
(d)(5)(iv)(C) of this section, in the case of a sale or disposition of 
digital assets, the total digital asset transaction costs paid by the 
customer are allocable to the sale or disposition of the digital 
assets.
    (C) Special rule for allocation of certain cascading digital asset 
transaction costs. In the case of a sale of one digital asset in 
exchange for another digital asset differing materially in kind or in 
extent (original transaction) and for which digital assets received in 
the original transaction are withheld to pay digital asset transaction 
costs, the total digital asset transaction costs paid by the taxpayer 
to effect both the original transaction and the disposition of the 
withheld digital assets are allocable exclusively to the disposition of 
digital assets in the original transaction.
    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(5). Unless otherwise indicated, all events and 
transactions in the following examples occur on or after January 1, 
2025.

    (A) Example 1: Determination of gross proceeds when digital 
asset transaction costs paid in digital assets--(1) Facts. CRX, a 
digital asset broker, buys, sells, and exchanges various digital 
assets for cash or different digital assets on behalf of its 
customers. For this service, CRX charges a transaction fee equal to 
1 unit of CRX's proprietary digital asset CM per transaction. Using 
the services of CRX, customer K, an individual not otherwise exempt 
from reporting, purchases 15 units of CM and 10 units of digital 
asset DE. On April 28, Year 1, when the CM units have a value of $2 
per unit, the DE units have a value of $8 per unit, and digital 
asset ST units have a value of $0.80 per unit, K instructs CRX to 
exchange K's 10 units of DE for 100 units of digital asset ST. CRX 
charges K one unit of CM as a transaction fee for the exchange.
    (2) Analysis. Under paragraph (d)(5)(iv)(A) of this section, K 
has digital asset transaction costs of $2, which is the value of 1 
CM unit. Under paragraph (d)(5)(ii)(A) of this section, the gross 
proceeds amount that CRX must report from K's sale of the 10 units 
of DE is equal to the fair market value of the 100 units of ST that 
K received (less the value of the CM unit sold to pay the digital 
asset transaction cost to CRX and allocable to the sale of the DE 
units). The fair market value of the 100 units of ST at the date and 
time the transaction was effected is equal to $80 (the product of 
$0.80 and 100 units). Accordingly, CRX must report gross proceeds of 
$78 from K's sale of the 10 units of DE. CRX must also report the 
gross proceeds from K's sale of one CM unit to pay for CRX's 
services. Under paragraph (d)(5)(ii)(A) of this section, the gross 
proceeds from K's sale of one unit of CM is equal to the fair market 
value of the digital assets used to pay for such transaction costs. 
Accordingly, CRX must report $2 as gross proceeds from K's sale of 
one unit of CM.
    (B) Example 2: Determination of gross proceeds when digital 
asset transaction costs are withheld from transferred digital 
assets--(1) Facts. K owns a total of 10 units of digital asset A 
that K deposits with broker BEX that provides custodial services for 
digital assets. K directs BEX to effect the exchange of 10 units of 
K's digital asset A for 20 units of digital asset B. At the time of 
the exchange, each unit of digital asset A has a fair market value 
of $2 and each unit of digital asset B has a fair market value of 
$1. BEX charges a fee of $2 per transaction, which BEX withholds 
from the units of the digital asset A transferred. At the time of 
the transaction, BEX withholds 1 unit of digital asset A. TP 
exchanges the remaining 9 units of digital asset A for 18 units of 
digital asset B.
    (2) Analysis. The withholding of 1 unit of digital asset A is a 
sale of a digital asset for BEX's services within the meaning of 
paragraph (a)(9)(ii)(C) of this section. Under paragraph 
(d)(5)(iv)(A) of this section, K has digital asset transaction costs 
of $2. Under paragraph (d)(5)(iv)(C) of this section, TP must 
allocate such costs to the disposition of the 10 units of digital 
asset A. Under paragraphs (d)(5)(ii)(A) and (d)(5)(iv)(C) of this 
section, TP's gross proceeds from the sale of the 10 units of 
digital asset A is $18, which is the excess of the fair market value 
of the 18 units of digital asset B received ($18) and the fair 
market value of the broker services received ($2) as of the date and 
time of the transaction over the allocated digital asset transaction 
costs ($2). Accordingly, BEX must report $18 as gross proceeds from 
K's sale of 10 units of digital asset A.
    (C) Example 3: Determination of gross proceeds when digital 
asset transaction costs are withheld from acquired digital assets in 
an exchange of digital assets--(1) Facts. The facts are the same as 
in paragraph (d)(5)(v)(B)(1) of this section (the facts in Example 
2), except that BEX requires its payment be withheld from the units 
of the digital asset acquired. At the time of the transaction, BEX 
withholds 3 units of digital asset B, two units of which effect the 
exchange of digital asset A for digital asset B and one unit of 
which effects the disposition of digital asset B for payment of the 
transaction fees.
    (2) Analysis. The withholding of 3 units of digital asset B is a 
disposition of digital assets for BEX's services within the meaning 
of paragraph (a)(9)(ii)(C) of this section. Under paragraph 
(d)(5)(iv)(A) of this section, K has digital asset transaction costs 
of $3. Under paragraph (d)(5)(iv)(C) of this section, K must 
allocate such costs to the disposition of the 10 units of digital 
asset A. Under paragraphs (d)(5)(ii)(A) and (d)(5)(iv)(C) of this 
section, K's gross proceeds from the sale of the 10 units of digital 
asset A is $17, which is the excess of the fair market value of the 
20 units of digital asset B received ($20) as of the date and time 
of the transaction over the allocated digital asset transaction 
costs ($3). K's gross proceeds from the sale of the 3 units of 
digital asset B used to pay digital asset transaction costs is $3, 
which is the fair market value of BEX's services received at the 
time of the transaction. Accordingly, BEX must report $17 as gross 
proceeds from K's sale of 10 units of digital asset A. Additionally, 
pursuant to paragraph (c)(3)(ii)(C) of this section, BEX is not 
required to report K's sale of the 3 withheld units of digital asset 
B because the 3 units of

[[Page 56567]]

digital asset B were units withheld from digital assets received by 
K to pay for K's digital asset transaction costs.
    (D) Example 4: Determination of gross proceeds--(1) Facts. CPP, 
a processor of digital asset payments, offers debit cards to its 
customers who hold digital asset FE in their accounts with CPP. The 
debit cards allow CPP's customers to use digital assets held in 
accounts with CPP to make payments to merchants who do not accept 
digital assets. CPP charges its card holders a 2% transaction fee 
for purchases made using the debit card and sets forth in its terms 
and conditions the process CPP will use to determine the exchange 
rate provided at the date and time of its customers' transactions. 
CPP has issued a debit card to B, an individual not otherwise exempt 
from reporting, who wants to make purchases using digital assets. B 
transfers 1,000 units of FE into B's account with CPP. B then uses 
the debit card to purchase merchandise from a U.S. merchant STR for 
$1,000. An exchange rate of 1 FE = $2 USD is applied to effect the 
transaction, based on the exchange rate at that date and time and 
pursuant to B's account agreement. To settle the transaction, CPP 
removes 510 units of FE from B's account equal to $1,020 ($1,000 
plus a 2% transaction fee equal to $20). CPP then pays STR $1,000 in 
cash.
    (2) Analysis. B paid $20 of digital asset transaction costs as 
defined in paragraph (d)(5)(iv)(A) of this section. Under paragraph 
(d)(5)(iii) of this section, the gross proceeds amount that CPP must 
report with respect to B's sale of the 510 units of FE to purchase 
the merchandise is $1,000, which is the sum of the amount of cash 
paid by CPP to STR plus the $20 digital asset transaction costs 
withheld by CPP, reduced by the $20 digital asset transaction costs 
as allocated under paragraph (d)(5)(iv)(B) of this section. CPP's 
payment of cash to STR is also a payment card transaction under 
Sec.  1.6050W-1(b) subject to reporting under Sec.  1.6050W-1(a).
    (E) Example 5: Determination of gross proceeds--(1) Facts. STR, 
a U.S. merchant corporation, advertises that it accepts digital 
asset FE as payment for its merchandise that is not digital assets. 
Customers making purchases at STR using digital asset FE are 
directed to create an account with CXX, a processor of digital asset 
payments, which, pursuant to a preexisting agreement with STR, 
accepts digital asset FE in return for payments in cash made to STR. 
CXX charges a 2% transaction fee, which is paid by STR and not STR's 
customers. S, an individual not otherwise exempt from reporting, 
seeks to purchase merchandise from STR for $10,000. To effect 
payment, S is directed by STR to CXX, with whom S has an account. An 
exchange rate of 1 FE = $2 USD is applied to effect the purchase 
transaction. Pursuant to this exchange rate, S then transfers 5,000 
units of FE to CXX, which, in turn, pays STR $9,800 ($10,000 less a 
2% transaction fee equal to $200).
    (2) Analysis. Under paragraph (d)(5)(iii) of this section, the 
gross proceeds amount that CXX must report with respect to this sale 
is $10,000, which is the sum of the amount in U.S. dollars paid by 
CPP to STR ($9,800) plus the $200 digital asset transaction costs 
withheld from the payment due to STR. Because S does not have any 
digital asset transaction costs, the $9,800 amount is not reduced by 
any digital asset transaction costs charged to STR because that fee 
was not paid by S. In addition, CXX's payment of cash to STR (plus 
the withheld transaction fee) may be reportable under Sec.  1.6050W-
1(a) as a third party network transaction under Sec.  1.6050W-1(c) 
if CXX is a third party settlement organization under the definition 
in Sec.  1.6050W-1(c)(2).
    (F) Example 6: Determination of gross proceeds in a real estate 
transaction--(1) Facts. J, an unmarried individual not otherwise 
exempt from reporting, enters into a contractual agreement with B, 
an individual not otherwise exempt from reporting, to exchange J's 
principal residence, Blackacre, which has a fair market value of 
$300,000, for cash in the amount of $75,000 and units of digital 
asset DE with a value of $225,000. Prior to closing, B transfers the 
digital asset portion of the payment directly from B's wallet to J's 
wallet. At closing, J certifies to the closing agent (CA) that J 
received the DE units required to be paid under the contractual 
agreement. CA is also a real estate reporting person under Sec.  
1.6045-4, and a digital asset middleman under paragraph (a)(21) of 
this section with respect to the transaction.
    (2) Analysis. CA is required to report on Form 1099-DA the gross 
proceeds received by B in exchange for B's sale of digital assets in 
this transaction. The gross proceeds amount to be reported under 
paragraph (d)(5)(ii)(A) of this section is equal to $225,000, which 
is the $300,000 value of Blackacre less $75,000 that B paid in cash. 
In addition, under Sec.  1.6045-4, CA is required to report on Form 
1099-S the $300,000 of gross proceeds received by J ($75,000 cash 
and $225,000 in digital assets) as consideration for J's disposition 
of Blackacre.

    (6) * * *
    (i) In general. For purposes of this section, the adjusted basis of 
a specified security is determined from the initial basis under 
paragraph (d)(6)(ii) of this section as of the date the specified 
security is acquired in an account, increased by the commissions and 
transfer taxes related to its sale to the extent not accounted for in 
gross proceeds as described in paragraph (d)(5) of this section. A 
broker is not required to consider transactions or events occurring 
outside the account except for an organizational action taken by an 
issuer of a specified security other than a digital asset during the 
period the broker holds custody of the security (beginning with the 
date that the broker receives a transferred security) reported on an 
issuer statement (as described in Sec.  1.6045B-1) furnished or deemed 
furnished to the broker. Except as otherwise provided in paragraph (n) 
of this section, a broker is not required to consider customer 
elections. For rules related to the adjusted basis of a debt 
instrument, see paragraph (n) of this section.
    (ii) Initial basis--(A) Cost basis for specified securities 
acquired for cash. For a specified security acquired for cash, the 
initial basis generally is the total amount of cash paid by the 
customer or credited against the customer's account for the specified 
security, increased by the commissions, transfer taxes, and digital 
asset transaction costs related to its acquisition. A broker may, but 
is not required to, take option premiums into account in determining 
the initial basis of securities purchased or acquired pursuant to the 
exercise of an option granted or acquired before January 1, 2014. For 
rules related to options granted or acquired on or after January 1, 
2014, see paragraph (m) of this section. A broker may, but is not 
required to, increase initial basis for income recognized upon the 
exercise of a compensatory option or the vesting or exercise of other 
equity-based compensation arrangements, granted or acquired before 
January 1, 2014. A broker may not increase initial basis for income 
recognized upon the exercise of a compensatory option or the vesting or 
exercise of other equity-based compensation arrangements, granted or 
acquired on or after January 1, 2014, or upon the vesting or exercise 
of a digital asset-based compensation arrangement granted or acquired 
on or after January 1, 2025. A broker must report the basis of 
identical stock (within the meaning of Sec.  1.1012-1(e)(4)) by 
averaging the basis of each share if the stock is purchased at separate 
times on the same calendar day in executing a single trade order and 
the broker executing the trade provides a single confirmation to the 
customer that reports an aggregate total price or an average price per 
share. However, a broker may not average the basis if the customer 
timely notifies the broker in writing of an intent to determine the 
basis of the stock by the actual cost per share in accordance with 
Sec.  1.1012-1(c)(1)(ii).
    (B) Basis of transferred securities--(1) In general. The initial 
basis of a security transferred to an account is generally the basis 
reported on the transfer statement (as described in Sec.  1.6045A-1).
    (2) Securities acquired by gift. If a transfer statement indicates 
that the security is acquired as a gift, a broker must apply the 
relevant basis rules for property acquired by gift in determining the 
initial basis, but is not required to adjust basis for gift tax. A 
broker must treat the initial basis as equal to the gross proceeds from 
the sale determined under paragraph (d)(5) of this section if the 
relevant basis rules for property

[[Page 56568]]

acquired by gift prevent recognizing both gain and loss, or if the 
relevant basis rules treat the initial basis of the security as its 
fair market value as of the date of the gift and the broker neither 
knows nor can readily ascertain this value. If the transfer statement 
did not report a date for the gift, the broker must treat the 
settlement date for the transfer as the date of the gift.
    (C) Digital assets acquired in exchange for property--(1) In 
general. This paragraph (d)(6)(ii)(C) applies solely for purposes of 
this section. For a digital asset acquired in exchange for property 
that is not a debt instrument described in Sec.  1.1012-1(h)(1)(v) or 
another digital asset differing materially in kind or extent, the 
initial basis of the digital asset is the fair market value of the 
digital asset received at the time of the exchange, increased by any 
digital asset transaction costs allocable to the acquisition of the 
digital asset. The fair market value of the digital asset received must 
be determined using a reasonable valuation method as of the date and 
time the exchange transaction was effected. In valuing the digital 
asset received, the broker may perform its own valuations or rely on 
valuations performed by a digital asset data aggregator as defined in 
paragraph (d)(5)(ii)(B) of this section, provided such valuations apply 
a reasonable valuation method for digital assets as described in 
paragraph (d)(5)(ii)(A)(3) of this section. If the broker or digital 
asset data aggregator reasonably determines that the fair market value 
of the digital asset received cannot be determined with reasonable 
accuracy, the fair market value of the digital asset received must be 
determined by reference to the property transferred at the time of the 
exchange. If the broker or digital asset data aggregator reasonably 
determines that neither the value of the digital asset received nor the 
value of the property transferred can be determined with reasonable 
accuracy, the fair market value of the received digital asset must be 
treated as zero. For a digital asset acquired in exchange for another 
digital asset differing materially in kind or extent, see paragraph 
(d)(6)(ii)(C)(2) of this section. For a digital asset acquired in 
exchange for a debt instrument described in Sec.  1.1012-1(h)(1)(v), 
the initial basis of the digital asset attributable to the debt 
instrument is the amount determined under Sec.  1.1012-1(h)(1)(v).
    (2) Allocation of digital asset transaction costs. Except as 
provided in the following sentence, in the case of a sale of one 
digital asset in exchange for another digital asset differing 
materially in kind or extent, the total digital asset transaction costs 
paid by the customer are allocable to the digital assets disposed. In 
the case of a transaction described in paragraph (d)(5)(iv)(C) of this 
section, the digital asset transaction costs paid by the customer to 
acquire the digital assets received are allocable as provided therein.
    (iii) * * *
    (A) Securities in the same account or wallet--(1) In general. A 
broker must apply the wash sale rules under section 1091 if both the 
sale and purchase transactions are of covered securities, other than 
covered securities reportable as digital assets after the application 
of paragraph (c)(8) of this section, with the same CUSIP number or 
other security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of this chapter). When reporting the sale 
transaction that triggered the wash sale, the broker must report the 
amount of loss that is disallowed by section 1091 in addition to gross 
proceeds and adjusted basis. The broker must increase the basis of the 
purchased covered security by the amount of loss disallowed on the sale 
transaction.
    (2) Special rules for covered securities that are also digital 
assets. In the case of a purchase or sale of a tokenized security 
described in paragraph (c)(8)(i)(D) of this section that is a stock or 
security for purposes of section 1091, a broker must apply the wash 
sale rules under section 1091 if both the sale and purchase 
transactions are of covered securities with the same CUSIP number or 
other security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of this chapter). When reporting the sale 
transaction that triggered the wash sale, the broker must report the 
amount of loss that is disallowed by section 1091 in addition to gross 
proceeds and adjusted basis. The broker must increase the basis of the 
purchased covered security by the amount of loss disallowed on the sale 
transaction.
    (B) Covered securities in different accounts or wallets. A broker 
is not required to apply paragraph (d)(6)(iii)(A) of this section if 
the covered securities are purchased and sold from different accounts 
or wallets, if the purchased covered security is transferred to another 
account or wallet before the wash sale, or if the covered securities 
are treated as held in separate accounts under Sec.  1.1012-1(e). A 
covered security is not purchased in an account or wallet if it is 
purchased in another account or wallet and transferred into the account 
or wallet.
* * * * *
    (v) Average basis method adjustments. For a covered security for 
which basis may be determined by the average basis method, a broker 
must compute basis using the average basis method if a customer validly 
elects that method for the covered securities sold or, in the absence 
of any instruction from the customer, if the broker chooses that method 
as its default basis determination method. See Sec.  1.1012-1(e). The 
previous sentence applies to any stock that is also a tokenized 
security described in paragraph (c)(8)(i)(D) of this section.
* * * * *
    (x) Examples. The following examples illustrate the rules of 
paragraph (d)(5) of this section and this paragraph (d)(6) as applied 
to digital assets. Unless otherwise indicated, all events and 
transactions in the following examples occur using the services of CRX, 
an entity that owns and operates a digital asset trading platform and 
provides digital asset broker and hosted wallet services. In performing 
these services, CRX holds and records all customer purchase and sale 
transactions using CRX's centralized omnibus account. CRX does not 
record any of its customer's purchase or sale transactions on the 
relevant cryptographically secured distributed ledgers. Additionally, 
unless otherwise indicated, all events and transactions in the 
following examples occur on or after January 1, 2026.

    (A) Example 1: Determination of gross proceeds and basis in 
digital assets--(1) Facts. As a digital asset broker, CRX generally 
charges transaction fees equal to 1 unit of CRX's proprietary 
digital asset CM per transaction. CRX does not, however, charge 
transaction fees for the purchase of CM. On March 9, Year 1, K, an 
individual not otherwise exempt from reporting, purchases 20 units 
of CM for $20 in cash in K's account at CRX. A week later, on March 
16, Year 1, K uses CRX's services to purchase 10 units of digital 
asset DE for $80 in cash. To pay for CRX's transaction fee, K 
directs CRX to debit 1 unit of CM (worth $1 at the time of transfer) 
from K's account.
    (2) Analysis. Under paragraph (d)(2)(i)(B) of this section, CRX 
must report the gross proceeds from K's sale of 1 unit of CM. 
Additionally, because the units of CM were purchased in K's account 
at a broker providing custodial services for digital assets that are 
specified securities described in paragraph (a)(14)(v) of this 
section, the units of CM purchased by K are covered securities under 
paragraph (a)(15)(i)(J) of this section. Accordingly, under 
paragraphs (d)(2)(i)(D)(1) and (2) of this section, CRX must report 
K's adjusted basis in the 1 unit of CM and whether any gain or loss 
with respect to the

[[Page 56569]]

CM unit sold is long-term or short-term. The gross proceeds from 
that sale is equal to the fair market value of the CM units on March 
16, Year 1 ($1), and the adjusted basis of that unit is equal to the 
amount K paid in cash for the CM unit on March 9, Year 1 ($1). This 
reporting is required regardless of the fact that there is $0 of 
gain or loss associated with this sale. Additionally, K's adjusted 
basis in the 10 units of DE acquired is equal to the $81 initial 
basis in DE, which is $80 plus the $1 value of 1 unit of CM paid as 
a digital asset transaction cost for the purchase of the DE units.
    (B) Example 2: Determination of gross proceeds and basis in 
digital assets--(1) Facts. The facts are the same as in paragraph 
(d)(6)(x)(A)(1) of this section (the facts in Example 1), except 
that on June 12, Year 2, K instructs CRX to exchange K's 10 units of 
DE for 50 units of digital asset ST. CRX effects this exchange using 
its own omnibus account holdings of ST at an exchange rate of 1 DE = 
5 ST. The total value of the 50 units of ST received by K is $100. K 
directs CRX to debit 1 CM unit (worth $2 at the time of the 
transfer) from K's account to pay CRX for the transaction fee.
    (2) Analysis. K has digital asset transaction costs of $2 as 
defined in paragraph (d)(5)(iv)(A) of this section, which is the 
value of 1 unit of CM. Under paragraph (d)(2)(i)(B) of this section, 
CRX must report the gross proceeds from K's exchange of DE for ST 
(as a sale of K's 10 units of DE) and the gross proceeds from K's 
disposition of 1 unit of CM for CRX's services. Additionally, 
because the units of DE and CM were purchased in K's account at a 
broker providing custodial services for digital assets that are 
specified securities described in paragraph (a)(14)(v) of this 
section, the units of DE and CM are covered securities under 
paragraph (a)(15)(i)(J) of this section, and, pursuant to paragraphs 
(d)(2)(i)(D)(1) and (2) of this section, CRX must report K's 
adjusted basis in the 10 units of DE and 1 unit of CM and whether 
any gain or loss with respect to the those units is long-term or 
short-term. Under paragraph (d)(5)(ii)(A) of this section, the gross 
proceeds from K's sale of the DE units is $98 (the fair market value 
of the 50 units of ST that K received less the $2 digital asset 
transaction costs paid by K using 1 unit of CM), that is allocable 
to the sale of the DE units. Under this paragraph (d)(6), K's 
adjusted basis in the 10 units of DE is $81 (which is $80 plus the 
$1 value of 1 unit of CM paid as a digital asset transaction cost 
for the purchase of the DE units), resulting in a long-term capital 
gain to K of $17 ($98-$81). The gross proceeds from K's sale of the 
single unit of CM is $2, and K's adjusted basis in the single unit 
of CM is $1, resulting in a long-term capital gain to K of $1 ($2-
$1). K's adjusted basis in the ST units under paragraph 
(d)(6)(ii)(C) of this section is equal to the initial basis in ST, 
which is $100.
    (C) Example 3: Determination of gross proceeds and basis when 
digital asset transaction costs are withheld from transferred 
digital assets--(1) Facts. K has an account with digital asset 
broker BEX. On December 20, Year 1, K acquired 10 units of digital 
asset A, for $2 per unit, and 100 units of digital asset B, for 
$0.50 per unit. (Assume that K did not incur any digital asset 
transaction costs on the units acquired on December 20, Year 1.) On 
July 20, Year 2, K directs BEX to effect the exchange of 10 units of 
digital asset A for 50 units of digital asset B. At the time of the 
exchange, each unit of digital asset A has a fair market value of $5 
per unit and each unit of digital asset B has a fair market value of 
$1 per unit. For the exchange of 10 units of digital asset A for 50 
units of digital asset B, BEX charges K a transaction fee equal to 2 
units of digital asset B, which BEX withholds from the units of the 
digital asset B credited to K's account on July 20, Year 2. For the 
disposition of 2 units of digital asset B withheld, BEX charges an 
additional transaction fee equal to 1 unit of digital asset B, which 
BEX also withholds from the units of digital asset B credited to K's 
account on July 20, Year 2. K has a standing order with BEX for the 
specific identification of digital assets as from the earliest units 
acquired.
    (2) Reporting with respect to the disposition of the A units. 
The withholding of 3 units of digital asset B is a disposition of 
digital assets for BEX's services within the meaning of paragraph 
(a)(9)(ii)(C) of this section. Under paragraph (d)(5)(iv)(A) of this 
section, K has digital asset transaction costs of $3. Under 
paragraph (d)(5)(iv)(C) of this section, the exchange of 10 units of 
digital asset A for 50 units of digital asset B is the original 
transaction. Accordingly, BEX must allocate the digital asset 
transaction costs of $3 exclusively to the disposition of the 10 
units of digital asset A. Additionally, because the units of A are 
specified securities described in paragraph (a)(14)(v) of this 
section and were purchased in K's account at BEX by a broker 
providing custodial services for such specified securities, the 
units of A are covered securities under paragraph (a)(15)(i)(J) of 
this section, and BEX must report K's adjusted basis in the 10 units 
of A. Under paragraphs (d)(5)(ii)(A) and (d)(5)(iv)(C) of this 
section, K's gross proceeds from the sale of the 10 units of digital 
asset A is $47, which is the excess of the fair market value of the 
50 units of digital asset B received ($50) as of the date and time 
of the transaction over the allocated digital asset transaction 
costs ($3). Under this paragraph (d)(6), K's adjusted basis in the 
10 units of A is $20, resulting in a short-term capital gain to K of 
$27 ($47-$20).
    (3) Reporting with respect to the disposition of the withheld B 
units. K's gross proceeds from the sale of the 3 units of digital 
asset B used to pay digital asset transaction costs is $3, which is 
the fair market value of the digital assets used to pay for such 
transaction costs. Pursuant to the special rule for the 
identification of units withheld from digital assets received in a 
transaction to pay a customer's digital asset transaction costs 
under paragraph (d)(2)(ii)(B)(3) of this section and regardless of 
K's standing order, the withheld units sold are treated as from the 
units received in the original (A for B) transaction. Accordingly, 
the basis of the 3 withheld units of digital asset B is $3, which is 
the fair market value of the 3 units of digital asset B received. 
Finally, pursuant to paragraph (c)(3)(ii)(C) of this section, BEX is 
not required to report K's sale of the 3 withheld units of digital 
asset B because the 3 units of digital asset B were units withheld 
from digital assets received by K to pay for K's digital asset 
transaction costs.
    (D) Example 4: Determination of gross proceeds and basis for 
digital assets--(1) Facts. On August 26, Year 1, Customer P 
purchases 10 units of digital asset DE for $2 per unit in cash in an 
account at CRX. CRX charges P a fixed transaction fee of $5 in cash 
for the exchange. On October 26, Year 2, P directs CRX to exchange 
P's 10 units of DE for units of digital asset FG. At the time of the 
exchange, CRX determines that each unit of DE has a fair market 
value of $100 and each unit of FG has a fair market value of $50. As 
a result of this determination, CRX effects an exchange of P's 10 
units of DE for 20 units of FG. CRX charges P a fixed transaction 
fee of $20 in cash for the exchange.
    (2) Analysis. Under paragraph (d)(5)(iv)(B) of this section, P 
has digital asset transaction costs of $20 associated with the 
exchange of DE for FG which must be allocated to the sale of the DE 
units. For the transaction that took place on October 26, Year 2, 
under paragraph (d)(2)(i)(B) of this section, CRX must report the 
amount of gross proceeds from the sale of DE in the amount of $980 
(the $1,000 fair market value of FG received on the date and time of 
transfer, less all of the digital asset transaction costs of $20 
allocated to the sale). Under paragraph (d)(6)(ii)(C) of this 
section, the adjusted basis of P's DE units is equal to $25, which 
is the $20 paid in cash for the 10 units increased by the $5 digital 
asset transaction costs allocable to that purchase. Finally, P's 
adjusted basis in the 20 units of FG is equal to the fair market 
value of the FG received, $1,000, because none of the $20 
transaction fee may be allocated under paragraph (d)(6)(ii)(C)(2) of 
this section to the acquisition of P's FG units.

    (7) * * *
    (i) In general. In determining whether any gain or loss on the sale 
of a covered security is long-term or short-term within the meaning of 
section 1222 for purposes of this section, the following rules apply:
    (A) A broker must consider the information reported on a transfer 
statement (as described in Sec.  1.6045A-1).
    (B) A broker is not required to consider transactions, elections, 
or events occurring outside the account except for an organizational 
action taken by an issuer during the period the broker holds custody of 
the covered security (beginning with the date that the broker receives 
a transferred security) reported on an issuer statement (as described 
in Sec.  1.6045B-1) furnished or deemed furnished to the broker.
    (C) A broker is required to apply the relevant rules for property 
acquired from a decedent or by gift for all covered securities.
    (ii) * * *

[[Page 56570]]

    (A) Securities in the same account or wallet--(1) In general. A 
broker must apply the wash sale rules under section 1091 if both the 
sale and purchase transactions are of covered securities, other than 
covered securities reportable as digital assets after the application 
of paragraph (c)(8) of this section, with the same CUSIP number or 
other security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of this chapter).
    (2) Special rules for covered securities that are also digital 
assets. In the case of a purchase or sale of a tokenized security 
described in paragraph (c)(8)(i)(D) of this section that is a stock or 
security for purposes of section 1091, a broker must apply the wash 
sale rules under section 1091 if both the sale and purchase 
transactions are of covered securities with the same CUSIP number or 
other security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2) of this chapter).
    (B) Covered securities in different accounts or wallets. A broker 
is not required to apply paragraph (d)(7)(ii)(A) of this section if the 
covered securities are purchased and sold from different accounts or 
wallets, if the purchased covered security is transferred to another 
account or wallet before the wash sale, or if the covered securities 
are treated as held in separate accounts under Sec.  1.1012-1(e). A 
covered security is not purchased in an account or wallet if it is 
purchased in another account or wallet and transferred into the account 
or wallet.
* * * * *
    (9) Coordination with the reporting rules for widely held fixed 
investment trusts under Sec.  1.671-5. Information required to be 
reported under section 6045(a) for a sale of a security or a digital 
asset in a widely held fixed investment trust (WHFIT) (as defined under 
Sec.  1.671-5) and the sale of an interest in a WHFIT must be reported 
as provided by this section unless the information is also required to 
be reported under Sec.  1.671-5. To the extent that this section 
requires additional information under section 6045(g), those 
requirements are deemed to be met through compliance with the rules in 
Sec.  1.671-5.
    (10) Optional reporting methods for qualifying stablecoins and 
specified nonfungible tokens. This paragraph (d)(10) provides optional 
reporting rules for sales of qualifying stablecoins as defined in 
paragraph (d)(10)(ii) of this section and sales of specified 
nonfungible tokens as defined in paragraph (d)(10)(iv) of this section. 
A broker may report sales of qualifying stablecoins or report sales of 
specified nonfungible tokens under the optional method provided in this 
paragraph (d)(10) instead of under paragraphs (d)(2)(i)(B) and (D) of 
this section for some or all customers and may change its reporting 
method for any customer from year to year; however, the method chosen 
for a particular customer must be applied for the entire year of that 
customer's sales.
    (i) Optional reporting method for qualifying stablecoins--(A) In 
general. In lieu of reporting all sales of qualifying stablecoins under 
paragraphs (d)(2)(i)(B) and (D) of this section, a broker may report 
designated sales of qualifying stablecoins, as defined in paragraph 
(d)(10)(i)(C) of this section, on an aggregate basis as provided in 
paragraph (d)(10)(i)(B) of this section. A broker reporting under this 
paragraph (d)(10)(i) is not required to report sales of qualifying 
stablecoins under this paragraph (d)(10)(i) or under paragraphs 
(d)(2)(i)(B) through (D) of this section if such sales are non-
designated sales of qualifying stablecoins or if the gross proceeds 
(after reduction for the allocable digital asset transaction costs) 
from all designated sales effected by that broker of qualifying 
stablecoins by the customer do not exceed $10,000 for the year as 
described in paragraph (d)(10)(i)(B) of this section.
    (B) Aggregate reporting method for designated sales of qualifying 
stablecoins. If a customer's aggregate gross proceeds (after reduction 
for the allocable digital asset transaction costs) from all designated 
sales effected by that broker of qualifying stablecoins exceed $10,000 
for the year, the broker must make a separate return for each 
qualifying stablecoin that includes the information set forth in this 
paragraph (d)(10)(i)(B). If the aggregate gross proceeds reportable 
under the previous sentence exceed $10,000, reporting is required with 
respect to each qualifying stablecoin for which there are designated 
sales even if the aggregate gross proceeds for a particular qualifying 
stablecoin does not exceed $10,000. A broker reporting under this 
paragraph (d)(10)(i)(B) must report the following information with 
respect to designated sales of each qualifying stablecoin on a separate 
Form 1099-DA or any successor form in the manner required by such form 
or instructions--
    (1) The name, address, and taxpayer identification number of the 
customer;
    (2) The name of the qualifying stablecoin sold;
    (3) The aggregate gross proceeds for the year from designated sales 
of the qualifying stablecoin (after reduction for the allocable digital 
asset transaction costs as defined and allocated pursuant to paragraph 
(d)(5)(iv) of this section);
    (4) The total number of units of the qualifying stablecoin sold in 
designated sales of the qualifying stablecoin;
    (5) The total number of designated sale transactions of the 
qualifying stablecoin; and
    (6) Any other information required by the form or instructions.
    (C) Designated sale of a qualifying stablecoin. For purposes of 
this paragraph (d)(10), the term designated sale of a qualifying 
stablecoin means: any sale as defined in paragraphs (a)(9)(ii)(A) 
through (D) of this section of a qualifying stablecoin other than a 
sale of a qualifying stablecoin in exchange for different digital 
assets that are not qualifying stablecoins. In addition, the term 
designated sale of a qualifying stablecoin includes the delivery of a 
qualifying stablecoin pursuant to the settlement of any executory 
contract which would be treated as a designated sale of the qualifying 
digital asset under the previous sentence if the contract had not been 
executory. Finally, the term non-designated sale of a qualifying 
stablecoin means any sale of a qualifying stablecoin other than a 
designated sale of a qualifying stablecoin as defined in this paragraph 
(d)(10)(i)(C).
    (D) Examples. For purposes of the following examples, assume that 
digital asset WW and digital asset YY are qualifying stablecoins, and 
digital asset DL is not a qualifying stablecoin. Additionally, assume 
that the transactions set forth in each example include all sales of 
qualifying stablecoins on behalf of the customer during Year 1, and 
that no transaction costs were imposed on the sales described therein.

    (1) Example 1: Optional reporting method for qualifying 
stablecoins--(i) Facts. CRX is a digital asset broker that provides 
services to customer K, an individual not otherwise exempt from 
reporting. CRX effects the following sales on behalf of K: sale of 
1,000 units of WW in exchange for cash of $1,000; sale of 5,000 
units of WW in exchange for YY, with a value of $5,000; sale of 
10,000 units of WW in return for DL, with a value of $10,000; and 
sale of 3,000 units of YY in exchange for cash of $3,000.
    (ii) Analysis. In lieu of reporting all of K's sales of WW and 
YY under paragraph (d)(2)(i)(B) of this section, CRX may report K's 
designated sales of WW and YY under the optional reporting method 
set forth in paragraph (d)(10)(i)(B) of this section. In this case, 
K's designated sales of qualifying stablecoins resulted in total 
gross proceeds of

[[Page 56571]]

$9,000, which is the total of $1,000 from sale of WW for cash, 
$5,000 from the sale of WW in exchange for YY, and $3,000 from the 
sale of YY for cash. Because K's designated sales of WW and YY did 
not exceed $10,000, CRX is not required to make a return of 
information under this section for any of K's qualifying stablecoin 
sales. The $10,000 of gross proceeds from the sale of WW for DL, 
which is not a qualifying stablecoin, is not included in this 
calculation to determine if the de minimis threshold has been 
exceeded because that sale is not a designated sale and, as such, is 
not reportable.
    (2) Example 2: Optional reporting method for qualifying 
stablecoins--(i) Facts. The facts are the same as in paragraph 
(d)(10)(i)(D)(1)(i) of this section (the facts in Example 1), except 
that CRX also effects an additional sale of 4,000 units of YY in 
exchange for cash of $4,000 on behalf of K.
    (ii) Analysis. In lieu of reporting all of K's sales of WW and 
YY under paragraph (d)(2)(i)(B) of this section, CRX may report K's 
designated sales of WW and YY under the optional reporting method 
set forth in paragraph (d)(10)(i)(B) of this section. In this case, 
K's designated sales of qualifying stablecoins resulted in total 
gross proceeds of $13,000, which is the total of $1,000 from sale of 
WW for cash, $5,000 from the sale of WW for YY, $3,000 from the sale 
of YY for cash, and $4,000 from the sale of YY for cash. Because K's 
designated sales of all types of qualifying stablecoins exceeds 
$10,000, CRX must make two returns of information under this 
section: one for all of K's designated sales of WW and another for 
all of K's designated sales of YY.

    (ii) Qualifying stablecoin. For purposes of this section, the term 
qualifying stablecoin means any digital asset that satisfies the 
conditions set forth in paragraphs (d)(10)(ii)(A) through (C) of this 
section for the entire calendar year.
    (A) Designed to track certain other currencies. The digital asset 
is designed to track on a one-to-one basis a single convertible 
currency issued by a government or a central bank (including the U.S. 
dollar).
    (B) Stabilization mechanism. Either:
    (1) The digital asset uses a stabilization mechanism that causes 
the unit value of the digital asset not to fluctuate from the unit 
value of the convertible currency it was designed to track by more than 
3 percent over any consecutive 10-day period, determined using 
Coordinated Universal Time (UTC), during the calendar year; or
    (2) The issuer of the digital asset is required by regulation to 
redeem a unit of the digital asset at any time on a one-to-one basis 
for the same convertible currency that the digital asset was designed 
to track.
    (C) Accepted as payment. The digital asset is generally accepted as 
payment by persons other than the issuer. A digital asset that 
satisfies the conditions set forth in paragraphs (d)(10)(ii)(A) and (B) 
of this section that is accepted by a broker pursuant to a sale of 
another digital asset, or that is accepted by a second party pursuant 
to a sale effected by a processor of digital asset payments described 
in paragraph (a)(9)(ii)(D) of this section, meets the condition set 
forth in this paragraph (d)(10)(ii)(C).

    (D) Examples--(1) Example 1--(i) Facts. Y is a privately held 
corporation that issues DL1, a digital asset designed to track the 
value of the U.S. dollar. Pursuant to regulatory requirements, DL1 
is backed in full by U.S. dollars and other liquid short-term U.S. 
dollar-denominated assets held by Y, and Y offers to redeem units of 
DL1 for U.S. dollars at par at any time. Y's retention of U.S. 
dollars and other liquid short-term U.S. dollar-denominated assets 
as collateral and Y's offer to redeem units of DL for U.S. dollars 
at par at any time are intended to cause DL1 to track the U.S. 
dollar on a one-to-one basis. Broker B accepts DL1 as payment in 
return for sales of other digital assets.
    (ii) Analysis. DL1 satisfies the three conditions set forth in 
paragraphs (d)(10)(ii)(A) through (C) of this section. First, DL1 
was designed to track on a one-to-one basis the U.S. dollar, which 
is a single convertible currency issued by a government or a central 
bank. Second, DL1 uses a stabilization mechanism, as described in 
paragraph (d)(10)(ii)(B)(2) of this section, that pursuant to 
regulatory requirements requires Y to offer to redeem one unit of 
DL1 for one U.S. dollar at any time. Finally, because B accepts DL1 
as payment for sales of other digital assets, DL1 is generally 
accepted as payment by persons other than Y. Accordingly, DL1 is a 
qualifying stablecoin under this paragraph (d)(10)(ii).
    (2) Example 2--(i) Facts. Z is a privately held corporation that 
issues DL2, a digital asset designed to track the value of the U.S. 
dollar on a one-to-one basis that has a mechanism that is intended 
to effect that tracking. On April 28, Year X, Broker B effects the 
sale of units of DL2 for cash on behalf of customer C. During Year 
X, the unit value of DL2 did not fluctuate from the U.S. dollar by 
more than 3 percent over any consecutive 10-day period. Merchant M 
accepts payment in DL2 in return for goods and services in 
connection with sales effected by processors of digital asset 
payments.
    (ii) Analysis. DL2 satisfies the three conditions set forth in 
paragraphs (d)(10)(ii)(A) through (C) of this section. First, DL2 
was designed to track on a one-to-one basis the U.S. dollar, which 
is a single convertible currency issued by a government or a central 
bank. Second, DL2 uses a stabilization mechanism, as described in 
paragraph (d)(10)(ii)(B)(2) of this section, that results in the 
unit value of DL2 not fluctuating from the U.S. dollar by more than 
3 percent over any consecutive 10-day period during the calendar 
year (Year X). Third, Merchant M accepts payment in DL2 in return 
for goods and services in connection with sales effected by 
processors of digital asset payments DL2 is generally accepted as 
payment by persons other than Z. Accordingly, DL2 is a qualifying 
stablecoin under this paragraph (d)(10)(ii).

    (iii) Optional reporting method for specified nonfungible tokens--
(A) In general. In lieu of reporting sales of specified nonfungible 
tokens under the reporting rules provided under paragraph (d)(2)(i)(B) 
of this section, a broker may report sales of specified nonfungible 
tokens as defined in paragraph (d)(10)(iv) of this section on an 
aggregate basis as provided in this paragraph (d)(10)(iii). Other 
digital assets, including nonfungible tokens that are not specified 
nonfungible tokens, are not eligible for the optional reporting method 
in this paragraph (d)(10)(iii).
    (B) Reporting method for specified nonfungible tokens. A broker 
reporting under this paragraph (d)(10)(iii) must report sales of 
specified nonfungible tokens if the customer's aggregate gross proceeds 
(after reduction for the allocable digital asset transaction costs) 
from all sales of specified nonfungible tokens exceed $600 for the 
year. If the customer's aggregate gross proceeds (after reduction for 
the allocable digital asset transaction costs) from such sales effected 
by that broker do not exceed $600 for the year, no report is required. 
A broker reporting under this paragraph (d)(10)(iii)(B) must report on 
a Form 1099-DA or any successor form in the manner required by such 
form or instructions the following information with respect to the 
customer's sales of specified nonfungible tokens--
    (1) The name, address, and taxpayer identification number of the 
customer;
    (2) The aggregate gross proceeds for the year from all sales of 
specified nonfungible tokens (after reduction for the allocable digital 
asset transaction costs as defined and allocated pursuant to paragraph 
(d)(5)(iv) of this section);
    (3) The total number of specified nonfungible token sales;
    (4) To the extent ordinarily known by the broker, the aggregate 
gross proceeds that is attributable to the first sale by a creator or 
minter of the specified nonfungible token; and
    (5) Any other information required by the form or instructions.
    (C) Examples. The following examples illustrate the rules of this 
paragraph (d)(10)(iii).

    (1) Example 1: Optional reporting method for specified 
nonfungible tokens--(i) Facts. CRX is a digital asset broker that 
provides services to customer J, an individual not otherwise exempt 
from reporting. In Year 1, CRX sells on behalf of J, ten specified 
nonfungible tokens for a gross proceeds amount equal to $1,500. CRX 
does not sell any other specified nonfungible tokens for J during 
Year 1.

[[Page 56572]]

    (ii) Analysis. In lieu of reporting J's sales of the ten 
specified nonfungible tokens under paragraph (d)(2)(i)(B) of this 
section, CRX may report these sales under the reporting method set 
forth in this paragraph (d)(10)(iii). In this case, J's sales of the 
ten specified nonfungible tokens gave rise to total gross proceeds 
of $1,500 for Year 1. Because the total gross proceeds from J's 
sales of the ten specified nonfungible tokens exceeds $600, CRX must 
make a single return of information under this section for these 
sales.
    (2) Example 2: Optional reporting method for specified 
nonfungible tokens--(i) Facts. The facts are the same as in 
paragraph (d)(10)(iii)(C)(1)(i) of this section (the facts in 
Example 1), except that the total gross proceeds from the sale of 
J's ten specified nonfungible tokens is $500.
    (ii) Analysis. Because J's sales of the specified nonfungible 
tokens result in total gross proceeds of $500, CRX is not required 
to make a return of information under this section for J's sales of 
the specified nonfungible tokens.

    (iv) Specified nonfungible token. For purposes of this section, the 
term specified nonfungible token means a digital asset that satisfies 
the conditions set forth in paragraphs (d)(10)(iv)(A) through (C) of 
this section.
    (A) Indivisible. The digital asset cannot be subdivided into 
smaller units without losing its intrinsic value or function.
    (B) Unique. The digital asset itself includes a unique digital 
identifier, other than a digital asset address, that distinguishes that 
digital asset from all other digital assets.
    (C) Excluded property. The digital asset is not and does not 
directly or through one or more other digital assets that satisfy the 
conditions described in paragraphs (d)(10)(iv)(A) and (B) of this 
section, provide the holder with any interest in any of the following 
excluded property--
    (1) A security under paragraph (a)(3) of this section;
    (2) A commodity under paragraph (a)(5) of this section;
    (3) A regulated futures contract under paragraph (a)(6) of this 
section;
    (4) A forward contract under paragraph (a)(7) of this section; or
    (5) A digital asset that does not satisfy the conditions described 
in paragraphs (d)(10)(iv)(A) and (B) of this section.
    (D) Examples. The following examples illustrate the rules of this 
paragraph (d)(10)(iv).

    (1) Example 1: Specified nonfungible token--(i) Facts. 
Individual J is an artist in the business of creating and selling 
digital assets that reference J's artwork. J creates a unique 
digital asset (DA-J) that represents J's artwork. The digital asset 
includes a unique digital identifier, other than a digital asset 
address, that distinguishes DA-J from all other digital assets. DA-J 
cannot be subdivided into smaller units.
    (ii) Analysis. DA-J is a digital asset that satisfies the three 
conditions described in paragraphs (d)(10)(iv)(A) through (C) of 
this section. DA-J cannot be subdivided into smaller units without 
losing its intrinsic value or function. Additionally, DA-J includes 
a unique digital identifier that distinguishes DA-J from all other 
digital assets. Finally, DA-J does not provide the holder with any 
interest in excluded property listed in paragraphs (d)(10)(iv)(C)(1) 
through (5) of this section Accordingly, DA-J is a specified 
nonfungible token under this paragraph (d)(10)(iv).
    (2) Example 2: Specified nonfungible token--(i) Facts. K creates 
a unique digital asset (DA-K) that provides the holder with the 
right to redeem DA-K for 100 units of digital asset DE. Units of DE 
can be subdivided into smaller units and do not include a unique 
digital identifier, other than a digital asset address, that 
distinguishes one unit of DE from any other unit of DE. DA-K cannot 
be subdivided into smaller units and includes a unique digital 
identifier, other than a digital asset address, that distinguishes 
DA-K from all other digital assets.
    (ii) Analysis. DA-K provides its holder with an interest in 100 
units of digital asset DE, which is excluded property, as described 
in paragraph (d)(10)(iv)(C)(5) of this section, because DE units can 
be subdivided into smaller units and do not include unique digital 
identifiers that distinguishes one unit of DE from any other unit of 
DE. Accordingly, DA-K is not a specified nonfungible token under 
this paragraph (d)(10)(iv).
    (3) Example 3: Specified nonfungible token--(i) Facts. The facts 
are the same as in paragraph (d)(10)(iv)(D)(2)(i) of this section 
(the facts in Example 2) except that in addition to providing its 
holder with an interest in the 100 units of DE, DA-K also provides 
rights to or access to a unique work of art.
    (ii) Analysis. Because DA-K provides its holder with an interest 
in excluded property described in paragraph (d)(10)(iv)(C)(5) of 
this section, it is not a specified nonfungible token under 
paragraph this (d)(10)(iv) without regard to whether it also 
references property that is not excluded property.
    (4) Example 4: Specified nonfungible token--(i) Facts. B creates 
a unique digital asset (DA-B) that provides the holder with the 
right to redeem DA-B for physical merchandise in B's store. DA-B 
cannot be subdivided into smaller units and includes a unique 
digital identifier, other than a digital asset address, that 
distinguishes DA-B from all other digital assets.
    (ii) Analysis. DA-B is a digital asset that satisfies the three 
conditions described in paragraphs (d)(10)(iv)(A) through (C) of 
this section. DA-B cannot be subdivided into smaller units without 
losing its intrinsic value or function. Additionally, DA-B includes 
a unique digital identifier that distinguishes DA-B from all other 
digital assets. Finally, DA-B does not provide the holder with any 
interest in excluded property listed in paragraphs (d)(10)(iv)(C)(1) 
through (5) of this section. Accordingly, DA-B is a specified 
nonfungible token under this paragraph (d)(10)(iv).

    (v) Joint accounts. For purposes of determining if the gross 
proceeds thresholds set forth in paragraphs (d)(10)(i)(B) and 
(d)(10)(iii)(B) of this section have been met for the customer, the 
customer is the person whose tax identification number would be 
required to be shown on the information return (but for the application 
of the relevant threshold) after the application of the backup 
withholding rules under Sec.  31.3406(h)-2(a) of this chapter.
    (11) Collection and retention of additional information with 
respect to the sale of a digital asset. A broker required to make an 
information return under paragraph (c) of this section with respect to 
the sale of a digital asset must collect the following additional 
information, retain it for seven years from the date of the due date 
for the information return required to be filed under this section, and 
make it available for inspection upon request by the Internal Revenue 
Service:
    (i) The transaction ID as defined in paragraph (a)(24) of this 
section in connection with the sale, if any; and the digital asset 
address as defined in paragraph (a)(20) of this section (or digital 
asset addresses if multiple) from which the digital asset was 
transferred in connection with the sale, if any;
    (ii) For each sale of a digital asset that was held by the broker 
in a hosted wallet on behalf of a customer and was previously 
transferred into an account at the broker (transferred-in digital 
asset), the transaction ID of such transfer in and the digital asset 
address (or digital asset addresses if multiple) from which the digital 
asset was transferred, if any.
    (e) * * *
    (2) * * *
    (iii) Coordination rules for exchanges of digital assets made 
through barter exchanges. Exchange transactions involving the exchange 
of one digital asset held by one customer of a broker for a different 
digital asset held by a second customer of the same broker must be 
treated as a sale under paragraph (a)(9)(ii) of this section subject to 
reporting under paragraphs (c) and (d) of this section, and not as an 
exchange of personal property through a barter exchange subject to 
reporting under this paragraph (e) and paragraph (f) of this section, 
with respect to both customers involved in the exchange transaction. In 
the case of an exchange transaction that involves the transfer of a 
digital asset for personal property or services that are not also 
digital assets, if the digital asset payment also is a reportable 
payment transaction subject to reporting by the barter exchange under 
Sec.  1.6050W-1(a)(1), the exchange transaction must be treated as a

[[Page 56573]]

reportable payment transaction and not as an exchange of personal 
property through a barter exchange subject to reporting under this 
paragraph (e) and paragraph (f) of this section with respect to the 
member or client disposing of personal property or services. 
Additionally, an exchange transaction described in the previous 
sentence must be treated as a sale under paragraph (a)(9)(ii)(D) of 
this section subject to reporting under paragraphs (c) and (d) of this 
section and not as an exchange of personal property through a barter 
exchange subject to reporting under this paragraph (e) and paragraph 
(f) of this section with respect to the member or client disposing of 
the digital asset. Nothing in this paragraph (e)(2)(iii) may be 
construed to mean that any broker is or is not properly classified as a 
barter exchange.
* * * * *
    (g) Exempt foreign persons--(1) Brokers. No return of information 
is required to be made by a broker with respect to a customer who is 
considered to be an exempt foreign person under paragraphs (g)(1)(i) 
through (iii) or paragraph (g)(4) of this section. See paragraph (a)(1) 
of this section for when a person is not treated as a broker under this 
section for a sale effected at an office outside the United States. See 
paragraphs (g)(1)(i) through (g)(3) of this section for rules relating 
to sales as defined in paragraph (a)(9)(i) of this section and see 
paragraph (g)(4) of this section for rules relating to sales of digital 
assets as defined in paragraph (a)(9)(ii) of this section.
    (i) With respect to a sale as defined in paragraph (a)(9)(i) of 
this section (relating to sales other than sales of digital assets) 
that is effected at an office of a broker either inside or outside the 
United States, the broker may treat the customer as an exempt foreign 
person if the broker can, prior to the payment, reliably associate the 
payment with documentation upon which it can rely in order to treat the 
customer as a foreign beneficial owner in accordance with Sec.  1.1441-
1(e)(1)(ii), as made to a foreign payee in accordance with Sec.  
1.6049-5(d)(1), or presumed to be made to a foreign payee under Sec.  
1.6049-5(d)(2) or (3). For purposes of this paragraph (g)(1)(i), the 
provisions in Sec.  1.6049-5(c) regarding rules applicable to 
documentation of foreign status shall apply with respect to a sale when 
the broker completes the acts necessary to effect the sale at an office 
outside the United States, as described in paragraph (g)(3)(iii)(A) of 
this section, and no office of the same broker within the United States 
negotiated the sale with the customer or received instructions with 
respect to the sale from the customer. The provisions in Sec.  1.6049-
5(c) regarding the definitions of U.S. payor, U.S. middleman, non-U.S. 
payor, and non-U.S. middleman shall also apply for purposes of this 
paragraph (g)(1)(i). The provisions of Sec.  1.1441-1 shall apply by 
substituting the terms broker and customer for the terms withholding 
agent and payee, respectively, and without regard for the fact that the 
provisions apply to amounts subject to withholding under chapter 3 of 
the Code. The provisions of Sec.  1.6049-5(d) shall apply by 
substituting the terms broker and customer for the terms payor and 
payee, respectively. For purposes of this paragraph (g)(1)(i), a broker 
that is required to obtain, or chooses to obtain, a beneficial owner 
withholding certificate described in Sec.  1.1441-1(e)(2)(i) from an 
individual may rely on the withholding certificate only to the extent 
the certificate includes a certification that the beneficial owner has 
not been, and at the time the certificate is furnished, reasonably 
expects not to be present in the United States for a period aggregating 
183 days or more during each calendar year to which the certificate 
pertains. The certification is not required if a broker receives 
documentary evidence under Sec.  1.6049-5(c)(1) or (4).
    (ii) With respect to a redemption or retirement of stock or an 
obligation (the interest or original issue discount on, which is 
described in Sec.  1.6049-5(b)(6), (7), (10), or (11) or the dividends 
on, which are described in Sec.  1.6042-3(b)(1)(iv)) that is effected 
at an office of a broker outside the United States by the issuer (or 
its paying or transfer agent), the broker may treat the customer as an 
exempt foreign person if the broker is not also acting in its capacity 
as a custodian, nominee, or other agent of the payee.
    (iii) With respect to a sale as defined in paragraph (a)(9)(i) of 
this section (relating to sales other than sales of digital assets) 
that is effected by a broker at an office of the broker either inside 
or outside the United States, the broker may treat the customer as an 
exempt foreign person for the period that those proceeds are assets 
blocked as described in Sec.  1.1441-2(e)(3). For purposes of this 
paragraph (g)(1)(iii) and section 3406, a sale is deemed to occur in 
accordance with paragraph (d)(4) of this section. The exemption in this 
paragraph (g)(1)(iii) shall terminate when payment of the proceeds is 
deemed to occur in accordance with the provisions of Sec.  1.1441-
2(e)(3).
    (2) Barter exchange. No return of information is required by a 
barter exchange under the rules of paragraphs (e) and (f) of this 
section with respect to a client or a member that the barter exchange 
may treat as an exempt foreign person pursuant to the procedures 
described in paragraph (g)(1) of this section.
    (3) Applicable rules--(i) Joint owners. Amounts paid to joint 
owners for which a certificate or documentation is required as a 
condition for being exempt from reporting under paragraph (g)(1)(i) or 
(g)(2) of this section are presumed made to U.S. payees who are not 
exempt recipients if, prior to payment, the broker or barter exchange 
cannot reliably associate the payment either with a Form W-9 furnished 
by one of the joint owners in the manner required in Sec. Sec.  
31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (g)(1)(i) of this section 
furnished by each joint owner upon which it can rely to treat each 
joint owner as a foreign payee or foreign beneficial owner. For 
purposes of applying this paragraph (g)(3)(i), the grace period 
described in Sec.  1.6049-5(d)(2)(ii) shall apply only if each payee 
qualifies for such grace period.
    (ii) Special rules for determining who the customer is. For 
purposes of paragraph (g)(1) of this section, the determination of who 
the customer is shall be made on the basis of the provisions in Sec.  
1.6049-5(d) by substituting in that section the terms payor and payee 
with the terms broker and customer.
    (iii) Place of effecting sale--(A) Sale outside the United States. 
For purposes of this paragraph (g), a sale as defined in paragraph 
(a)(9)(i) of this section (relating to sales other than sales of 
digital assets) is considered to be effected by a broker at an office 
outside the United States if, in accordance with instructions directly 
transmitted to such office from outside the United States by the 
broker's customer, the office completes the acts necessary to effect 
the sale outside the United States. The acts necessary to effect the 
sale may be considered to have been completed outside the United States 
without regard to whether--
    (1) Pursuant to instructions from an office of the broker outside 
the United States, an office of the same broker within the United 
States undertakes one or more steps of the sale in the United States; 
or
    (2) The gross proceeds of the sale are paid by a draft drawn on a 
United States bank account or by a wire or other electronic transfer 
from a United States account.

[[Page 56574]]

    (B) Sale inside the United States. For purposes of this paragraph 
(g), a sale that is considered to be effected by a broker at an office 
outside the United States under paragraph (g)(3)(iii)(A) of this 
section shall nevertheless be considered to be effected by a broker at 
an office inside the United States if either--
    (1) The customer has opened an account with a United States office 
of that broker;
    (2) The customer has transmitted instructions concerning this and 
other sales to the foreign office of the broker from within the United 
States by mail, telephone, electronic transmission or otherwise (unless 
the transmissions from the United States have taken place in isolated 
and infrequent circumstances);
    (3) The gross proceeds of the sale are paid to the customer by a 
transfer of funds into an account (other than an international account 
as defined in Sec.  1.6049-5(e)(4)) maintained by the customer in the 
United States or mailed to the customer at an address in the United 
States;
    (4) The confirmation of the sale is mailed to a customer at an 
address in the United States; or
    (5) An office of the same broker within the United States 
negotiates the sale with the customer or receives instructions with 
respect to the sale from the customer.
    (iv) Special rules where the customer is a foreign intermediary or 
certain U.S. branches. A foreign intermediary, as defined in Sec.  
1.1441-1(c)(13), is an exempt foreign person, except when the broker 
has actual knowledge (within the meaning of Sec.  1.6049-5(c)(3)) that 
the person for whom the intermediary acts is a U.S. person that is not 
exempt from reporting under paragraph (c)(3) of this section or the 
broker is required to presume under Sec.  1.6049-5(d)(3) that the payee 
is a U.S. person that is not an exempt recipient. If a foreign 
intermediary, as described in Sec.  1.1441-1(c)(13), or a U.S. branch 
that is not treated as a U.S. person receives a payment from a payor or 
middleman (as defined in Sec.  1.6049-4(a) and (f)(4)), which payment 
the payor or middleman can reliably associate with a valid withholding 
certificate described in Sec.  1.1441-1(e)(3)(ii), (iii) or (v), 
respectively, furnished by such intermediary or branch, then the 
intermediary or branch is not required to report such payment when it, 
in turn, pays the amount, unless, and to the extent, the intermediary 
or branch knows that the payment is required to be reported under this 
section and was not so reported. For example, if a U.S. branch 
described in Sec.  1.1441-1(b)(2)(iv) fails to provide information 
regarding U.S. persons that are not exempt from reporting under 
paragraph (c)(3) of this section to the person from whom the U.S. 
branch receives the payment, the U.S. branch must report the payment on 
an information return. See, however, paragraph (c)(3)(ii) of this 
section for when reporting under section 6045 is coordinated with 
reporting under chapter 4 of the Code or an applicable IGA (as defined 
in Sec.  1.6049-4(f)(7)). The exception of this paragraph (g)(3)(iv) 
for amounts paid by a foreign intermediary shall not apply to a 
qualified intermediary that assumes reporting responsibility under 
chapter 61 of the Code except as provided under the agreement described 
in Sec.  1.1441-1(e)(5)(iii).
    (4) Rules for sales of digital assets. The rules of this paragraph 
(g)(4) apply to a sale of a digital asset as defined in paragraph 
(a)(9)(ii) of this section. See paragraph (a)(1) of this section for 
when a person is treated as a broker under this section with respect to 
a sale of a digital asset. See paragraph (c) of this section for rules 
requiring brokers to report sales. See paragraph (g)(1) of this section 
providing that no return of information is required to be made by a 
broker effecting a sale of a digital asset for a customer who is 
considered to be an exempt foreign person under this paragraph (g)(4).
    (i) Definitions. The following definitions apply for purposes of 
this section.
    (A) U.S. digital asset broker. A U.S. digital asset broker is a 
person that effects sales of digital assets on behalf of others and 
that is--
    (1) A U.S. payor or U.S. middleman as defined in Sec.  1.6049-
5(c)(5)(i)(A) that is not a foreign branch or office of such person, 
Sec.  1.6049-5(c)(5)(i)(B) or (F) that is not a territory financial 
institution described in Sec.  1.1441-1(b)(2)(iv).
    (2) [Reserved]
    (B) [Reserved]
    (ii) Rules for U.S. digital asset brokers--(A) Place of effecting 
sale. For purposes of this section, a sale of a digital asset that is 
effected by a U.S. digital asset broker is considered a sale effected 
at an office inside the United States.
    (B) Determination of foreign status. A U.S. digital asset broker 
may treat a customer as an exempt foreign person with respect to a sale 
effected at an office inside the United States provided that, prior to 
the payment to such customer of the gross proceeds from the sale, the 
broker has a beneficial owner withholding certificate described in 
Sec.  1.1441-1(e)(2)(i) that the broker may treat as valid under Sec.  
1.1441-1(e)(2)(ii) and that satisfies the requirements of paragraph 
(g)(4)(vi) of this section. Additionally, a U.S. digital asset broker 
may treat a customer as an exempt foreign person with respect to a sale 
effected at an office inside the United States under an applicable 
presumption rule as provided in paragraph (g)(4)(vi)(A)(2)(i) of this 
section. A beneficial owner withholding certificate provided by an 
individual must include a certification that the beneficial owner has 
not been, and at the time the certificate is furnished reasonably 
expects not to be, present in the United States for a period 
aggregating 183 days or more during each calendar year to which the 
certificate pertains. See paragraphs (g)(4)(vi)(A) through (D) of this 
section for additional rules applicable to withholding certificates, 
when a broker may rely on a withholding certificate, presumption rules 
that apply in the absence of documentation, and rules for customers 
that are joint account holders. See paragraph (g)(4)(vi)(E) of this 
section for the extent to which a U.S. digital asset broker may treat a 
customer as an exempt foreign person with respect to a payment treated 
as made to a foreign intermediary, flow-through entity or certain U.S. 
branches. See paragraph (g)(4)(vi)(F) of this section for a transition 
rule for preexisting accounts.
    (iii) Rules for CFC digital asset brokers not conducting activities 
as money services businesses.
    (iv) Rules for non-U.S. digital asset brokers not conducting 
activities as money services businesses.
    (A) [Reserved]
    (B) Sale treated as effected at an office inside the United 
States--(1) [Reserved]
    (2) U.S. indicia. The U.S. indicia relevant for purposes of this 
paragraph (g)(4)(iv)(B) are as follows--
    (i) A permanent residence address (as defined in Sec.  1.1441-
1(c)(38)) in the U.S. or a U.S. mailing address for the customer, a 
current U.S. telephone number and no non-U.S. telephone number for the 
customer, or the broker's classification of the customer as a U.S. 
person in its records;
    (ii) An unambiguous indication of a U.S. place of birth for the 
customer; or
    (v) [Reserved]
    (vi) Rules applicable to brokers that obtain or are required to 
obtain documentation for a customer and presumption rules--(A) In 
general. Paragraph (g)(4)(vi)(A)(1) of this section describes rules 
applicable to documentation permitted to be used under this paragraph 
(g)(4) to determine whether a customer may be treated as an exempt 
foreign person. Paragraph

[[Page 56575]]

(g)(4)(vi)(A)(2) of this section provides presumption rules that apply 
if the broker does not have documentation on which the broker may rely 
to determine a customer's status. Paragraph (g)(4)(vi)(A)(3) of this 
section provides a grace period for obtaining documentation in 
circumstances where there are indicia that a customer is a foreign 
person. Paragraph (g)(4)(vi)(A)(4) of this section provides rules 
relating to blocked income. Paragraph (g)(4)(vi)(B) of this section 
provides rules relating to reliance on beneficial ownership withholding 
certificates to determine whether a customer is an exempt foreign 
person. Paragraph (g)(4)(vi)(C) of this section provides rules relating 
to reliance on documentary evidence to determine whether a customer is 
an exempt foreign person. Paragraph (g)(4)(vi)(D) of this section 
provides rules relating to customers that are joint account holders. 
Paragraph (g)(4)(vi)(E) of this section provides special rules for a 
customer that is a foreign intermediary, a flow-through entity, or 
certain U.S. branches. Paragraph (g)(4)(vi)(F) of this section provides 
a transition rule for obtaining documentation to treat a customer as an 
exempt foreign person.
    (1) Documentation of foreign status. A broker may treat a customer 
as an exempt foreign person when the broker obtains valid documentation 
permitted to support a customer's foreign status as described in 
paragraph (g)(4)(ii), (iii), or (iv) of this section (as applicable) 
that the broker can reliably associate (within the meaning of Sec.  
1.1441-1(b)(2)(vii)(A)) with a payment of gross proceeds, provided that 
the broker is not required to treat the documentation as unreliable or 
incorrect under paragraph (g)(4)(vi)(B) or (C) of this section. For 
rules regarding the validity period of a withholding certificate, or of 
documentary evidence (when permitted to be relied upon under paragraph 
(g)(4)(vi)(C) of this section), retention of documentation, electronic 
transmission of documentation, information required to be provided on a 
withholding certificate, who may sign a withholding certificate, when a 
substitute withholding certificate may be accepted, and general 
reliance rules on documentation (including when a prior version of a 
withholding certificate may be relied upon), the provisions of 
Sec. Sec.  1.1441-1(e)(4)(i) through (ix) and 1.6049-5(c)(1)(ii) apply, 
with the following modifications--
    (i) The provisions in Sec.  1.1441-1(e)(4)(i) through (ix) apply by 
substituting the terms broker and customer for the terms withholding 
agent and payee, respectively, and disregarding the fact that the 
provisions under Sec.  1.1441-1 apply only to amounts subject to 
withholding under chapter 3 of the Code;
    (ii) The provisions of Sec.  1.6049-5(c)(1)(ii) (relating to 
general requirements for when a payor may rely upon and must maintain 
documentary evidence with respect to a payee) apply (as applicable to 
the broker) by substituting the terms broker and customer for the terms 
payor and payee, respectively;
    (iii) To apply Sec.  1.1441-1(e)(4)(viii) (reliance rules for 
documentation), the reference to Sec.  1.1441-7(b)(4) through (6) is 
replaced by the provisions of paragraph (g)(4)(vi)(B) or (C) of this 
section, as applicable, and the reference to Sec.  1.1441-6(c)(2) is 
disregarded; and
    (iv) To apply Sec.  1.1441-1(e)(4)(viii) (reliance rules for 
documentation) and (ix) (certificates to be furnished to a withholding 
agent for each obligation unless an exception applies), the provisions 
applicable to a financial institution apply to a broker described in 
this paragraph (g)(4) whether or not it is a financial institution.
    (2) Presumption rules--(i) In general. If a broker is not permitted 
to treat a customer as an exempt foreign person under paragraph 
(g)(4)(vi)(A)(1) of this section because the broker has not collected 
the documentation permitted to be collected under this paragraph (g)(4) 
or is not permitted to rely on the documentation it has collected, the 
broker must determine the classification of a customer (as an 
individual, entity, etc.) by applying the presumption rules of Sec.  
1.1441-1(b)(3)(ii), except that references in Sec.  1.1441-
1(b)(3)(ii)(B) to exempt recipient categories under section 6049 are 
replaced by the exempt recipient categories in paragraph (c)(3)(i) of 
this section. With respect to a customer that a broker has classified 
as an entity, the broker must determine the status of the customer as 
U.S. or foreign by applying Sec. Sec.  1.1441-1(b)(3)(iii)(A) and 
1.1441-5(d) and (e)(6), except that Sec.  1.1441-1(b)(3)(iii)(A)(1)(iv) 
does not apply. For presumption rules to treat a payment as made to an 
intermediary or flow-through entity and whether the payment is also 
treated as made to an exempt foreign person, see paragraph 
(g)(4)(vi)(E) of this section. Notwithstanding the provisions of this 
paragraph (g)(4)(vi)(A)(2), a broker may not treat a customer as a 
foreign person under this paragraph (g)(4)(vi)(A)(2) if the broker has 
actual knowledge or reason to know that the customer is a U.S. person. 
For purposes of applying the presumption rules of this paragraph 
(g)(4)(vi)(A)(2), a broker must identify its customer by applying the 
rules of Sec.  1.6049-5(d)(1), substituting the terms customer and 
broker for the terms payee and payor, respectively.
    (ii) Presumption rule specific to U.S. digital asset brokers. With 
respect to a customer that a U.S. digital asset broker has classified 
as an individual, the broker must treat the customer as a U.S. person.
    (3) Grace period to collect valid documentation in the case of 
indicia of a foreign customer. If a broker has not obtained valid 
documentation that it can reliably associate with a payment of gross 
proceeds to a customer to treat the customer as an exempt foreign 
person, or if the broker is unable to rely upon documentation under the 
rules described in paragraph (g)(4)(vi)(A)(1) of this section or is 
required to treat documentation obtained for a customer as unreliable 
or incorrect (after applying paragraphs (g)(4)(vi)(B) and (C) of this 
section), the broker may apply the grace period described in Sec.  
1.6049-5(d)(2)(ii) (generally allowing in certain circumstances a payor 
to treat an account as owned by a foreign person for a 90 day period). 
In applying Sec.  1.6049-5(d)(2)(ii), references to securities 
described in Sec.  1.1441-6(c)(2) are replaced with digital assets.
    (4) Blocked income. A broker may apply the provisions in paragraph 
(g)(1)(iii) of this section to treat a customer as an exempt foreign 
person when the proceeds are blocked income as described in Sec.  
1.1441-2(e)(3).
    (B) Reliance on beneficial ownership withholding certificates to 
determine foreign status. For purposes of determining whether a 
customer may be treated as an exempt foreign person under this section, 
except as otherwise provided in this paragraph (g)(4)(vi)(B), a broker 
may rely on a beneficial owner withholding certificate described in 
paragraph (g)(4)(ii)(B) of this section unless the broker has actual 
knowledge or reason to know that the certificate is unreliable or 
incorrect. With respect to a U.S. digital asset broker described in 
paragraph (g)(4)(i)(A)(1) of this section, reason to know is limited to 
when the broker has any of the U.S. indicia set forth in paragraph 
(g)(4)(iv)(B)(2)(i) or (ii) of this section in its account opening 
files or other files pertaining to the account (account information), 
including documentation collected for purposes of an AML program or the 
beneficial owner withholding certificate. A broker will not be 
considered to have reason to know that a certificate is unreliable or 
incorrect based on documentation collected for an AML program until the 
date that is 30 days after the account is opened. A

[[Page 56576]]

broker may rely, however, on a beneficial owner withholding certificate 
notwithstanding the presence of any of the U.S. indicia set forth in 
paragraph (g)(4)(iv)(B)(2)(i) or (ii) of this section on the 
withholding certificate or in the account information for a customer in 
the circumstances described in paragraphs (g)(4)(vi)(B)(1) and (2) of 
this section.
    (1) Collection of information other than U.S. place of birth--(i) 
In general. With respect to any of the U.S. indicia described in 
paragraph (g)(4)(iv)(B)(2)(i) of this section, the broker has in its 
possession for a customer who is an individual documentary evidence 
establishing foreign status (as described in Sec.  1.1471-3(c)(5)(i)) 
that does not contain a U.S. address and the customer provides the 
broker with a reasonable explanation (as defined in Sec.  1.1441-
7(b)(12)) from the customer, in writing, supporting the claim of 
foreign status. Notwithstanding the preceding sentence, in a case in 
which the broker classified an individual customer as a U.S. person in 
its account information, the broker may treat the customer as an exempt 
foreign person only if it has in its possession documentary evidence 
described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a 
country other than the United States. In the case of a customer that is 
an entity, the broker may treat the customer as an exempt foreign 
person if it has in its possession documentation establishing foreign 
status that substantiates that the entity is actually organized or 
created under the laws of a foreign country.
    (ii) [Reserved]
    (2) Collection of information showing U.S. place of birth. With 
respect to the U.S. indicia described in paragraph (g)(4)(iv)(B)(2)(ii) 
of this section, the broker has in its possession documentary evidence 
described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a 
country other than the United States and the broker has in its 
possession either a copy of the customer's Certificate of Loss of 
Nationality of the United States or a reasonable written explanation of 
the customer's renunciation of U.S. citizenship or the reason the 
customer did not obtain U.S. citizenship at birth.
    (C) [Reserved]
    (D) Joint owners. In the case of amounts paid to customers that are 
joint account holders for which a certificate or documentation is 
required as a condition for being exempt from reporting under this 
paragraph (g)(4), such amounts are presumed made to U.S. payees who are 
not exempt recipients (as defined in paragraph (c)(3)(i)(B) of this 
section) when the conditions of paragraph (g)(3)(i) of this section are 
met.
    (E) Special rules for customer that is a foreign intermediary, a 
flow-through entity, or certain U.S. branches--(1) Foreign 
intermediaries in general. For purposes of this paragraph (g)(4), a 
broker may determine the status of a customer as a foreign intermediary 
(as defined in Sec.  1.1441-1(c)(13)) by reliably associating (under 
Sec.  1.1441-1(b)(2)(vii)) a payment of gross proceeds with a valid 
foreign intermediary withholding certificate described in Sec.  1.1441-
1(e)(3)(ii) or (iii), without regard to whether the withholding 
certificate contains a withholding statement and withholding 
certificates or other documentation for each account holder. In the 
case of a payment of gross proceeds from a sale of a digital asset that 
a broker treats as made to a foreign intermediary under this paragraph 
(g)(4)(vi)(E)(1), the broker must treat the foreign intermediary as an 
exempt foreign person except to the extent required by paragraph 
(g)(3)(iv) of this section (rules for when a broker is required to 
treat a payment as made to a U.S. person that is not an exempt 
recipient under paragraph (c)(3) of this section and for reporting that 
may be required by the foreign intermediary).
    (i) Presumption rule specific to U.S. digital asset brokers. A U.S. 
digital asset broker that does not have a valid foreign intermediary 
withholding certificate or a valid beneficial owner withholding 
certificate described in paragraph (g)(4)(ii)(B) of this section for 
the customer applies the presumption rules in Sec.  1.1441-
1(b)(3)(ii)(B) (which would presume that the entity is not an 
intermediary). For purposes of applying the presumption rules 
referenced in the preceding sentence, a U.S. digital asset broker must 
identify its customer by applying the rules of Sec.  1.6049-5(d)(1), 
substituting the terms customer and U.S. digital asset broker for the 
terms payee and payor, respectively. See Sec.  1.1441-1(b)(3)(iii) for 
presumption rules relating to the U.S. or foreign status of a customer.
    (ii) [Reserved]
    (2) Foreign flow-through entities. For purposes of this paragraph 
(g)(4), a broker may determine the status of a customer as a foreign 
flow-through entity (as defined in Sec.  1.1441-1(c)(23)) by reliably 
associating (under Sec.  1.1441-1(b)(2)(vii)) a payment of gross 
proceeds with a valid foreign flow-through withholding certificate 
described in Sec.  1.1441-5(c)(3)(iii) (relating to nonwithholding 
foreign partnerships) or Sec.  1.1441-5(e)(5)(iii) (relating to foreign 
simple trusts and foreign grantor trusts that are nonwithholding 
foreign trusts), without regard to whether the withholding certificate 
contains a withholding statement and withholding certificates or other 
documentation for each partner. A broker may alternatively determine 
the status of a customer as a foreign flow-through entity based on the 
presumption rules in Sec. Sec.  1.1441-1(b)(3)(ii)(B) (relating to 
entity classification), 1.1441-5(d) (relating to partnership status as 
U.S. or foreign) and 1.1441-5(e)(6) (relating to the status of trusts 
and estates as U.S. or foreign). For purposes of applying the 
presumption rules referenced in the preceding sentence, a broker must 
identify its customer by applying the rules of Sec.  1.6049-5(d)(1), 
substituting the terms customer and broker for the terms payee and 
payor, respectively. In the case of a payment of gross proceeds from a 
sale of a digital asset that a broker treats as made to a foreign flow-
through entity under this paragraph (g)(4)(vi)(E)(2), the broker must 
treat the foreign flow-through entity as an exempt foreign person 
except to the extent required by Sec.  1.6049-5(d)(3)(ii) (rules for 
when a broker is required to treat a payment as made to a U.S. person 
other than an exempt recipient (substituting exempt recipient under 
Sec.  1.6045-1(c)(3) for exempt recipient described in Sec.  1.6049-
4(c))).
    (3) U.S. branches that are not beneficial owners. For purposes of 
this paragraph (g)(4), a broker may determine the status of a customer 
as a U.S. branch (as described in Sec.  1.1441-1(b)(2)(iv)) that is not 
a beneficial owner (as defined in Sec.  1.1441-1(c)(6)) of a payment of 
gross proceeds by reliably associating (under Sec.  1.1441-
1(b)(2)(vii)) the payment with a valid U.S. branch withholding 
certificate described in Sec.  1.1441-1(e)(3)(v) without regard to 
whether the withholding certificate contains a withholding statement 
and withholding certificates or other documentation for each person for 
whom the branch receives the payment. If a U.S. branch certifies on a 
U.S. branch withholding certificate described in the preceding sentence 
that it agrees to be treated as a U.S. person under Sec.  1.1441-
1(b)(2)(iv)(A), the broker provided the certificate must treat the U.S. 
branch as an exempt foreign person. If a U.S. branch does not certify 
as described in the preceding sentence on its U.S. branch withholding 
certificate, the broker provided the certificate must treat the U.S. 
branch as an exempt foreign person except to the extent required by 
paragraph (g)(3)(iv) of this section (rules for when a broker is 
required to treat a payment as made to a U.S. person that is not an 
exempt

[[Page 56577]]

recipient under paragraph (c)(3) of this section and for reporting that 
may be required by the U.S. branch). In a case in which a broker cannot 
reliably associate a payment of gross proceeds made to a U.S. branch 
with a U.S. branch withholding certificate described in Sec.  1.1441-
1(e)(3)(v) or a valid beneficial owner withholding certificate 
described in paragraph (g)(4)(ii)(B) of this section, see paragraph 
(g)(4)(vi)(E)(1) of this section for determining the status of the U.S. 
branch as a beneficial owner or intermediary.
    (F) Transition rule for obtaining documentation to treat a customer 
as an exempt foreign person. Notwithstanding the rules of this 
paragraph (g)(4) for determining the status of a customer as an exempt 
foreign person, for a sale of a digital asset effected before January 
1, 2027, that was held in an account established for the customer by a 
broker before January 1, 2026, the broker may treat the customer as an 
exempt foreign person provided that the customer has not previously 
been classified as a U.S. person by the broker, and the information 
that the broker has in the account opening files or other files 
pertaining to the account, including documentation collected for 
purposes of an AML program, includes a residence address for the 
customer that is not a U.S. address.
    (vii) Barter exchanges. No return of information is required by a 
barter exchange under the rules of paragraphs (e) and (f) of this 
section with respect to a client or a member that the barter exchange 
may treat as an exempt foreign person pursuant to the procedures 
described in this paragraph (g)(4).
    (5) Examples. The application of the provisions of paragraphs 
(g)(1) through (3) of this section may be illustrated by the following 
examples:

    (i) Example 1. FC is a foreign corporation that is not a U.S. 
payor or U.S. middleman described in Sec.  1.6049-5(c)(5) that 
regularly issues and retires its own debt obligations. A is an 
individual whose residence address is inside the United States, who 
holds a bond issued by FC that is in registered form (within the 
meaning of section 163(f) and the regulations under that section). 
The bond is retired by FP, a foreign corporation that is a broker 
within the meaning of paragraph (a)(1) of this section and the 
designated paying agent of FC. FP mails the proceeds to A at A's 
U.S. address. The sale would be considered to be effected at an 
office outside the United States under paragraph (g)(3)(iii)(A) of 
this section except that the proceeds of the sale are mailed to a 
U.S. address. For that reason, the sale is considered to be effected 
at an office of the broker inside the United States under paragraph 
(g)(3)(iii)(B) of this section. Therefore, FC is a broker under 
paragraph (a)(1) of this section with respect to this transaction 
because, although it is not a U.S. payor or U.S. middleman, as 
described in Sec.  1.6049-5(c)(5), it is deemed to effect the sale 
in the United States. FP is a broker for the same reasons. However, 
under the multiple broker exception under paragraph (c)(3)(iii) of 
this section, FP, rather than FC, is required to report the payment 
because FP is responsible for paying the holder the proceeds from 
the retired obligations. Under paragraph (g)(1)(i) of this section, 
FP may not treat A as an exempt foreign person and must make an 
information return under section 6045 with respect to the retirement 
of the FC bond, unless FP obtains the certificate or documentation 
described in paragraph (g)(1)(i) of this section.
    (ii) Example 2. The facts are the same as in paragraph (g)(5)(i) 
of this section (the facts in Example 1) except that FP mails the 
proceeds to A at an address outside the United States. Under 
paragraph (g)(3)(iii)(A) of this section, the sale is considered to 
be effected at an office of the broker outside the United States. 
Therefore, under paragraph (a)(1) of this section, neither FC nor FP 
is a broker with respect to the retirement of the FC bond. 
Accordingly, neither is required to make an information return under 
section 6045.
    (iii) Example 3. The facts are the same as in paragraph 
(g)(5)(ii) of this section (the facts in Example 2) except that FP 
is also the agent of A. The result is the same as in paragraph 
(g)(5)(ii) of this section (Example 2). Neither FP nor FC are 
brokers under paragraph (a)(1) of this section with respect to the 
sale since the sale is effected outside the United States and 
neither of them are U.S. payors (within the meaning of Sec.  1.6049-
5(c)(5)).
    (iv) Example 4. The facts are the same as in paragraph (g)(5)(i) 
of this section (the facts in Example 1) except that the registered 
bond held by A was issued by DC, a domestic corporation that 
regularly issues and retires its own debt obligations. Also, FP 
mails the proceeds to A at an address outside the United States. 
Interest on the bond is not described in paragraph (g)(1)(ii) of 
this section. The sale is considered to be effected at an office 
outside the United States under paragraph (g)(3)(iii)(A) of this 
section. DC is a broker under paragraph (a)(1)(i)(B) of this 
section. DC is not required to report the payment under the multiple 
broker exception under paragraph (c)(3)(iii) of this section. FP is 
not required to make an information return under section 6045 
because FP is not a U.S. payor described in Sec.  1.6049-5(c)(5) and 
the sale is effected outside the United States. Accordingly, FP is 
not a broker under paragraph (a)(1) of this section.
    (v) Example 5. The facts are the same as in paragraph (g)(5)(iv) 
of this section (the facts in Example 4) except that FP is also the 
agent of A. DC is a broker under paragraph (a)(1) of this section. 
DC is not required to report under the multiple broker exception 
under paragraph (c)(3)(iii) of this section. FP is not required to 
make an information return under section 6045 because FP is not a 
U.S. payor described in Sec.  1.6049-5(c)(5) and the sale is 
effected outside the United States and therefore FP is not a broker 
under paragraph (a)(1) of this section.
    (vi) Example 6. The facts are the same as in paragraph 
(g)(5)(iv) of this section (the facts in Example 4) except that the 
bond is retired by DP, a broker within the meaning of paragraph 
(a)(1) of this section and the designated paying agent of DC. DP is 
a U.S. payor under Sec.  1.6049-5(c)(5). DC is not required to 
report under the multiple broker exception under paragraph 
(c)(3)(iii) of this section. DP is required to make an information 
return under section 6045 because it is the person responsible for 
paying the proceeds from the retired obligations unless DP obtains 
the certificate or documentary evidence described in paragraph 
(g)(1)(i) of this section.
    (vii) Example 7--(A) Facts. Customer A owns U.S. corporate bonds 
issued in registered form after July 18, 1984, and carrying a stated 
rate of interest. The bonds are held through an account with foreign 
bank, X, and are held in street name. X is a wholly-owned subsidiary 
of a U.S. company and is not a qualified intermediary within the 
meaning of Sec.  1.1441-1(e)(5)(ii). X has no documentation 
regarding A. A instructs X to sell the bonds. In order to effect the 
sale, X acts through its agent in the United States, Y. Y sells the 
bonds and remits the sales proceeds to X. X credits A's account in 
the foreign country. X does not provide documentation to Y and has 
no actual knowledge that A is a foreign person but it does appear 
that A is an entity (rather than an individual).
    (B) Analysis with respect to Y's obligations to withhold and 
report. Y treats X as the customer, and not A, because Y cannot 
treat X as an intermediary because it has received no documentation 
from X. Y is not required to report the sales proceeds under the 
multiple broker exception under paragraph (c)(3)(iii) of this 
section, because X is an exempt recipient. Further, Y is not 
required to report the amount of accrued interest paid to X on Form 
1042-S under Sec.  1.1461-1(c)(2)(ii) because accrued interest is 
not an amount subject to reporting under chapter 3 unless the 
withholding agent knows that the obligation is being sold with a 
primary purpose of avoiding tax.
    (C) Analysis with respect to X's obligations to withhold and 
report. Although X has effected, within the meaning of paragraph 
(a)(1) of this section, the sale of a security at an office outside 
the United States under paragraph (g)(3)(iii) of this section, X is 
treated as a broker, under paragraph (a)(1) of this section, because 
as a wholly-owned subsidiary of a U.S. corporation, X is a 
controlled foreign corporation and therefore is a U.S. payor. See 
Sec.  1.6049-5(c)(5). Under the presumptions described in Sec.  
1.6049-5(d)(2) (as applied to amounts not subject to withholding 
under chapter 3), X must apply the presumption rules of Sec.  
1.1441-1(b)(3)(i) through (iii), with respect to the sales proceeds, 
to treat A as a partnership that is a U.S. non-exempt recipient 
because the presumption of foreign status for offshore obligations 
under Sec.  1.1441-1(b)(3)(iii)(D) does not apply. See paragraph 
(g)(1)(i) of this section. Therefore, unless X is an FFI (as defined 
in Sec.  1.1471-1(b)(47)) that is excepted from reporting the sales 
proceeds under paragraph (c)(3)(ii) of this section, the

[[Page 56578]]

payment of proceeds to A by X is reportable on a Form 1099 under 
paragraph (c)(2) of this section. X has no obligation to backup 
withhold on the payment based on the exemption under Sec.  
31.3406(g)-1(e) of this chapter, unless X has actual knowledge that 
A is a U.S. person that is not an exempt recipient. X is also 
required to separately report the accrued interest (see paragraph 
(d)(3) of this section) on Form 1099 under section 6049 because A is 
also presumed to be a U.S. person who is not an exempt recipient 
with respect to the payment because accrued interest is not an 
amount subject to withholding under chapter 3 and, therefore, the 
presumption of foreign status for offshore obligations under Sec.  
1.1441-1(b)(3)(iii)(D) does not apply. See Sec.  1.6049-5(d)(2)(i).
    (viii) Example 8--(A) Facts. The facts are the same as in 
paragraph (g)(5)(vii) of this section (the facts in Example 7) 
except that X is a foreign corporation that is not a U.S. payor 
under Sec.  1.6049-5(c).
    (B) Analysis with respect to Y's obligations to withhold and 
report. Y is not required to report the sales proceeds under the 
multiple broker exception under paragraph (c)(3)(iii) of this 
section, because X is the person responsible for paying the proceeds 
from the sale to A.
    (C) Analysis with respect to X's obligations to withhold and 
report. Although A is presumed to be a U.S. payee under the 
presumptions of Sec.  1.6049-5(d)(2), X is not considered to be a 
broker under paragraph (a)(1) of this section because it is a not a 
U.S. payor under Sec.  1.6049-5(c)(5). Therefore, X is not required 
to report the sale under paragraph (c)(2) of this section.
* * * * *
    (j) Time and place for filing; cross-references to penalty and 
magnetic media filing requirements. Forms 1096 and 1099 required under 
this section shall be filed after the last calendar day of the 
reporting period elected by the broker or barter exchange and on or 
before February 28 of the following calendar year with the appropriate 
Internal Revenue Service Center, the address of which is listed in the 
instructions for Form 1096. For a digital asset sale effected prior to 
January 1, 2025, for which a broker chooses under paragraph 
(d)(2)(iii)(B) of this section to file an information return, Form 1096 
and the Form 1099-B, Proceeds From Broker and Barter Exchange 
Transactions, or the Form 1099-DA, Digital Asset Proceeds from Broker 
Transactions, must be filed on or before February 28 of the calendar 
year following the year of that sale. See paragraph (l) of this section 
for the requirement to file certain returns on magnetic media. For 
provisions relating to the penalty provided for the failure to file 
timely a correct information return under section 6045(a), see Sec.  
301.6721-1 of this chapter. See Sec.  301.6724-1 of this chapter for 
the waiver of a penalty if the failure is due to reasonable cause and 
is not due to willful neglect.
* * * * *
    (m) * * *
    (1) In general. This paragraph (m) provides rules for a broker to 
determine and report the information required under this section for an 
option that is a covered security under paragraph (a)(15)(i)(E) or (H) 
of this section.
    (2) * * *
    (ii) * * *
    (C) Notwithstanding paragraph (m)(2)(i) of this section, if an 
option is an option on a digital asset or an option on derivatives with 
a digital asset as an underlying property, this paragraph (m) applies 
to the option if it is granted or acquired on or after January 1, 2026.
* * * * *
    (n) * * *
    (6) * * *
    (i) Sale. A broker must report the amount of market discount that 
has accrued on a debt instrument as of the date of the instrument's 
sale, as defined in paragraph (a)(9)(i) of this section. See paragraphs 
(n)(5) and (n)(11)(i)(B) of this section to determine whether the 
amount reported should take into account a customer election under 
section 1276(b)(2). See paragraph (n)(8) of this section to determine 
the accrual period to be used to compute the accruals of market 
discount. This paragraph (n)(6)(i) does not apply if the customer 
notifies the broker under the rules in paragraph (n)(5) of this section 
that the customer elects under section 1278(b) to include market 
discount in income as it accrues.
* * * * *
    (q) Applicability dates. Except as otherwise provided in paragraphs 
(d)(6)(ix), (m)(2)(ii), and (n)(12)(ii) of this section, and in this 
paragraph (q), this section applies on or after January 6, 2017. 
Paragraphs (k)(4) and (l) of this section apply with respect to 
information returns required to be filed and payee statements required 
to be furnished on or after January 1, 2024. (For rules that apply 
after June 30, 2014, and before January 6, 2017, see 26 CFR 1.6045-1, 
as revised April 1, 2016.) Except in the case of a sale of digital 
assets for real property as described in paragraph (a)(9)(ii)(B) of 
this section, this section applies to sales of digital assets on or 
after January 1, 2025. In the case of a sale of digital assets for real 
property as described in paragraph (a)(9)(ii)(B) of this section, this 
section applies to sales of digital assets on or after January 1, 2026. 
For assets that are commodities pursuant to the Commodity Futures 
Trading Commission's certification procedures described in 17 CFR 40.2, 
this section applies to sales of such commodities on or after January 
1, 2025, without regard to the date such certification procedures were 
undertaken.
    (r) Cross-references. For provisions relating to backup withholding 
for reportable transactions under this section, see Sec.  
31.3406(b)(3)-2 of this chapter for rules treating gross proceeds as 
reportable payments, Sec.  31.3406(d)-1 of this chapter for rules with 
respect to backup withholding obligations, and Sec.  31.3406(h)-3 of 
this chapter for the prescribed form for the certification of 
information required under this section.

0
Par. 7. Section 1.6045-4 is amended by:
0
1. Revising the section heading and paragraph (b)(1);
0
2. Removing the period at the end of paragraph (c)(2)(i) and adding a 
semicolon in its place;
0
3. Removing the word ``or'' from the end of paragraph (c)(2)(ii);
0
4. Removing the period at the end of paragraph (c)(2)(iii) and adding 
``; or'' in its place;
0
5. Adding paragraph (c)(2)(iv);
0
6. Revising paragraph (d)(2)(ii)(A);
0
7. In paragraphs (e)(3)(iii)(A) and (B), adding the words ``or digital 
asset'' after the word ``cash'';
0
8. Revising and republishing paragraphs (g) and (h)(1);
0
9. Adding paragraphs (h)(2)(iii) and (h)(3);
0
10. Revising paragraphs (i)(1) and (2), (i)(3)(ii), and (o);
0
11. In paragraph (r):
0
a. Redesignating Examples 1 through 9 as paragraphs (r)(1) through (9), 
respectively;
0
b. In newly redesignated paragraph (r)(3), removing ``section (b)(1)'' 
and adding ``paragraph (b)(1)'' in its place;
0
c. Removing the heading in newly redesignated reserved paragraph 
(r)(5);
0
d. Revising newly redesignated paragraph (r)(7);
0
e. In the first sentence of newly redesignated paragraph (r)(8), 
removing ``example (6)'' and adding ``paragraph (r)(6) of this section 
(the facts in Example 6)'' in its place;
0
f. In the first sentence of newly redesignated paragraph (r)(9), 
removing ``example (8)'' and adding ``paragraph (r)(8) of this section 
(the facts in Example 8)'' in its place; and
0
g. Adding paragraph (r)(10).
0
12. Adding a sentence to the end of paragraph (s).
    The revisions and additions read as follows:


Sec.  1.6045-4  Information reporting on real estate transactions.

* * * * *

[[Page 56579]]

    (b) * * *
    (1) In general. A transaction is a real estate transaction under 
this section if the transaction consists in whole or in part of the 
sale or exchange of reportable real estate (as defined in paragraph 
(b)(2) of this section) for money, indebtedness, property other than 
money, or services. The term sale or exchange shall include any 
transaction properly treated as a sale or exchange for Federal income 
tax purposes, whether or not the transaction is currently taxable. 
Thus, for example, a sale or exchange of a principal residence is a 
real estate transaction under this section even though the transferor 
may be entitled to the special exclusion of gain up to $250,000 (or 
$500,000 in the case of married persons filing jointly) from the sale 
or exchange of a principal residence provided by section 121 of the 
Code.
* * * * *
    (c) * * *
    (2) * * *
    (iv) A principal residence (including stock in a cooperative 
housing corporation) provided the reporting person obtain from the 
transferor a written certification consistent with guidance that the 
Secretary has designated or may designate by publication in the Federal 
Register or in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) 
of this chapter). If a residence has more than one owner, a real estate 
reporting person must either obtain a certification from each owner 
(whether married or not) or file an information return and furnish a 
payee statement for any owner that does not make the certification. The 
certification must be retained by the reporting person for four years 
after the year of the sale or exchange of the residence to which the 
certification applies. A reporting person who relies on a certification 
made in compliance with this paragraph (c)(2)(iv) will not be liable 
for penalties under section 6721 of the Code for failure to file an 
information return, or under section 6722 of the Code for failure to 
furnish a payee statement to the transferor, unless the reporting 
person has actual knowledge or reason to know that any assurance is 
incorrect.
    (d) * * *
    (2) * * *
    (ii) * * *
    (A) The United States or a State, the District of Columbia, the 
Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana 
Islands, the U.S. Virgin Islands, or American Samoa, a political 
subdivision of any of the foregoing, or any wholly owned agency or 
instrumentality of any one or more of the foregoing; or
* * * * *
    (g) Prescribed form. Except as otherwise provided in paragraph (k) 
of this section, the information return required by paragraph (a) of 
this section shall be made on Form 1099-S, Proceeds From Real Estate 
Transactions or any successor form.
    (h) * * *
    (1) In general. The following information must be set forth on the 
Form 1099-S required by this section:
    (i) The name, address, and taxpayer identification number (TIN) of 
the transferor (see also paragraph (f)(2) of this section);
    (ii) A general description of the real estate transferred (in 
accordance with paragraph (h)(2)(i) of this section);
    (iii) The date of closing (as defined in paragraph (h)(2)(ii) of 
this section);
    (iv) To the extent required by the Form 1099-S and its 
instructions, the entire gross proceeds with respect to the transaction 
(as determined under the rules of paragraph (i) of this section), and, 
in the case of multiple transferors, the gross proceeds allocated to 
the transferor (as determined under paragraph (i)(5) of this section);
    (v) To the extent required by the Form 1099-S and its instructions, 
an indication that the transferor--
    (A) Received (or will, or may, receive) property (other than cash, 
consideration treated as cash, and digital assets in computing gross 
proceeds) or services as part of the consideration for the transaction; 
or
    (B) May receive property (other than cash and digital assets) or 
services in satisfaction of an obligation having a stated principal 
amount; or
    (C) May receive, in connection with a contingent payment 
transaction, an amount of gross proceeds that cannot be determined with 
certainty using the method described in paragraph (i)(3)(iii) of this 
section and is therefore not included in gross proceeds under 
paragraphs (i)(3)(i) and (iii) of this section;
    (vi) The real estate reporting person's name, address, and TIN;
    (vii) In the case of a payment made to the transferor using digital 
assets, the name and number of units of the digital asset, and the date 
the payment was made;
    (viii) [Reserved]
    (ix) Any other information required by the Form 1099-S or its 
instructions.
    (2) * * *
    (iii) Digital assets. For purposes of this section, a digital asset 
has the meaning set forth in Sec.  1.6045-1(a)(19).
    (3) Limitation on information provided. The information required in 
the case of payment made to the transferor using digital assets under 
paragraph (h)(1)(vii) of this section and the portion of any gross 
proceeds attributable to that payment required to be reported by 
paragraph (h)(1)(iv) of this section is not required unless the real 
estate reporting person has actual knowledge or ordinarily would know 
that digital assets were received by the transferor as payment. For 
purposes of this limitation, a real estate reporting person is 
considered to have actual knowledge that payment was made to the 
transferor using digital assets if the terms of the real estate 
contract provide for payment using digital assets.
    (i) * * *
    (1) In general. Except as otherwise provided in this paragraph (i), 
the term gross proceeds means the total cash received, including cash 
received from a processor of digital asset payments as described in 
Sec.  1.6045-1(a)(22), consideration treated as cash received, and the 
value of any digital asset received by or on behalf of the transferor 
in connection with the real estate transaction.
    (i) Consideration treated as cash. For purposes of this paragraph 
(i), consideration treated as cash received by or on behalf of the 
transferor in connection with the real estate transaction includes the 
following amounts:
    (A) The stated principal amount of any obligation to pay cash to or 
for the benefit of the transferor in the future (including any 
obligation having a stated principal amount that may be satisfied by 
the delivery of property (other than cash) or services);
    (B) The amount of any liability of the transferor assumed by the 
transferee as part of the consideration for the transfer or of any 
liability to which the real estate acquired is subject (whether or not 
the transferor is personally liable for the debt); and
    (C) In the case of a contingent payment transaction, as defined in 
paragraph (i)(3)(ii) of this section, the maximum determinable 
proceeds, as defined in paragraph (i)(3)(iii) of this section.
    (ii) Digital assets received. For purposes of this paragraph (i), 
the value of any digital asset received means the fair market value in 
U.S. dollars of the digital asset actually received. Additionally, if 
the consideration received by the transferor includes an obligation to 
pay a digital asset to, or for the benefit of, the transferor in the 
future, the value of any digital asset received includes the fair 
market value,

[[Page 56580]]

as of the date and time the obligation is entered into, of the digital 
assets to be paid as stated principal under such obligation. The fair 
market value of any digital asset received must be determined based on 
the valuation rules provided in Sec.  1.6045-1(d)(5)(ii).
    (iii) Other property. Gross proceeds does not include the value of 
any property (other than cash, consideration treated as cash, and 
digital assets) or services received by, or on behalf of, the 
transferor in connection with the real estate transaction. See 
paragraph (h)(1)(v) of this section for the information that must be 
included on the Form 1099-S required by this section in cases in which 
the transferor receives (or will, or may, receive) property (other than 
cash, consideration treated as cash, and digital assets) or services as 
part of the consideration for the transfer.
    (2) Treatment of sales commissions and similar expenses. In 
computing gross proceeds, the total cash, consideration treated as 
cash, and digital assets received by or on behalf of the transferor 
shall not be reduced by expenses borne by the transferor (such as sales 
commissions, amounts paid or withheld from consideration received to 
effect the digital asset transfer as described in Sec.  1.1001-7(b)(2), 
expenses of advertising the real estate, expenses of preparing the 
deed, and the cost of legal services in connection with the transfer).
    (3) * * *
    (ii) Contingent payment transaction. For purposes of this section, 
the term contingent payment transaction means a real estate transaction 
with respect to which the receipt, by or on behalf of the transferor, 
of cash, consideration treated as cash under paragraph (i)(1)(i)(A) of 
this section, or digital assets under paragraph (i)(1)(ii) of this 
section is subject to a contingency.
* * * * *
    (o) No separate charge. A reporting person may not separately 
charge any person involved in a real estate transaction for complying 
with any requirements of this section. A reporting person may, however, 
take into account its cost of complying with such requirements in 
establishing its fees (other than in charging a separate fee for 
complying with such requirements) to any customer for performing 
services in the case of a real estate transaction.
* * * * *
    (r) * * *

    (7) Example 7: Gross proceeds (contingencies). The facts are the 
same as in paragraph (r)(6) of this section (the facts in Example 
6), except that the agreement does not provide for adequate stated 
interest. The result is the same as in paragraph (r)(6) of this 
section (the results in Example 6).
* * * * *
    (10) Example 10: Gross proceeds (exchange involving digital 
assets)--(i) Facts. K, an individual, agrees in a contract for sale 
to pay 140 units of digital asset DE with a total fair market value 
of $280,000 to J, an unmarried individual who is not an exempt 
transferor, in exchange for Whiteacre, which has a fair market value 
of $280,000. No liabilities are involved in the transaction. P is 
the reporting person with respect to both sides of the transaction.
    (ii) Analysis. P has actual knowledge that payment was made to J 
using digital assets because the terms of the real estate contract 
provide for payment using digital assets. Accordingly, with respect 
to the payment by K of 140 units of digital asset DE to J, P must 
report gross proceeds received by J of $280,000 (140 units of DE) on 
Form 1099-S, Proceeds From Real Estate Transactions. Additionally, 
to the extent K is not an exempt recipient under Sec.  1.6045-1(c) 
or an exempt foreign person under Sec.  1.6045-1(g), P is required 
to report gross proceeds paid to K on Form 1099-DA, Digital Asset 
Proceeds from Broker Transactions, with respect to K's sale of 140 
units of digital asset DE, in the amount of $280,000 pursuant to 
Sec.  1.6045-1.

    (s) * * * The amendments to paragraphs (b)(1), (c)(2)(iv), 
(d)(2)(ii), (e)(3)(iii), (h)(1)(v) through (ix), (h)(2)(iii), (i)(1) 
and (2), (i)(3)(ii), (o), and (r) of this section apply to real estate 
transactions with dates of closing occurring on or after January 1, 
2026.

0
Par. 8. Section 1.6045A-1 is amended by:
0
1. In paragraph (a)(1)(i), in the first sentence, removing ``paragraphs 
(a)(1)(ii) through (v) of this section,'' and adding ``paragraphs 
(a)(1)(ii) through (vi) of this section,'' in its place; and
0
2. Adding paragraph (a)(1)(vi).
    The addition reads as follows:


Sec.  1.6045A-1  Statements of information required in connection with 
transfers of securities.

    (a) * * *
    (1) * * *
    (vi) Exception for transfers of specified securities that are 
reportable as digital assets. No transfer statement is required under 
paragraph (a)(1)(i) of this section with respect to a specified 
security, the sale of which is reportable as a digital asset after the 
application of the special coordination rules under Sec.  1.6045-
1(c)(8). A transferor that chooses to provide a transfer statement with 
respect to a specified security described in the preceding sentence 
that is a tokenized security described in Sec.  1.6045-1(c)(8)(i)(D) 
that reports some or all of the information described in paragraph (b) 
of this section is not subject to penalties under section 6722 of the 
Code for failure to report this information correctly.
* * * * *

0
Par. 9. Section 1.6045B-1 is amended by:
0
1. Revising paragraph (a)(1) introductory text;
0
2. Adding paragraph (a)(6);
0
3. Removing the word ``and'' from the end of paragraph (j)(5);
0
4. Removing the period from the end of paragraph (j)(6) and adding in 
its place ``; and'';
0
5. Adding paragraph (j)(7).
    The revision and additions read as follows:


Sec.  1.6045B-1  Returns relating to actions affecting basis of 
securities.

    (a) * * *
    (1) Information required. Except as provided in paragraphs (a)(4) 
and (5) of this section, an issuer of a specified security within the 
meaning of Sec.  1.6045-1(a)(14)(i) through (iv) that takes an 
organizational action that affects the basis of the security must file 
an issuer return setting forth the following information and any other 
information specified in the return form and instructions:
* * * * *
    (6) Reporting for certain specified securities that are digital 
assets. Unless otherwise excepted under this section, an issuer of a 
specified security described in paragraph (a)(1) of this section is 
required to report under this section without regard to whether the 
specified security is also described in Sec.  1.6045-1(a)(14)(v) or 
(vi). If a specified security is described in Sec.  1.6045-1(a)(14)(v) 
or (vi) but is not also described in Sec.  1.6045-1(a)(14)(i), (ii), 
(iii) or (iv), the issuer of that specified security is permitted, but 
not required, to report under this section. An issuer that chooses to 
provide the reporting and furnish statements for a specified security 
described in the previous sentence is not subject to penalties under 
section 6721 or 6722 of the Code for failure to report this information 
correctly.
* * * * *
    (j) * * *
    (7) Organizational actions occurring on or after January 1, 2025, 
that affect the basis of digital assets described in Sec.  1.6045-
1(a)(14)(v) or (vi) that are also described in one or more paragraphs 
of Sec.  1.6045-1(a)(14)(i) through (iv).

0
Par. 10. Section 1.6050W-1 is amended by adding a sentence to the end 
of paragraph (a)(2), adding paragraph (c)(5), and revising paragraph 
(j) to read as follows:

[[Page 56581]]

Sec.  1.6050W-1  Information reporting for payments made in settlement 
of payment card and third party network transactions.

    (a) * * *
    (2) * * * In the case of a third party settlement organization that 
has the contractual obligation to make payments to participating 
payees, a payment in settlement of a reportable payment transaction 
includes the submission of instructions to a purchaser to transfer 
funds directly to the account of the participating payee for purposes 
of settling the reportable payment transaction.
* * * * *
    (c) * * *
    (5) Coordination with information returns required under section 
6045 of the Code--(i) Reporting on exchanges involving digital assets. 
Notwithstanding the provisions of this paragraph (c), the reporting of 
a payment made in settlement of a third party network transaction in 
which the payment by a payor is made using digital assets as defined in 
Sec.  1.6045-1(a)(19) or the goods or services provided by a payee are 
digital assets must be as follows:
    (A) Reporting on payors with respect to payments made using digital 
assets. If a payor makes a payment using digital assets and the 
exchange of the payor's digital assets for goods or services is a sale 
of digital assets by the payor under Sec.  1.6045-1(a)(9)(ii), the 
amount paid to the payor in settlement of that exchange is subject to 
the rules as described in Sec.  1.6045-1 (including any exemption from 
reporting under Sec.  1.6045-1) and not this section.
    (B) Reporting on payees with respect to the sale of goods or 
services that are digital assets. If the goods or services provided by 
a payee in an exchange are digital assets, the exchange is a sale of 
digital assets by the payee under Sec.  1.6045-1(a)(9)(ii), and the 
payor is a broker under Sec.  1.6045-1(a)(1) that effected the sale of 
such digital assets, the amount paid to the payee in settlement of that 
exchange is subject to the rules as described in Sec.  1.6045-1 
(including any exemption from reporting under Sec.  1.6045-1) and not 
this section.

    (ii) Examples. The following examples illustrate the rules of 
this paragraph (c)(5).
    (A) Example 1--(1) Facts. CRX is a shared-service organization 
that performs accounts payable services for numerous purchasers that 
are unrelated to CRX. A substantial number of sellers of goods and 
services, including Seller S, have established accounts with CRX and 
have agreed to accept payment from CRX in settlement of their 
transactions with purchasers. The agreement between sellers and CRX 
includes standards and mechanisms for settling the transactions and 
guarantees payment to the sellers, and the arrangement enables 
purchasers to transfer funds to providers. Pursuant to this seller 
agreement, CRX accepts cash from purchasers as payment as well as 
digital assets, which it exchanges into cash for payment to sellers. 
Additionally, CRX is a processor of digital asset payments as 
defined in Sec.  1.6045-1(a)(22) and a broker under Sec.  1.6045-
1(a)(1). P, an individual not otherwise exempt from reporting, 
purchases one month of services from S through CRX's organization. S 
is also an individual not otherwise exempt from reporting. S's 
services are not digital assets under Sec.  1.6045-1(a)(19). To 
effect this transaction, P transfers 100 units of DE, a digital 
asset as defined in Sec.  1.6045-1(a)(19), to CRX. CRX, in turn, 
exchanges the 100 units of DE for $1,000, based on the fair market 
value of the DE units, and pays $1,000 to S.
    (2) Analysis with respect to CRX's status. CRX's arrangement 
constitutes a third party payment network under paragraph (c)(3) of 
this section because a substantial number of persons that are 
unrelated to CRX, including S, have established accounts with CRX, 
and CRX is contractually obligated to settle transactions for the 
provision of goods or services by these persons to purchasers, 
including P. Thus, under paragraph (c)(2) of this section, CRX is a 
third party settlement organization and the transaction involving 
P's purchase of S's services using 100 units of digital asset DE is 
a third party network transaction under paragraph (c)(1) of this 
section.
    (3) Analysis with respect to the reporting on P. P's payment of 
100 units of DE to CRX in return for the payment by CRX of $1,000 in 
cash to S is a sale of the DE units as defined in Sec.  1.6045-
1(a)(9)(ii)(D) that is effected by CRX, a processor of digital asset 
payments and broker under Sec.  1.6045-1(a)(1). Accordingly, 
pursuant to the rules under paragraph (c)(5)(i)(A) of this section, 
CRX must file an information return under Sec.  1.6045-1 with 
respect to P's sale of the DE units and is not required to file an 
information return under paragraph (a)(1) of this section with 
respect to P.
    (4) Analysis with respect to the reporting on S. S's services 
are not digital assets as defined in Sec.  1.6045-1(a)(19). 
Accordingly, pursuant to the rules under paragraph (c)(5)(i)(B) of 
this section, CRX's payment of $1,000 to S in settlement of the 
reportable payment transaction is subject to the reporting rules 
under paragraph (a)(1) of this section and not the reporting rules 
as described in Sec.  1.6045-1.
    (B) Example 2--(1) Facts. CRX is an entity that owns and 
operates a digital asset trading platform and provides digital asset 
custodial services and digital asset broker services under Sec.  
1.6045-1(a)(1). CRX also exchanges on behalf of customers digital 
assets under Sec.  1.6045-1(a)(19), including nonfungible tokens, 
referred to as NFTs, representing ownership in unique digital 
artwork, video, or music. Exchange transactions undertaken by CRX on 
behalf of its customers are considered sales under Sec.  1.6045-
1(a)(9)(ii) that are effected by CRX and subject to reporting by CRX 
under Sec.  1.6045-1. A substantial number of NFT sellers have 
accounts with CRX, into which their NFTs are deposited for sale. 
None of these sellers are related to CRX, and all have agreed to 
settle transactions for the sale of their NFTs in digital asset DE, 
or other forms of consideration, and according to the terms of their 
contracts with CRX. Buyers of NFTs also have accounts with CRX, into 
which digital assets are deposited for later use as consideration to 
acquire NFTs. Once a buyer decides to purchase an NFT for a price 
agreed to by the NFT seller, CRX effects the requested exchange of 
the buyer's consideration for the NFT, which allows CRX to guarantee 
delivery of the bargained for consideration to both buyer and 
seller. CRX charges a transaction fee on every NFT sale, which is 
paid by the buyer in additional units of digital asset DE. Seller J, 
an individual not otherwise exempt from reporting, sells NFTs 
representing digital artwork on CRX's digital asset trading 
platform. J does not perform any other services with respect to 
these transactions. Buyer B, also an individual not otherwise exempt 
from reporting, seeks to purchase J's NFT-4 using units of DE. Using 
CRX's platform, buyer B and seller J agree to exchange J's NFT-4 for 
B's 100 units of DE (with a value of $1,000). At the direction of J 
and B, CRX executes this exchange, with B paying CRX's transaction 
fee using additional units of DE.
    (2) Analysis with respect to CRX's status. CRX's arrangement 
with J and the other NFT sellers constitutes a third party payment 
network under paragraph (c)(3) of this section because a substantial 
number of providers of goods or services who are unrelated to CRX, 
including J, have established accounts with CRX, and CRX is 
contractually obligated to settle transactions for the provision of 
goods or services, such as NFTs representing goods or services, by 
these persons to purchasers. Thus, under paragraph (c)(2) of this 
section, CRX is a third party settlement organization and the sale 
of J's NFT-4 for 100 units of DE is a third party network 
transaction under paragraph (c)(1) of this section. Therefore, CRX 
is a payment settlement entity under paragraph (a)(4)(i)(B) of this 
section.
    (3) Analysis with respect to the reporting on B. The exchange of 
B's 100 units of DE for J's NFT-4 is a sale under Sec.  1.6045-
1(a)(9)(ii)(A)(2) by B of the 100 DE units that was effected by CRX. 
Accordingly, under paragraph (c)(5)(i)(A) of this section, the 
amount paid to B in settlement of the exchange is subject to the 
rules as described in Sec.  1.6045-1, and CRX must file an 
information return under Sec.  1.6045-1 with respect to B's sale of 
the 100 DE units. CRX is not required to also file an information 
return under paragraph (a)(1) of this section with respect to the 
amount paid to B even though CRX is a third party settlement 
organization.
    (4) Analysis with respect to the reporting on J. The exchange of 
J's NFT-4 for 100 units of DE is a sale under Sec.  1.6045-
1(a)(9)(ii) by J of a digital asset under Sec.  1.6045-1(a)(19) that 
was effected by CRX. Accordingly, under paragraph (c)(5)(i)(B) of 
this section, the amount paid to J in settlement of the

[[Page 56582]]

exchange is subject to the rules as described in Sec.  1.6045-1, and 
CRX must file an information return under Sec.  1.6045-1 with 
respect to J's sale of the NFT-4. CRX is not required to also file 
an information return under paragraph (a)(1) of this section with 
respect to the amount paid to J even though CRX is a third party 
settlement organization.
* * * * *
    (j) Applicability date. Except with respect to payments made using 
digital assets, the rules in this section apply to returns for calendar 
years beginning after December 31, 2010. For payments made using 
digital assets, this section applies on or after January 1, 2025.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

0
Par. 11. The authority citation for part 31 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805.


0
Par. 12. Section 31.3406-0 is amended by:
0
1. Revising the heading for the entry for Sec.  31.3406(b)(3)-2;
0
2. Adding entries for Sec. Sec.  31.3406(b)(3)-2(b)(6), 31.3406(g)-
1(e)(1) and (2); and
0
3. Revising the entry for Sec.  31.3406(g)-1(f).
    The additions and revision read as follows:


Sec.  31.3406-0  Outline of the backup withholding regulations.

* * * * *
31.3406(b)(3)-2 Reportable barter exchanges and gross proceeds of 
sales of securities, commodities, or digital assets by brokers.
* * * * *
    (b) * * *
    (6) Amount subject to backup withholding in the case of 
reporting under Sec.  1.6045-1(d)(2)(i)(C) and (d)(10) of this 
chapter.
    (i) Optional reporting method for sales of qualifying 
stablecoins and specified nonfungible tokens.
    (A) In general.
    (B) Backup withholding on non-designated sales of qualifying 
stablecoins.
    (1) In general.
    (2) Non-qualifying events.
    (ii) Applicable threshold for sales by processors of digital 
asset payments.
* * * * *
Sec.  31.3406(g)-1 Exception for payments to certain payees and 
certain other payments.
* * * * *
    (e) * * *
    (1) Reportable payments other than gross proceeds from sales of 
digital assets.
    (2) Reportable payments of gross proceeds from sales of digital 
assets.
    (i) [Reserved]
    (ii) [Reserved]
    (f) Applicability date.
* * * * *

0
Par. 13. Section 31.3406(b)(3)-2 is amended by revising the section 
heading and adding paragraphs (b)(6) and (c) to read as follows:


Sec.  31.3406(b)(3)-2.  Reportable barter exchanges and gross proceeds 
of sales of securities, commodities, or digital assets by brokers.

* * * * *
    (b) * * *
    (6) Amount subject to backup withholding in the case of reporting 
under Sec.  1.6045-1(d)(2)(i)(C) and (d)(10) of this chapter--(i) 
Optional reporting method for sales of qualifying stablecoins and 
specified nonfungible tokens--(A) In general. The amount subject to 
withholding under section 3406 for a broker that reports sales of 
digital assets under the optional method for reporting qualifying 
stablecoins or specified nonfungible tokens under Sec.  1.6045-1(d)(10) 
of this chapter is the amount of gross proceeds from designated sales 
of qualifying stablecoins as defined in Sec.  1.6045-1(d)(10)(i)(C) of 
this chapter and sales of specified nonfungible tokens without regard 
to the amount which must be paid to the broker's customer before 
reporting is required.
    (B) Backup withholding on non-designated sales of qualifying 
stablecoins--(1) In general. A broker is not required to withhold under 
section 3406 on non-designated sales of qualifying stablecoins as 
defined under Sec.  1.6045-1(d)(10)(i)(C) of this chapter.
    (2) Non-qualifying events. In the case of a digital asset that 
would satisfy the definition of a non-designated sale of a qualifying 
stablecoin as defined under Sec.  1.6045-1(d)(10)(i)(C) of this chapter 
for a calendar year but for a non-qualifying event during that year, a 
broker is not required to withhold under section 3406 on such sale if 
it occurs no later than the end of the day that is 30 days after the 
first non-qualifying event with respect to such digital asset during 
such year. A non-qualifying event is the first date during a calendar 
year on which the digital asset no longer satisfies all three 
conditions described in Sec.  1.6045-1(d)(10)(ii)(A) through (C) of 
this chapter to be a qualifying stablecoin. For purposes of this 
paragraph (b)(6)(i)(B)(2), the date on which a non-qualifying event has 
occurred with respect to a digital asset and the date that is no later 
than 30 days after such non-qualifying event must be determined using 
Coordinated Universal Time (UTC).
    (ii) Applicable threshold for sales by processors of digital asset 
payments. For purposes of determining the amount subject to withholding 
under section 3406, the amount subject to reporting under section 6045 
is determined without regard to the minimum gross proceeds which must 
be paid to the customer under Sec.  1.6045-1(d)(2)(i)(C) of this 
chapter before reporting is required.
    (c) Applicability date. This section applies to reportable payments 
made on or after January 1, 2025. For the rules applicable to 
reportable payments made prior to January 1, 2025, see Sec.  
31.3406(b)(3)-2 in effect and contained in 26 CFR part 1 revised April 
1, 2024.

0
Par. 14. Section 31.3406(g)-1 is amended by revising paragraphs (e) and 
(f) to read as follows:


Sec.  31.3406(g)-1  Exception for payments to certain payees and 
certain other payments.

* * * * *
    (e) Certain reportable payments made outside the United States by 
foreign persons, foreign offices of United States banks and brokers, 
and others--(1) Reportable payments other than gross proceeds from 
sales of digital assets. For reportable payments made after June 30, 
2014, other than gross proceeds from sales of digital assets (as 
defined in Sec.  1.6045-1(a)(19) of this chapter), a payor or broker is 
not required to backup withhold under section 3406 of the Code on a 
reportable payment that is paid and received outside the United States 
(as defined in Sec.  1.6049-4(f)(16) of this chapter) with respect to 
an offshore obligation (as defined in Sec.  1.6049-5(c)(1) of this 
chapter) or on the gross proceeds from a sale effected at an office 
outside the United States as described in Sec.  1.6045-1(g)(3)(iii) of 
this chapter (without regard to whether the sale is considered effected 
inside the United States under Sec.  1.6045-1(g)(3)(iii)(B) of this 
chapter). The exception to backup withholding described in the 
preceding sentence does not apply when a payor or broker has actual 
knowledge that the payee is a United States person. Further, no backup 
withholding is required on a reportable payment of an amount already 
withheld upon by a participating FFI (as defined in Sec.  1.1471-
1(b)(91) of this chapter) or another payor in accordance with the 
withholding provisions under chapter 3 or 4 of the Code and the 
regulations under those chapters even if the payee is a known U.S. 
person. For example, a participating FFI is not required to backup 
withhold on a reportable payment allocable to its chapter 4 withholding 
rate pool (as defined in Sec.  1.6049-4(f)(5) of this chapter) of 
recalcitrant account holders (as described in Sec.  1.6049-4(f)(11) of 
this chapter), if withholding was applied to the payment (either by the 
participating

[[Page 56583]]

FFI or another payor) pursuant to Sec.  1.1471-4(b) or Sec.  1.1471-
2(a) of this chapter. For rules applicable to notional principal 
contracts, see Sec.  1.6041-1(d)(5) of this chapter. For rules 
applicable to reportable payments made before July 1, 2014, see Sec.  
31.3406(g)-1(e) in effect and contained in 26 CFR part 1 revised April 
1, 2013.
    (2) [Reserved]
    (f) Applicability date. This section applies to payments made on or 
after January 1, 2025. (For payments made before January 1, 2025, see 
Sec.  31.3406(g)-1 in effect and contained in 26 CFR part 1 revised 
April 1, 2024.)

0
Par. 15. Section 31.3406(g)-2 is amended by adding a sentence to the 
end of paragraphs (e) and (h) to read as follows:


Sec.  31.3406(g)-2  Exception for reportable payment for which 
withholding is otherwise required.

* * * * *
    (e) * * * Notwithstanding the previous sentence, a real estate 
reporting person must withhold under section 3406 of the Code and 
pursuant to the rules under Sec.  31.3406(b)(3)-2 on a reportable 
payment made in a real estate transaction with respect to a purchaser 
that exchanges digital assets for real estate to the extent that the 
exchange is treated as a sale of digital assets subject to reporting 
under Sec.  1.6045-1 of this chapter.
* * * * *
    (h) * * * For sales of digital assets, this section applies on or 
after January 1, 2026.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 16. The authority citation for part 301 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805.


0
Par. 17. Section 301.6721-1 is amended by revising paragraph 
(h)(3)(iii) and adding a sentence to the end of paragraph (j) to read 
as follows:


Sec.  301.6721-1  Failure to file correct information returns.

* * * * *
    (h) * * *
    (3) * * *
    (iii) Section 6045(a) or (d) of the Code (relating to returns of 
brokers, generally reported on Form 1099-B, Proceeds From Broker and 
Barter Exchange Transactions, for broker transactions not involving 
digital assets; Form 1099-DA, Digital Asset Proceeds from Broker 
Transactions for broker transactions involving digital assets; Form 
1099-S, Proceeds From Real Estate Transactions, for gross proceeds from 
the sale or exchange of real estate; and Form 1099-MISC, Miscellaneous 
Income, for certain substitute payments and payments to attorneys); and
* * * * *
    (j) * * * Paragraph (h)(3)(iii) of this section applies to returns 
required to be filed on or after January 1, 2026.

0
Par. 18. Section 301.6722-1 is amended by revising paragraph 
(e)(2)(viii) and adding a sentence to the end of paragraph (g) to read 
as follows:


Sec.  301.6722-1  Failure to furnish correct payee statements.

* * * * *
    (e) * * *
    (2) * * *
    (viii) Section 6045(a) or (d) (relating to returns of brokers, 
generally reported on Form 1099-B, Proceeds From Broker and Barter 
Exchange Transactions, for broker transactions not involving digital 
assets; Form 1099-DA, Digital Asset Proceeds From Broker Transactions, 
for broker transactions involving digital assets; Form 1099-S, Proceeds 
From Real Estate Transactions, for gross proceeds from the sale or 
exchange of real estate; and Form 1099-MISC, Miscellaneous Income, for 
certain substitute payments and payments to attorneys);
* * * * *
    (g) * * * Paragraph (e)(2)(viii) of this section applies to payee 
statements required to be furnished on or after January 1, 2026.

Douglas W. O' Donnell,
Deputy Commissioner.
    Approved: June 17, 2024.
Aviva R. Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-14004 Filed 6-28-24; 4:15 pm]
BILLING CODE 4830-01-P