The US Treasury Department and Internal Revenue Service (IRS) has published a document (TD 10021) finalising final regulations regarding information reporting by brokers that regularly provide services effectuating certain digital asset sales and exchanges 30 December 2024.

The final regulations require these brokers to file information returns and furnish payee statements reporting gross proceeds on dispositions of digital assets effected for customers in certain sale or exchange transactions.

These regulations will go into effect on 28 February 2025.

These finalised regulations follows after the US IRS and Treasury Department published ‘“Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realised and Basis for Digital Asset Transactions”, outlining the final regulations regarding information reporting and the determination of the amount realised and the basis for certain digital asset sales and exchanges on 9 July 2024.

However, the finalised regulations include key amendments such as:

• Clarification to the “trading front-end services” with expanded definitions and examples, and specify who qualifies as a broker. Providers of front-end services typically offer a suite of services that enable their customers to view the market conditions relating to a customer’s proposed trade, to input their proposed trade, and then to initiate the additional steps necessary to trade their digital assets (trading front-end services).
• Address compliance challenges specific to decentralised asset trading. When customers use trading front-end services, they will typically be provided with an array of available digital asset trading pairs applicable to the digital assets they hold in their unhosted wallets. For example, a customer that wishes to exchange a digital asset will be shown a menu of the trading pairs available for exchange of the customer’s digital asset for different digital assets as well as the current exchange rate for each potential trade. Some trading frontend services also offer customers the ability to choose the DeFi trading application that will execute their transaction.
• Include transitional relief provisions from Notice 2025-3 to give brokers more time to meet reporting and withholding requirements.

Transitional Relief: Notice 2025-3

The Treasury Department and the IRS also issued Notice 2025-3 offering transitional relief to help brokers address compliance challenges.

This notice provides transitional relief from penalties for certain brokers who fail to report sales of digital assets, other than digital assets not required to be reported as digital assets on information returns (Form 1099-DA, Digital Asset Proceeds From Broker Transactions), or fail to furnish payee statements under section 6045.

The penalty relief provided by this notice is available for brokers providing trading front-end services, and is available for information returns required to be filed and payee statements required to be furnished in 2028 for sales of digital assets effected in calendar year 2027, provided that the broker makes a good faith effort to file the appropriate information return and furnish the associated payee statement accurately.

In addition, this notice provides transitional relief from the liability for the payment of backup withholding tax required to be withheld under section 3406 and its accompanying regulations as well as from penalties for DeFi brokers who fail to pay that tax with respect to certain sales of digital assets required to be reported under section 6045.

Specifically, this notice provides certain relief from penalties (1) for any sale of a digital asset effected by a DeFi broker during calendar year 2027 and (2) for any sale of a digital asset effected by a DeFi broker during calendar year 2028 for a customer (payee) if the broker submits that payee’s name and tax identification number (TIN) combination to the Internal Revenue Service’s (IRS) TIN Matching Program and receives a response that the name and TIN combination furnished by the payee matches the name and TIN combination for that payee in IRS records.

For sales effected before 1 January 2029, this notice also provides that a DeFi broker may treat a customer as an exempt foreign person if the customer has not been previously classified as a U.S. person by the DeFi broker, and the information that the DeFi broker has for the customer includes a residence address that is not a U.S. address.

This notice also provides transitional relief from penalties for DeFi brokers who fail to backup withhold and pay the full backup withholding tax due if such failure is due to a decrease in the value of withheld digital assets in a sale of digital assets in return for different digital assets effected on or before 31 December 2028, and the broker immediately liquidates the withheld digital assets for cash.

The notice is effective as of 27 December 2024.