Bulletin No. 2023–38

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2023–38

September 18, 2023

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

Notice 2023-56, page 824.

This notice describes the rules that the Internal Revenue

Service (IRS) applies in determining the Federal income tax

consequences of refunds of State or local taxes and certain other payments made by State or local governments

(States) to individuals (State payments) and includes examples illustrating the application of these rules. This notice

also describes the applicable Federal information reporting

requirements. Section 5 of this notice requests comments,

including comments on the application of the rules described

in this notice.

REG-122793-19, page 829.

This NPRM proposes rules regarding information reporting,

determining amount realized and basis, and backup withholding, for sales and exchanges of digital assets. Based on

Finding Lists begin on page ii.

existing authority and changes to the Internal Revenue Code

of 1986 made by the Infrastructure Investment and Jobs Act,

Pub. L. No. 117-58, the NPRM would require brokers, including

digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets, to file information returns, and furnish payee statements, reporting gross

proceeds for sales and certain exchanges of digital assets

effected for customers on or after 1/1/2025. Certain brokers

would also be required to report basis for sales and exchange

transactions effected for customers on or after 1/1/2026.

For real estate transactions that close on or after 1/1/2025,

the NPRM would require real estate reporting persons, such as

title companies, closing attorneys, mortgage lenders, and real

estate brokers, to report the disposition of digital assets paid

as consideration by real estate purchasers and to report on

Form 1099-S the fair market value of digital assets paid to real

estate sellers. The NPRM sets forth gain and loss computation

rules, basis determination rules, and backup withholding rules

applicable to digital asset sale and exchange transactions.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

September 18, 2023 

Bulletin No. 2023–38

Part III

Federal Income Tax

Consequences of Certain

State Payments

Notice 2023-56

SECTION 1. PURPOSE

This notice describes the rules that the

Internal Revenue Service (IRS) applies

in determining the Federal income tax

consequences of refunds of State or local

taxes and certain other payments made

by State or local governments (States) to

individuals (State payments) and includes

examples illustrating the application of

these rules. This notice also describes the

applicable Federal information reporting requirements. Section 5 of this notice

requests comments, including comments

on the application of the rules described

in this notice.

SECTION 2. BACKGROUND

In 2022, a number of States implemented programs to provide State payments to certain individuals residing in

their States. Many of these programs were

related, directly or indirectly, to the various consequences of the Coronavirus

Disease 2019 (COVID-19) pandemic, and

the programs varied in terms of the types

of payments, payment amounts, and eligibility criteria.

In response to numerous requests for

guidance on how individuals should treat

these payments on their 2022 Federal

income tax returns, on February 10,

2023, the IRS issued IRS News Release

IR-2023-231 to provide certainty for the

2023 Federal income tax filing season.

After noting that determining whether

State payments qualify for the exclusion

from Federal gross income under the general welfare doctrine or as disaster relief

payments is a complex and fact-intensive

1

2

inquiry that depends on a number of considerations, the News Release stated as

follows:

 he IRS has reviewed the types of

T

payments made by various states in

2022 that may fall in these categories

and given the complicated fact-specific

nature of determining the treatment of

these payments for federal tax purposes

balanced against the need to provide

certainty and clarity for individuals

who are now attempting to file their

federal income tax returns, the IRS has

determined that in the best interest of

sound tax administration and given the

fact that the pandemic emergency declaration is ending in May, 2023 making this an issue only for the 2022 tax

year, if a taxpayer does not include the

amount of one of these payments in its

2022 income for federal income tax

purposes, the IRS will not challenge

the treatment of the 2022 payment as

excludable from income on an original

or amended return.

The News Release identified 2022 payment programs in 17 States that qualified

for this treatment.

As the News Release made clear, the

guidance in the News Release applied

only for payments made in 2022. The

IRS has received requests for guidance

regarding the Federal income tax consequences of State payments made in 2023

and future years, as well as requests that

States be allowed to provide comments

on the guidance. This notice is issued in

response to these requests.

SECTION 3. SUMMARY OF

APPLICABLE FEDERAL INCOME

TAX LAW

.01 Gross Income. Section 61(a) of the

Internal Revenue Code (Code)2 provides

that, except as otherwise provided in subtitle A of the Code, gross income for Federal

income tax purposes “means all income

from whatever source derived” (Federal

gross income). See also § 1.61-1(a). The

U.S. Supreme Court has held that Federal

gross income includes any “undeniable

accession to wealth, clearly realized, over

which a taxpayer has complete dominion.”

Commissioner v. Glenshaw Glass Co.,

348 U.S. 426, 431 (1955), 1955-1 C.B.

207. State payments are subject to this

general rule unless an exception applies to

exclude such amounts from Federal gross

income. Relevant exceptions include certain refunds of previously paid State taxes

(State tax refunds), certain payments subject to the general welfare exclusion, and

certain disaster relief payments (including

certain payments made in connection with

the COVID-19 pandemic).

.02 State Tax Refunds. In determining whether a State payment constitutes

a State tax refund, as opposed to some

other type of State payment, the particular label given to the payment under

State law is not controlling for Federal

tax purposes. Instead, Federal tax law

looks to the substance of the payment to

determine its purpose and Federal income

tax characterization. See, e.g., Morgan v.

Commissioner, 309 U.S. 78, 81 (1940);

Maines v. Commissioner, 144 T.C. 123,

132 (2015). In Maines, the U.S. Tax Court

considered whether payments referred to

by the State as refunds for overpayment

of State taxes were properly viewed as

refunds for Federal income tax purposes.

The payments in question related to three

different types of refundable State income

tax credits. The court held that where the

refundable credit amount was limited to

State taxes actually paid by the taxpayer,

as in the case of one of the credits, the

payments constituted refunds for Federal

income tax purposes. In contrast, where

the credit amount was not so limited, the

court concluded that the payment was not

in substance a refund for overpayment of

State taxes and was therefore includable

in Federal gross income.

Available at https://www.irs.gov/newsroom/irs-issues-guidance-on-state-tax-payments-to-help-taxpayers.

Unless otherwise specified, all “section” or “§” references are to sections of the Code or to the Income Tax Regulations (26 CFR part 1).

September 18, 2023

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Bulletin No. 2023–38

State payments that are properly treated

as State tax refunds generally are not

includible in the recipient’s Federal gross

income because, as the return of an overpayment of the recipient’s State tax liability, these refunds are not an accession to

wealth. See Rev. Rul. 70-86, 1970-1 C.B.

23 (holding that a refund by the State of

real property taxes previously paid by an

individual is a recovery of those taxes

and is generally not includible in Federal

gross income). However, certain State

payments that are properly treated as

State tax refunds may result in Federal

gross income due to the application of

the “tax benefit rule.” See § 111; see also

Rev. Rul. 2019-11, 2019-17 I.R.B. 1041;

Rev. Rul. 93-75, 1993-2 C.B. 63. The tax

benefit rule generally requires a taxpayer

to include in Federal gross income an

amount recovered during a taxable year

that the taxpayer deducted for Federal

income tax purposes in a prior taxable

year to the extent the Federal income tax

deduction reduced the taxpayer’s Federal

income tax liability in the prior taxable

year. Thus, an individual who receives a

State tax refund for a prior year tax payment that the individual did not previously

deduct for Federal income tax purposes3

is not required to include the State tax

refund in Federal gross income because

it is simply a reduction in the individual’s prior year State tax liability, with no

corresponding Federal income tax benefit.

Generally, if an individual deducted a payment of State taxes in a prior taxable year

for Federal income tax purposes that gives

rise to a State tax refund in any subsequent

taxable year, then the State tax refund is

included in the individual’s Federal gross

income during the taxable year in which

the State tax refund is received to the

extent that the Federal income tax deduction in the prior taxable year reduced the

individual’s Federal income tax liability in

the prior taxable year.

For most individuals, State tax refunds

will not be includible in Federal gross

income. For example, individuals who

claimed the standard deduction (as most

individuals do) will not include State tax

refunds in Federal gross income because

they would not have previously deducted

on their Federal income tax returns the

refunded amount of State taxes paid.

Individuals who itemized deductions and

deducted for Federal income tax purposes

the amounts of any State taxes paid, however, generally are required to include the

State tax refunds in gross income on their

Federal income tax returns to the extent

that they received a Federal income tax

benefit from the prior Federal income tax

deductions.4

.03 General Welfare Exclusion. Despite

the general rule that Federal gross income

includes all income from whatever source

derived, payments made to, or on behalf

of, individuals by governmental units

under legislatively provided social benefit

programs for the promotion of the general

welfare are not includible in an individual

recipient’s Federal gross income (general

welfare exclusion). See, e.g., Rev. Rul.

78-170, 1978-1 C.B. 24 (concluding that

amounts paid under the laws of the State

of Ohio to low-income elderly and disabled persons to help alleviate their cost

of winter energy consumption are made

for the promotion of general welfare, and

are not includible in the recipients’ gross

income for Federal income tax purposes);

see also Rev. Rul. 76-395, 1976-2 C.B. 16

(applying the general welfare exclusion

to home rehabilitation grants to low-income families to correct substandard

conditions).

To qualify for the general welfare

exclusion, State payments must (1) be

paid from a governmental fund, (2) be

for the promotion of general welfare (that

is, based on the need of the individual

or family receiving such payments), and

(3) not represent compensation for services absent a specific Federal income tax

exclusion. See Notice 2003-18, 2003-14

I.R.B. 699, and Rev. Rul. 76-229, 1976-2

C.B. 16.

Payments that are based on some criteria other than individual or family need

do not qualify for the general welfare

exclusion. Compare Rev. Rul. 76-395,

1976-2 C.B. 16 (home rehabilitation

grants received by low-income homeowners residing in a defined area of a city

under the city’s community development

program funded under the Housing and

Community Development Act of 1974 are

in the nature of general welfare and are not

includible in their gross income) with Rev.

Rul. 76-131, 1976-1 C.B. 16 (payments

made by the State of Alaska to individuals

at least 65 years of age who have maintained an Alaska domicile for at least 25

years to encourage them to continue their

residence in the State did not qualify under

the general welfare exclusion because the

payments were made to residents regardless of financial status, health, educational

background, or employment status).

.04 Disaster Relief. Section 139(a) provides that Federal gross income does not

include any amount received by an individual as a qualified disaster relief payment.

Section 139(b)(4) defines a “qualified

disaster relief payment” to include, among

other things, any amount paid to, or for the

benefit of, an individual if such amount is

paid by a Federal, State, or local government, or agency or instrumentality thereof,

in connection with a qualified disaster

in order to promote the general welfare.5

Under § 139(c)(2), a qualified disaster

includes a Federally declared disaster as

“defined by section 165(i)(5)(A).” Section

165(i)(5)(A) defines a Federally declared

disaster as “any disaster subsequently

determined by the President of the United

States to warrant assistance by the Federal

Government under the Robert T. Stafford

Section 164(a) generally allows a Federal income tax deduction for certain “State and local taxes” (as well as certain other taxes) for the taxable year within which paid or accrued.

Section 164(b)(6), as added by § 11042(a) of Public Law 115-97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), limits an individual’s

deduction under § 164(a) (SALT deduction limitation) to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of certain “State and local taxes”

paid during the calendar year. This SALT deduction limitation applies to taxable years beginning after December 31, 2017, and before January 1, 2026.

5

This notice does not address, and no inference is intended with respect to, the Federal income tax treatment of Indian general welfare benefits provided pursuant to § 139E. The Treasury

Department and the IRS are actively working to develop proposed regulations under § 139E in coordination with the Department of the Treasury Tribal Advisory Committee established pursuant to § 3(a) of the Tribal General Welfare Exclusion Act of 2014, Public Law 113-168, 128 Stat. 1883 (2014). Those proposed regulations will be the subject of future Tribal Consultation

pursuant to Executive Order 13175, President Biden’s Presidential Memorandum for Tribal Consultation and Strengthening Nation to Nation Relationships, and the Treasury Department’s

Action Plan for Tribal Consultation and Collaboration.

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Bulletin No. 2023–38

825

September 18, 2023

Disaster Relief and Emergency Assistance

Act.”

On March 13, 2020, the President

declared that the novel COVID-19 outbreak in the United States constituted a

national emergency under the National

Emergencies Act (50 U.S.C. 1601 et

seq.).6 On that same day, the President

determined that the COVID-19 pandemic

was of sufficient severity and magnitude

to warrant an emergency declaration

under § 501(b) of the Robert T. Stafford

Disaster Relief and Emergency Assistance

Act (42 U.S.C. 5121-5207).7 Because the

President determined that the COVID19 pandemic warranted assistance by the

Federal Government under the Stafford

Act, on March 13, 2020, the COVID-19

pandemic was also a “Federally declared

disaster” under §§ 139(c)(2) and 165(i)(5)

(A). On February 24, 2021, the President

continued the national emergency concerning the COVID-19 pandemic beyond

March 1, 2021.8

On February 10, 2023, the President

announced that he anticipated terminating

the national emergency concerning the

COVID-19 pandemic on May 11, 2023.9

On April 10, 2023, the President signed

into law a Joint Resolution of Congress

terminating the national emergency

concerning the COVID-19 pandemic.10

Accordingly, the related “Federally

declared disaster,” as defined by §§ 139(c)

(2) and 165(i)(5)(A), terminated on May

11, 2023.

The remaining criteria for disaster

relief payments under § 139(b)(4) are

that the payments be made “in connection with” a qualified disaster and that

they are made in order to “promote the

general welfare.” In the context of a qualified disaster such as the COVID-19 pandemic, payments made in connection with

the disaster are presumed to be made in

order to promote the general welfare (that

is, based on individual or family need) for

all individuals affected by the disaster. See

Notice 2002-76, 2002-2 C.B. 917. As in

the case of the general welfare exclusion

outside of § 139(b)(4), payments cannot

represent compensation for services.

.05 Information Reporting. Section

6041(a) generally requires that all persons

engaged in a trade or business and making payment in the course of such trade

or business to another person of rent; salaries; wages; premiums; annuities; compensations; remunerations; emoluments;

or other fixed or determinable gains, profits, and income, of $600 or more in any

taxable year, must make a true and accurate return to the Secretary of the Treasury

or her delegate (Secretary).

Section 6041(d) provides that every

person required to make a return under

§ 6041(a) must furnish to each person with respect to whom such return is

required a written statement showing the

name, address, and phone number of the

contact information of the person required

to make such return, and the aggregate

amount of payments to the person required

to be shown on the return. Section 1.60411(b)(1) provides that the term “all persons

engaged in a trade or business,” as used

in § 6041(a), includes organizations the

activities of which are not for the purpose

of gain or profit. Thus, that term includes

the organizations referred to in § 1.60411(i). Section 1.6041-1(i) provides that the

United States or a State, or political subdivision thereof, or the District of Columbia,

or any agency or instrumentality of any one

or more of the foregoing must file Form

1099 Series information returns to report

payments of $600 or more and Form W-2,

Wage and Tax Statement, to report wages

paid to employees under the provisions of

§ 1.6041-2. The information returns must

be made by the officer or employee having

control of such payments or by the officer

or employee appropriately designated to

make such returns. Form 1099-G, Certain

Government Payments, is used by States

to report the amount of grants that are

included in the Federal gross income of

the recipient.

Section 6050E(a) provides that every

person who, with respect to any individual, during any calendar year makes payments of refunds of State income taxes

(or allows credits or offsets with respect

to such taxes) aggregating $10 or more

must make a return according to forms or

regulations prescribed by the Secretary

setting forth the aggregate amount of such

payments, credits, or offsets, and the name

and address of the individual with respect

to whom such payment, credit, or offset

was made. Section 6050E and § 1.6050E1(k)(1) provide that every person required

to make a return under § 6050E(a) and §

1.6050E-1(c) must furnish to each individual whose name is required to be set

forth in such return a written statement

showing the name of the State or political

subdivision thereof, and the information

required to be shown on the return with

respect to refunds, credits, and offsets to

the individual. Section 1.6050E-1(k)(2)

provides that a State refund officer need

not furnish a statement to an individual

under § 1.6050E-1(k)(1) if the refund

officer verifies that the individual did not

claim itemized deductions for Federal

income tax purposes for the taxable year

giving rise to the State tax refund. Form

1099-G is used by States to report State

tax refunds.

SECTION 4. GUIDANCE FOR

INDIVIDUALS RECEIVING AND

STATES MAKING CERTAIN STATE

PAYMENTS

.01 State Income Tax Refunds. If an individual claimed the standard deduction on

the individual’s Federal income tax return

for the taxable year in which the individual

paid State taxes, a State income tax refund

(related to the prior payment of those

State taxes) in a subsequent taxable year

is not includible in the individual’s gross

Proclamation 9994 of March 13, 2020, Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak, 85 Fed. Reg. 15337 (March 18, 2020), available

at https://www.federalregister.gov/documents/2020/03/18/2020-05794/declaring-a-national-emergency-concerning-the-novel-coronavirus-disease-covid-19-outbreak.

7

Letter from the President on Emergency Determination Under the Stafford Act, available at https://trumpwhitehouse.archives.gov/wp-content/uploads/2020/03/LetterFromThePresident.pdf.

8

See Presidential Notice, 86 Fed. Reg. 11599 (February 24, 2021).

9

See Notice of February 10, 2023, Continuation of the National Emergency Concerning the Coronavirus Disease 2019 (COVID-19) Pandemic, 88 Fed. Reg. 9385 (February 14, 2023), available at https://www.federalregister.gov/documents/2023/02/14/2023-03218/continuation-of-the-national-emergency-concerning-the-coronavirus-disease-2019-covid-19-pandemic.

10

See Joint Resolution relating to a national emergency declared by the President on March 13, 2020, Public Law 118-3, 137 Stat. 6 (April 10, 2023), available at https://www.congress.

gov/118/plaws/publ3/PLAW-118publ3.pdf.

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September 18, 2023

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Bulletin No. 2023–38

income for Federal income tax purposes.

An individual who itemized deductions

and deducted amounts of State income

taxes paid, however, is required to include

the State tax refund in gross income on the

individual’s Federal income tax return to

the extent that the individual received a

Federal income tax benefit from the prior

Federal income tax deduction.

Example. In January 2023, State A enacted a statute providing that certain State A funds be returned

to certain individuals as a refund of State A income

taxes paid in 2021. Pursuant to that statute, State A

will pay up to $250 to individuals who filed State A

income tax returns for taxable year 2021 as single

filers and up to $500 to spouses who filed as married, filing jointly, but the payment cannot exceed

an individual’s State A income tax liability for taxable year 2021. B, a single individual, filed a State

A income tax return in 2022 for taxable year 2021 as

a single filer. B reported State A income tax liability

of $2,500, all of which B paid through income tax

withholding in 2021. B filed B’s Federal income tax

return in 2022 for taxable year 2021 and claimed the

standard deduction. In 2023, State A paid B $250 as

a refund of B’s State A income taxes paid for taxable

year 2021.

State A’s payment of $250 to B is a State tax

refund of B’s State A income taxes paid for taxable

year 2021. B claimed the standard deduction on B’s

Federal income tax return for taxable year 2021.

Thus, B did not deduct State A income taxes paid

on B’s Federal income tax return for taxable year

2021. Accordingly, B is not required to include the

$250 State A income tax refund in B’s Federal gross

income on B’s Federal income tax return for taxable

year 2023.

Section 6050E requires State A to file with the

IRS and furnish to B a Form 1099-G that includes

the $250 payment in Box 2, State or local income tax

refunds, credits, or offsets, unless the State A refund

officer (as defined in § 1.6050E-1(b)(1)) verifies

that B did not claim itemized deductions for Federal

income tax purposes. Thus, B may receive a Form

1099-G from State A that includes the $250 payment

even though B is not required to include the payment

on B’s Federal income tax return for taxable year

2023.

.02 State Property Tax Refunds. If an

individual claimed the standard deduction

on the individual’s Federal income tax

return for the taxable year in which the

individual paid State taxes, a State property tax refund (related to the prior payment of those State taxes) in a subsequent

taxable year is not includible in the individual’s gross income for Federal income

tax purposes. An Individual who itemized deductions and deducted amounts

of State property taxes paid, however, is

required to include the State tax refund in

gross income on the individual’s Federal

income tax returns to the extent that the

Bulletin No. 2023–38

individual received a Federal income tax

benefit from the prior Federal income tax

deduction.

Example. In March 2023, State C enacted a statute providing that certain State C funds be returned

to certain individuals who paid State C property

taxes in 2021. Pursuant to that statute, State C will

pay individuals a refund equal to the lesser of 10%

of State C property taxes paid or $300. D, an individual, was liable for State C property taxes of $2,800

for taxable year 2021, which D paid in 2021. D filed

D’s Federal income tax return in 2022 for taxable

year 2021 and claimed itemized deductions totaling

$9,000, which included the $2,800 property tax payment and which reduced D’s Federal income tax liability for the year. In 2023, State C paid D $280 as a

refund of D’s State C property taxes paid for taxable

year 2021 and made no other payments to D.

State C’s payment of $280 to D is a State tax

refund of D’s State C property taxes paid for taxable

year 2021. D claimed the $2,800 property tax payment as a deduction on D’s Federal income tax return

for taxable year 2021, with a corresponding reduction in D’s Federal income tax liability for the year.

Accordingly, D is required to include the $280 State

C property tax refund in D’s Federal gross income on

D’s Federal income tax return for taxable year 2023.

State C is not required to file or furnish an information return with respect to the $280 payment to D.

Section 6050E does not apply because the payment

is a refund of State property taxes paid, not a refund

of State income taxes. Section 6041 does not apply

because the total payments from State C to D in 2023

were less than $600. The fact that no information

return is required does not relieve D of the obligation

to include the $280 in D’s Federal gross income.

.03 Spillover Payments under 2022

Programs Covered by IRS News Release

IR-2023-23. Some of the 2022 programs

covered by the guidance in IRS News

Release IR-2023-23 provided for certain

State payments under the program to be

made in early 2023. To the extent that the

News Release provided that an individual

taxpayer could exclude such a State payment received in 2022, individual taxpayers who did not receive a payment under

the program during 2022 may exclude a

State payment received in 2023 under the

2022 program from Federal gross income.

Example. In 2022, State E enacted a program to

make State payments to its residents who met certain

requirements (2022 program). Under the 2022 program, each State E resident who filed a 2021 State E

income tax return was entitled to receive $750. State

E made most of the State payments under the 2022

program on or before December 31, 2022. Under

the 2022 program, State E may make remaining

2022 program State payments in early 2023. State

E made a 2022 program State payment of $750 to

F on January 15, 2023. State E’s 2022 program was

listed in IRS News Release IR-2023-23 as one of

the programs that would be treated as qualifying for

an exclusion from Federal gross income for 2022

payments.

827

Because State E’s January 15, 2023, State payment to F resulted from the 2022 program, which

was listed in IRS News Release IR-2023-23 as qualifying for an exclusion from Federal gross income, F

may exclude this State payment from Federal gross

income on F’s Federal income tax return for taxable

year 2023. Because the State payment from the 2022

program is not Federal gross income to F, § 6041 and

§ 1.6041-1 do not require State E to file with the IRS

or furnish to F a Form 1099-MISC, Miscellaneous

Information.

.04 State Payments Excluded Under

the General Welfare Exclusion. State payments made under a State program for

the promotion of the general welfare are

not includible in an individual’s Federal

gross income. To qualify under the general welfare exclusion, State payments

must be made from a governmental fund;

be for the promotion of the general welfare (that is, based on individual or family

need); and not represent compensation for

services.

Example. In 2023, State G makes State payments to eligible residents under an “Energy Relief

Payment Program” to help those low-income residents who may not otherwise be able to afford to pay

their heating bills. Eligible residents were limited to

those who lived in State G full time in 2021 and filed

a State G income tax return for taxable year 2021 no

later than October 31, 2022. State G pays $650 to

low-income taxpayers who filed as single or married,

filing separately, for taxable year 2021. Individual H

filed a State G income tax return for taxable year

2021 as a single filer. State G paid a $650 State payment to H in 2023.

State payments that State G makes under its

Energy Relief Payment Program are made for the

promotion of general welfare and are excluded

from Federal gross income under the general welfare exclusion. Thus, H may exclude the $650 State

payment from Federal gross income for taxable year

2023 under the general welfare exclusion. Section

6041 and § 1.6041-1 do not require State G to furnish to H an information return that includes the

$650 State payment.

SECTION 5. REQUEST FOR

COMMENTS

.01 In General. Comments are requested

on the application of the rules described in

this notice. Comments are also requested

on specific aspects of State payment programs or additional situations with respect

to which the issuance of Federal income

tax guidance would be helpful. Comments

are specifically requested on the Federal

income tax treatment of payments that are

characterized under State law as State sales

tax refunds in light of the fact that it may

not be practicable to determine the amount

of State sales tax an individual paid during

September 18, 2023

a particular taxable year. After considering the comments, the Department of the

Treasury (Treasury Department) and the

IRS intend to issue further guidance on the

Federal income tax consequences of State

payments.

.02 Procedures for Submitting

Comments.

(1) Timing. Comments should be submitted in writing on or before October 16,

2023. Consideration will be given, however, to any written comments submitted

after October 16, 2023, if such consideration will not delay the issuance of further

guidance.

(2) Form and manner. The subject

line for the comments should include a

September 18, 2023

reference to Notice 2023-56. All commenters are strongly encouraged to submit comments electronically. However,

comments may be submitted in one of two

ways:

(a) Electronically via the Federal

eRulemaking Portal at https://www.regulations.gov (type IRS-2023-0033 in the

search field on the https://www.regulations.gov homepage to find this notice and

submit comments); or

(b) By mail to: Internal Revenue Service,

CC:PA:LPD:PR (Notice 2023-56), Room

5203, P.O. Box 7604, Ben Franklin Station,

Washington, D.C., 20044.

(3) Publication of comments. The

Treasury Department and the IRS will

828

publish for public availability any comment submitted electronically or on paper

to its public docket on https://www.regulations.gov.

SECTION 6. DRAFTING AND

CONTACT INFORMATION

The principal author of this notice

is Jonathan Hauck of the Office of the

Associate Chief Counsel (Income Tax

and Accounting). Other personnel from

the Treasury Department and the IRS participated in its development. For further

information regarding this notice contact

Jonathan Hauck at (202) 317-7009 (not a

toll-free number).

Bulletin No. 2023–38

Part IV

Notice of Proposed

Rulemaking

REG-122793-19

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: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains

proposed regulations regarding information reporting, the determination of

amount realized and basis, and backup

withholding, for certain digital asset sales

and exchanges. Based on existing authority as well as changes to the applicable tax

law made by the Infrastructure Investment

and Jobs Act, these proposed regulations

would require brokers, including digital asset trading platforms, digital asset

payment processors, and certain digital

asset hosted wallets, to file information

returns, and furnish payee statements, on

dispositions of digital assets effected for

customers in certain sale or exchange

transactions. These proposed regulations

would also require real estate reporting

persons, who are treated as brokers with

respect to reportable real estate transactions, to include on filed information

returns and furnished payee statements

the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions.

Additionally, these real estate reporting

persons would also be required to file

information returns and furnish payee

statements with respect to real estate purchasers who use digital assets to acquire

real estate in these transactions.

DATES: Written or electronic comments

must be received by October 30, 2023. A

Bulletin No. 2023–38

public hearing on this proposed regulation

has been scheduled for November 7, 2023,

at 10 a.m. ET. If the number of requests to

speak at the hearing exceed the number

that can be accommodated in one day, a

second public hearing date for this proposed regulation will be held on November

8, 2023. Requests to speak and outlines of

topics to be discussed at the public hearing must be received by October 30, 2023.

If no outlines are received by October 30,

2023, the public hearing will be cancelled.

Requests to attend the public hearing must

be received by 5 p.m. ET on November

3, 2023. The public hearing will be made

accessible to people with disabilities.

Requests for special assistance during the

public hearing must be received by 5 p.m.

ET on November 2, 2023.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking Portal

at www.regulations.gov (indicate IRS

and REG-122793-19) by following the

online instructions for submitting comments. Once submitted to the Federal

eRulemaking Portal, comments cannot be

edited or withdrawn. The Department of

the Treasury (Treasury Department) and

the IRS will publish any comments submitted electronically or on paper to the

public docket. Send paper submissions

to: CC:PA:LPD:PR (REG-122793-19),

Room 5203, Internal Revenue Service,

P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand-delivered Monday through

Friday between the hours of 8 a.m. and 4

p.m. to CC:PA:LPD:PR (REG-12279319), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC 20224.

FOR

FURTHER

INFORMATION

CONTACT: Concerning the proposed

regulations under sections 1001 and 1012,

Kyle Walker, (202) 317-4718, or Harith

Razaa, (202) 317-7006, of the Office of

the Associate Chief Counsel (Income Tax

and Accounting); concerning the international sections of the proposed regulations under sections 3406 and 6045,

829

John Sweeney or Alan Williams of the

Office of the Associate Chief Counsel

(International) at (202) 317-6933, and

concerning the remainder of the proposed

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). Concerning submissions of comments and requests to participate in the public hearing, Vivian Hayes at

publichearings@irs.gov (preferred) or at

(202) 317-5306 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

These proposed regulations extend the

information reporting rules in §1.6045-1

to brokers who, in the ordinary course of a

trade or business, act as agents, principals,

or digital asset middlemen for others to

effect sales or exchanges of digital assets

for cash, broker services, or property of

a type that is subject to reporting by the

brokers (including different digital assets,

securities, and real estate) under section

6045 of the Internal Revenue Code (Code)

or effect on behalf of customers payments

of digital assets associated with payment

card and third party network transactions

subject to reporting under section 6050W

of the Code. These proposed regulations

also clarify that the definition of broker

for purposes of section 6045 includes digital asset trading platforms, digital asset

payment processors, certain digital asset

hosted wallet providers, and persons who

regularly offer to redeem digital assets

that were created or issued by that person. In addition, these proposed regulations would require real estate reporting

persons to report on real estate purchasers who use digital assets to acquire real

estate in a reportable real estate transaction and extend the information that must

be reported under §1.6045-4 with respect

to sellers of real estate to include the fair

market value of digital assets received

by sellers in exchange for real estate.

Additionally, in the case of a transaction

involving the exchange of digital assets

September 18, 2023

for goods (other than digital assets) or

services, these proposed regulations treat

the provision of the goods or services as

reportable under section 6050W and the

disposition of the digital assets as reportable under proposed §1.6045-1 and not

under section 6050W. These proposed

regulations also provide that exchanges

of digital assets for property or services

are generally not reportable as barter

exchange transactions under the existing

rules under §1.6045-1(e). Finally, these

proposed regulations provide specific

rules under section 1001 for determining

the amount realized in a sale, exchange,

or other disposition of digital assets and

under section 1012 for calculating the

basis of digital assets.

These proposed 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.

I. Background on Digital Assets and

Virtual Currency

Digital assets are digital representations

of value that use cryptography to secure

transactions that are digitally recorded

using distributed ledger technology on a

distributed ledger, such as a blockchain or

similar technology. Digital assets do not

exist in physical form. Depending on the

particular digital asset, individual units of

a digital asset may be referred to as coins

or tokens. Some digital assets are referred

to as virtual currency or as cryptocurrency.

Virtual currency is defined in Notice

2014-21, 2014-16 I.R.B. 938 (April 14,

2014) (Notice 2014-21 or Notice), for

Federal income tax purposes as a digital

representation of value that functions as a

medium of exchange, a unit of account, or

a store of value other than the U.S. dollar or a foreign currency (fiat currency).

The Notice provides that convertible virtual currency (that is, virtual currency that

has an equivalent value in real currency or

that acts as a substitute for real currency)

is treated as property for Federal income

tax purposes.

A digital asset account or wallet generally provides its owner or custodian with

the ability to store the public and private

keys to digital asset holdings. These keys

are required to conduct transactions with

the digital assets associated with those

keys and thus to control the ability to

transfer those digital assets. References

in this preamble and these proposed regulations to an owner holding digital assets

generally or holding digital assets in a

wallet or account are meant to refer to

holding or controlling, whether directly or

indirectly through a custodian, the keys to

the digital assets and, thus, the ability to

transfer those digital assets.

Some wallets may provide additional

or different capabilities beyond storing

keys. Wallets can be digital (software) or

physical (hardware) and can be connected

to the Internet (hot) or disconnected from

the Internet (cold). Wallets can be custodial (hosted) or non-custodial (unhosted).

Unhosted wallets are sometimes referred

to as self-hosted or self-custodial wallets.

Some owners use the services of a hosted

wallet provider that stores their public and

private keys. A hosted wallet provider may

also maintain balance information, provide cybersecurity services, and facilitate

the owners’ ability to own, and conduct

transactions using, digital assets. These

services may also include providing owners with online platforms that directly link

owners to third party services that allow

owners to buy and sell digital assets held

in their hosted wallets. Other owners do

not use the services of a hosted wallet provider and instead store private keys in a

software program or written record, often

referred to as an unhosted wallet. In general, only the user of an unhosted wallet

has access to both the public and private

keys necessary to effect transactions in the

digital assets associated with those keys.

Additionally, some providers of unhosted

wallets also provide their unhosted wallet

users with online platform services, which

may include links or other mechanisms for

direct access to third party services that

allow users to buy and sell digital assets

held in their unhosted wallets.

A person that operates a trading platform or website that allows users to

exchange digital assets in return for different digital assets or cash (meaning

the U.S. dollar or foreign currency) is

referred to in this preamble as a digital

asset trading platform. Some digital asset

trading platforms also offer hosted wallet services. In some circumstances, the

custodial digital asset trading platform

will match up buy and sell orders from

separate users, whereas in other circumstances, the digital asset trading platform

will settle users’ orders using the digital

asset trading platform’s own account.

In either circumstance, the digital asset

trading platform could elect to require

users to deposit with the trading platform

the digital assets traded on the platform.

Users typically pay these digital asset

trading platforms a transaction fee (sometimes in digital assets). A custodial digital

asset trading platform might often record

its users’ digital asset sale and exchange

transactions on a centralized, omnibus

ledger without also recording the transactions on the relevant distributed ledgers

of the digital asset sold or exchanged. In

other instances, however, the custodial

digital asset trading platform might record

user transactions directly on the distributed ledgers of the applicable digital

assets involved in the transaction. These

custodial digital asset trading platforms

may provide users with valuations (in fiat

currency) of the digital asset involved in

these exchanges and keep records of each

user’s exchange activity.

Some digital asset trading platforms do

not have access to the private keys and,

therefore, do not take custody of their

users’ digital assets.1 Owners of digital

assets using these non-custodial trading

platforms can buy, sell, and trade digital

assets directly with others using automatically executing contracts (so-called smart

contracts) to ensure that transactions are

executed as agreed. For example, some

peer-to-peer trading platforms facilitate

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, which are outside the scope of these regulations.

1

September 18, 2023

830

Bulletin No. 2023–38

transactions between owners of digital

assets by matching buyers and sellers

without holding the funds or digital assets

of buyers or sellers. Some peer-to-peer

trading platforms use software that connects buyers and sellers, who then effect

the desired transactions off the platform.

Other non-custodial trading platforms use

automated market maker (AMM) systems that rely on liquidity pools or liquidity providers to automatically facilitate

buy and sell orders on a platform. Some

non-custodial trading platforms involve

persons (operators) who provide services

beyond that provided by software that

merely facilitates digital asset trading. For

example, to enhance secure transactions,

non-custodial trading platform operators

might process a transaction by communicating (or providing software that will

communicate) with the wallets of buyers

and sellers. Operators of non-custodial

trading platforms may charge fees for

some or all of these services, which may

also include advertising or other services

closely related to the facilitation of sales

of digital assets.

In addition to buying, selling, and

exchanging digital assets, taxpayers can

participate in an increasing number and

type of transactions that involve digital

assets. For example, taxpayers can purchase or enter into derivative transactions

involving digital assets, such as options,

regulated futures contracts, and forward

contracts. Some digital asset owners

also use digital assets to make payments,

including to purchase goods or services

from merchants or to pay taxes or other

fees to government entities. Digital assets

may also be used as payment in consideration for the purchase of real estate. These

payment transactions can be made directly

to the seller through the use of smart contracts that can execute a transaction without an intermediary party, or through an

intermediary that can process payments

in digital assets (digital asset payment

processor). To effect payment transactions using digital assets, some digital

asset payment processors will, for a fee,

accept digital assets directly from payors

in exchange for the payment of cash at

predetermined exchange rates to payment

recipients or will facilitate the transfer

of the payor’s digital assets as part of a

payment transaction. In some instances,

Bulletin No. 2023–38

digital asset payment processors will

instead direct payors to transfer the digital

asset payment directly to payment recipients, who may have the right to exchange

the received digital asset for cash with the

digital asset payment processors at predetermined fixed exchange rates.

II. Application of Existing Information

Reporting Rules to Virtual Currency or

Other Digital Assets

Notice 2014-21 provides guidance on

the application of the current information reporting requirements when virtual

currency is used to pay wages (requiring the filing of Forms W-2, Wage and

Tax Statement), to make miscellaneous

payments (requiring the filing of Forms

1099-MISC, Miscellaneous Income), and

to settle third party network transactions

(requiring the filing of Forms 1099-K,

Payment Card and Third Party Network

Transactions). The guidance provided

by the Notice, however, focuses only on

information reporting for virtual currency

payments received by payees. The guidance does not address the information

reporting requirements for income realized by persons who dispose of virtual

currency or other digital assets. Although

there are several existing information

reporting provisions in the Code that do,

or may, apply to dispositions of virtual

currency and other digital assets, those

provisions do not provide clear and comprehensive rules for consistent reporting

of these dispositions.

A. Sections 1001 and 1012

Section 1001 of the Code provides

rules for determining the amount of gain

or loss recognized in a sale or exchange

transaction. Under section 1001(a), gain

from the sale or other disposition of

property equals the excess of the amount

realized from the transaction over the

adjusted basis of the property, and loss

from the sale or other disposition of property equals the excess of the adjusted basis

of the property over the amount realized.

Section 1.1001-1(a) provides that “[e]

xcept as otherwise provided in subtitle A

of the Code, the gain or loss realized from

the conversion of property into cash, or

from the exchange of property for other

831

property differing materially either in kind

or in extent, is treated as income or as loss

sustained.” These regulations do not specifically address the determination of gain

or loss with respect to digital assets.

Section 1012 of the Code provides

that the basis of property is the cost of

the property. The existing regulations

under section 1012 provide special rules

regarding the calculation of basis for certain types of property. These regulations

do not expressly address the calculation of

basis for digital assets.

B. Section 6041

Section 6041 of the Code requires any

person who, in the course of a trade or

business, makes payments of $600 or more

that are deemed to be fixed or determinable income to file information returns,

and furnish statements to the payee (payee

statements), setting forth the amount of

gains, profits, and income resulting from

that payment and the name and address of

the recipient of that payment. Published

guidance states that the amount of gains,

profits, or income resulting from a payment made in consideration for a capital

asset is not fixed or determinable under

section 6041 if the payor has no way of

ascertaining the payee’s basis in that asset.

See, for example, Rev. Rul. 80-22, 1980-1

C.B. 286 (January 21, 1980). Thus, a payor

otherwise required to report on a payment

made in exchange for digital assets is

required to report the payee’s gain from

that transaction under section 6041 if the

payor has a way to ascertain the payee’s

basis and if the gain (in addition to any

other payments made by that payor to the

payee during the calendar year) is equal

to $600 or more. Reporting under section

6041, however, does not apply to brokers

with respect to payments made to customers. See §1.6041-3(b). If a payment that

is reportable under section 6041 is also

subject to the information reporting rules

under section 6050W, §1.6041-1(a)(1)(iv)

provides that the transaction must instead

be reported under section 6050W.

C. Sections 6045, 6045A, and 6045B

Section 6045 and the regulations thereunder require a person doing business as

a broker to file information returns, and

September 18, 2023

furnish payee statements, in accordance

with regulations, for each customer for

whom the broker has sold stocks, certain

commodities, options, regulated futures

contracts, securities futures contracts,

forward contracts or debt instruments, in

exchange for cash, showing each customer’s name and address, details regarding

gross proceeds, the adjusted basis of certain

categories of assets sold, and other information as the Secretary of the Treasury or

her delegate (Secretary) may require by

forms or regulations. Section 80603 of the

Infrastructure Investment and Jobs Act,

Pub. L. 117-58, 135 Stat. 429, 1339 (2021)

(Infrastructure Act) 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. These changes are discussed

below in Part III of this Background. This

Part II.C. of this Background discusses the

rules in place prior to the changes made by

the Infrastructure Act.

The term broker is defined by section

6045(c)(1) 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 existing regulations under section

6045 (existing regulations), further refine

the meaning of a broker. Under existing

§1.6045-1(a)(1), a broker is defined to

mean “any person . . ., U.S. or foreign,

that, in the ordinary course of a trade or

business during the calendar year, stands

ready to effect sales to be made by others.” The term effect, as defined under

existing §1.6045-1(a)(10), means either to

act as a principal with respect to a sale (for

example, a dealer in securities who buys a

security from one customer and then sells

that security to another customer) or to

act as 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. Accordingly, the term broker

for purposes of gross proceeds reporting

includes persons that may not otherwise

be considered to act as a broker, including certain securities custodians, escrow

agents, and stock transfer agents. The term

broker for this purpose also includes persons that are not custodians. For example,

September 18, 2023

a non-custodial executing broker that acts

as an agent for customers to effect sales

of securities is included in this definition. Finally, an obligor that regularly

issues and retires its own debt obligations and a corporation (such as a mutual

fund described in existing §1.6045-1(b)

Example 1 (i)) that regularly redeems

its own stock also are treated as brokers

under existing §1.6045-1(a)(1).

The term commodity is defined in

existing §1.6045-1(a)(5) to mean any

type of personal property (or interest

therein), the trading of regulated futures

contracts in which has been approved

by the Commodities Futures Trading

Commission (CFTC). At the time existing

§1.6045-1(a)(5) was promulgated, affirmative CFTC approval was required to list

new regulated futures contracts on a commodities exchange. Since that time, however, the CFTC has revised its approval

procedures pursuant to the Commodity

Futures Modernization Act (“CFMA”),

Pub. L. 106-554, 114 Stat. 2763 (2000).

The CFTC now also allows new contracts

to be listed if the listing market self-certifies that the new contracts comply with

the Commodity Exchange Act, 7 U.S.C.

1 et seq., and the CFTC’s regulations.

See CFTC, Listing of New Contracts

by Self-Certification, https://cftc.gov/

IndustryOversight/ContractsProducts/

index.htm and 17 CFR 40.2. Section

1.6045-1(a)(5) does not explicitly address

whether digital assets, the trading of

regulated futures contracts in which is

permitted pursuant to the CFTC’s self-certification procedures, are commodities

subject to reporting.

For brokers required to file an information return with respect to the sale of a

covered security, section 6045(g) requires

that the return include the adjusted basis of

the security and whether any gain or loss

with respect to the security is long-term

or short-term (adjusted basis reporting).

With the exception of stock, covered securities are defined under section 6045(g)(3)

as specified securities that are acquired on

or after January 1, 2013, or such later date

as determined by the Secretary. For stock

to be included in the definition of covered securities, it must be acquired on or

after either January 1, 2011, or January 1,

2012, depending on whether the average

basis method is permissible with respect

832

to the stock under section 1012. Under

section 6045(g)(3)(B), specified securities

generally include: (i) shares of corporate

stock, (ii) notes, bonds, debentures, and

other evidence of indebtedness, (iii) commodities, contracts, or derivatives with

respect to commodities, if the Secretary

determines that adjusted basis reporting

is appropriate, and (iv) any other financial instrument with respect to which the

Secretary determines that adjusted basis

reporting is appropriate. The existing regulations under section 6045 do not specifically include digital assets as a specified

security.

Section 6045A of the Code generally

requires applicable persons who transfer

securities that are covered securities in

the hands of those applicable persons to

a broker (the receiving broker) to furnish

to the receiving broker a written statement setting forth such information as

the Secretary may by regulations require.

Existing §1.6045A-1(b) requires transfer statements to include the name of the

person effecting the transfer, the receiving broker, the name and account number

of the customer for whom the security is

transferred, as well as information about

the security itself, including the transfer

date, the adjusted basis, and the original

acquisition date of the security. Prior to

amendments made by the Infrastructure

Act, section 6045A did not address

the extent to which these requirements

applied to transfers of digital assets. These

amendments are discussed below in Part

III of this Background.

Section 6045B of the Code requires

certain securities issuers to report to the

IRS as well as to shareholders or their

nominees the effect on basis of certain

organizational actions (such as a stock

split, merger, or acquisition) that impact

the basis of issued securities. These rules

also do not explicitly address the reporting

requirements with respect to digital assets.

Any organization with members or

clients that contract with each other or

with the organization to trade or barter

property or services is a barter exchange

under existing §1.6045-1(a)(4). A barter

exchange must file information returns,

and furnish payee statements, with respect

to the exchange of property or services by

its members or clients. Property or services are considered exchanged through

Bulletin No. 2023–38

a barter exchange if payment is made

by means of a credit on the books of the

barter exchange or a scrip issued by the

barter exchange, or if the barter exchange

arranges a direct exchange of property or

services between members. See existing

§1.6045-1(e)(2).

Section 6045(e) requires real estate

reporting persons to file information

returns, and furnish payee statements,

including the seller’s name and address,

the gross proceeds paid to the seller, and

other information as the Secretary may

require by forms or regulations with

respect to certain real estate transactions.

A real estate reporting person is defined

in section 6045(e)(2) to mean the person

responsible for closing the transaction

or, if no such person exists, the mortgage

lender, the transferor’s broker, the transferee’s broker, or the person designated

by the Secretary pursuant to regulations.

Real estate reporting persons are treated

as brokers under section 6045(e)(2) for

purposes of the reporting obligations

under section 6045. An exception to this

real estate reporting rule is made for real

estate reporting persons who rely on seller

certifications setting forth written assurances in compliance with Rev. Proc. 200712, 2007-1 C.B. 357 (January 22, 2007),

that the real estate being sold is the seller’s

principal residence and the full amount of

the gain on the sale or exchange of the

principal residence is excludable from

gross income under section 121 of the

Code, which generally permits individuals

to exclude from gross income gain up to

$250,000 (and married individuals filing

joint returns gain up to $500,000) on the

sale or exchange of a principal residence

if certain conditions are met. Section

1.6045-4(i) also limits gross proceeds

reporting required under section 6045(e)

to cash received and cash to be received

(also referred to in the existing regulations

as consideration treated as cash) by or on

behalf of the real estate seller in connection with the real estate transaction. As a

result, these rules do not require the reporting of payments using digital assets made

to real estate sellers in partial or full consideration for the sale of real estate, except

to the extent that a digital asset falls within

the definition of consideration treated as

cash under existing §1.6045-4(i)(1).

The definition of broker in existing

regulations generally excludes a person

described as a non-U.S. payor or non-U.S.

middleman under §1.6049-5(c)(5) with

respect to a sale that is effected by the broker on behalf of a customer at an office

outside the United States. Additionally,

under existing regulations, regardless of a

broker’s status as U.S. or non-U.S. broker,

a broker is not required to file an information return under section 6045 with

respect to a sale for a customer whom the

broker may treat as an exempt foreign

person based primarily on documentation

requirements that depend on whether the

sale is effected at an office of the broker inside or outside the United States.2

Generally, the effect of these rules is that

non-U.S. securities brokers (other than

controlled foreign corporations (CFCs)

and a limited class of other brokers with

U.S. activities, such as U.S. branches of

foreign brokers) are not required to report

information to the IRS on their customers,

and that both U.S. and non-U.S. securities

brokers are not required to report information to the IRS on non-U.S. customers

under section 6045.

D. Section 6050W

Section 6050W requires payment settlement entities to file information returns,

and furnish payee statements, with respect

to each participating payee to whom they

have made one or more payments in settlement of reportable payment transactions.

Payment settlement entities are merchant

acquiring entities, which are banks or

other organizations that are contractually

obligated to make payments to participating payees in settlement of payment card

transactions, and third party settlement

organizations (TPSOs). TPSOs are central

organizations that are contractually obligated to make payments to participating

payees with respect to third party network

transactions for the purchase of goods or

services sold through a third party payment network.

Payments by TPSOs to settle third

party network transactions are required

to be reported only if they exceed a de

minimis threshold. Section 9674(a) of the

American Rescue Plan Act of 2021, Pub.

L. 117-2, 135 Stat. 4, 185 (ARP), lowered

and modified this threshold for calendar

years beginning after December 31, 2021.

Under the prior threshold, payments by

TPSOs to settle third party network transactions were required to be reported only

if the aggregate number of transactions

with a payee exceeded 200 and the aggregate amount to be reported with respect to

those transactions exceeded $20,000 for a

calendar year. Under the ARP provision,

TPSOs must report third party network

transactions with any participating payee

that exceed a minimum threshold of $600

in aggregate payments, regardless of the

aggregate number of these transactions.

The rules under section 6050W, however, do not expressly address whether

exchanges of digital assets for cash, services, or property effected through TPSOs

are subject to reporting under section

6050W or whether the information reporting provisions under section 6045 would

apply to such exchanges.

III. Infrastructure Investment and Jobs

Act

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. First, section 80603(a) of the

Infrastructure Act clarifies the definition

of broker to include any person who, for

consideration, is responsible for regularly providing any service effectuating

transfers of digital assets on behalf of

another person. Second, section 80603(b)

(1) of the Infrastructure Act modifies the

definition of specified securities under

section 6045(g) to explicitly include

digital assets and to provide that these

specified securities are treated as covered

See Part I.I.4 of the Explanation of Provisions footnote 5 regarding the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the Financial Crimes Enforcement Network’s (FinCEN) implementing

regulations thereunder.

2

Bulletin No. 2023–38

833

September 18, 2023

securities for purposes of basis reporting

if they are acquired on or after January

1, 2023. Third, section 80603(b)(1)(B)

of 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, except as otherwise

provided by the Secretary. Fourth, section 80603(b)(2) of the Infrastructure Act

clarifies that transfer statement reporting

under section 6045A(a) applies to covered securities that are digital assets, and

also adds a new information reporting

provision under section 6045A(d) to provide for broker reporting 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

that the broker knows or has reason to

know is also a broker. Section 80603(c)

of the Infrastructure Act provides that

these amendments apply to returns

required to be filed, and statements

required to be furnished, after December

31, 2023. Finally, section 80603(d) of

the Infrastructure Act provides a rule of

construction which states 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).

IV. Reasons for New Information

Reporting Rules for Digital Assets

Digital assets have grown in popularity as both a payment method and an

investment or trading asset. Proponents

believe that digital assets may offer potential benefits over traditional fiat currencies, such as lower transaction costs and

faster transaction speeds. Digital assets

may also be popular, however, because

the distributed ledger record of transactions does not include the identity of the

parties involved in the transactions. This

pseudonymity creates a significant risk to

tax administration.

Digital assets are increasingly common in ordinary course transactions of a

type that may be subject to information

September 18, 2023

reporting if carried out using fiat currency or traditional financial assets.

For example, several payment processors and credit card issuers that handle

large volumes of payments now facilitate payments made using digital assets.

Taxpayers can buy and sell digital assets

directly or invest in digital assets through

investment funds. Taxpayers can also

trade derivatives, including futures and

option contracts, on digital assets. A

number of traditional financial institutions are offering, or have announced

plans to offer, custody and trading services with respect to digital assets for

institutional investors. In addition, some

institutions are converting, or tokenizing, stock and security ownership interests into digital tokens. These tokenized

stock and security interests trade on some

digital asset trading platforms, and other

trading platforms offer unique digital

assets referred to as non-fungible tokens

(NFTs) for sale in exchange for cash or

other digital assets. Transactions of these

kinds by U.S. taxpayers may take place

either on U.S. custodial or non-custodial

trading platforms or with U.S. financial

intermediaries, or on foreign custodial or

non-custodial trading platforms or with

foreign financial intermediaries.

According to the Government

Accountability Office (GAO), limits on

third party information reporting to the IRS

is an important factor contributing to the

tax gap, which is the difference between

taxes legally owed and taxes actually paid.

GAO, Tax Gap: Multiple Strategies Are

Needed to Reduce Noncompliance, GAO19-558T at 6 (Washington, D.C.: May 9,

2019). Third party information reporting

generally leads to higher levels of taxpayer compliance because the income

earned by taxpayers is made transparent

to both the IRS and taxpayers (who will

use the furnished information to avoid

both inadvertent errors and intentional

misstatements). With third party information reporting that specifically identifies

digital asset transactions, the IRS could

more easily identify taxpayers with digital

asset transactions that are otherwise difficult to discover. An information reporting

regime requiring reporting to the IRS on

digital asset transactions would benefit

tax compliance by helping to close the

information gap with respect to digital

834

assets. See TIGTA, Ref. No. 2020-30066, The Internal Revenue Service Can

Improve Taxpayer Compliance for Virtual

Currency Transactions, 10 (Sept. 2020);

GAO, Virtual Currencies: Additional

Information Reporting and Clarified

Guidance Could Improve Tax Compliance,

28, GAO-20-188 (Washington, D.C.: Feb.

2020). In addition to the loss of information with respect to the recipients of digital asset payments that the IRS otherwise

might receive if these transactions were

carried out using fiat currency or traditional

investment assets, these transactions give

rise to a separate tax compliance concern

because the disposition of digital assets is

itself a taxable event that may give rise to

gain or loss to the transferor that is reportable on a tax return. Existing information

reporting rules do not specifically address

how certain transactions involving digital

assets must be reported to the party who

disposes of the digital assets in exchange

for cash, services, stored-value cards, or

other property (including different digital

assets).

Expanding information reporting for

digital assets also benefits taxpayers.

First, taxpayers use information provided

to them by brokers to prepare their tax

returns. The lack of such information

reporting for digital assets may make it

difficult for taxpayers to properly track

and report their gain or loss from dispositions of digital assets. Publicly available information indicates that this gap

is being filled in part by voluntary tax

reporting to customers by some digital

asset platforms, and by digital asset tax

service providers, including providers of

tax software, who charge for the preparation of tax information. The existence

of these services illustrates the benefits

of information reporting to taxpayers

because the same information that is

reported by brokers to the IRS on dispositions of digital assets must also be

furnished by brokers to their customers.

A second benefit to taxpayers from information reporting is that it enables the

IRS to focus its audit efforts on taxpayers who are more likely to have underreported their income from digital asset

transactions.

Consequently, tax compliance would

be increased if brokers, including digital asset trading platforms, digital asset

Bulletin No. 2023–38

payment processors, certain digital asset

hosted wallet providers, and persons who

regularly offer to redeem digital assets

that were created or issued by that person, were required to file information

returns, and furnish payee statements,

under section 6045 with respect to digital asset dispositions in exchange for

cash, broker services, or other property

the sale of which is separately subject

to reporting under section 6045 or with

respect to transactions that are subject to

reporting (with respect to the digital asset

recipient) under section 6050W. Thus, for

example, a digital asset trading platform,

including an operator of a peer-to-peer or

AMM trading platform, that facilitates a

digital asset sale on behalf of a customer

should be required to file an information

return, and furnish a payee statement with

respect to that sale, reporting the gross

proceeds realized by the customer as a

result of that sale. In addition, reporting

should be required by digital asset payment processors who facilitate the use of

digital assets to make payments of cash to

others by either effecting the sale of digital assets on behalf of the person making payment (and paying the cash to the

payment recipient) or by agreeing with

the recipient of a digital asset payment in

advance of the payment to exchange the

digital assets received by that recipient

for cash at a predetermined exchange rate.

Further, digital asset payment processors

who facilitate payments that are potentially subject to reporting under the existing section 6050W regulations should be

required to report on the payor’s exchange

of digital assets in those transactions as

well. Additionally, a stockbroker who

accepts digital assets from a customer

as payment for the customer’s purchase

of stock should be required to file an

information return, and furnish a payee

statement, reporting the gross proceeds

realized by the customer as a result of that

customer’s exchange of digital assets for

stock. Reporting should also be required

in this example if the broker accepts digital assets in exchange for the broker’s

services (for example, transaction fees

or commissions). Finally, to facilitate the

filing by taxpayers of accurate information returns with respect to digital asset

dispositions, substantive rules are needed

for determining gain or loss in a digital

Bulletin No. 2023–38

asset sale or exchange transaction and for

calculating the basis of digital assets.

Explanation of Provisions

The Treasury Department and the

IRS expect to make the changes to broker reporting for digital assets in multiple phases. These proposed regulations

generally focus on changes to existing

§1.6045-1 to require brokers to report on

digital asset sales. Later phases will generally focus on implementing transfer statement reporting under section 6045A(a)

and broker information reporting under

section 6045A(d) for covered security

transfers that are not transfers to accounts

maintained by persons known to be brokers or subject to reporting as sales.

I. Proposed §1.6045-1

These proposed regulations generally follow the framework and concepts

of the existing rules for broker information reporting but differ from those rules

as necessary to reflect both the unique

nature of digital assets and the clarifications and changes made to section 6045

by the Infrastructure Act. These proposed

regulations do not address every transaction involving digital assets that may give

rise to income, such as the receipt of digital assets in hard forks, because it is more

appropriate to address those transactions

under other provisions of the Code.

A. Expansion of the types of property

subject to reporting

Under existing §1.6045-1(a)(9), brokers are generally required to file an

information return for each sale effected

on behalf of a customer. A disposition is

treated as a sale subject to reporting only

if the property disposed of is a security,

commodity, option, regulated futures contract, securities futures contract, or forward contract and the disposition is for

cash. These proposed regulations provide

that reporting under section 6045 is also

required 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.

835

1. Definition of Digital Assets

The definition of digital assets in these

proposed regulations follows the definition in section 80603(b)(1)(B) of the

Infrastructure Act. Specifically, proposed

§1.6045-1(a)(19)(i) defines a digital asset

as a digital representation of value that is

recorded on a cryptographically secured

distributed ledger (or similar technology).

These proposed regulations also provide

that a digital asset does not include cash,

for example, a fiat currency in digital

form such as funds in a bank or payment

processor account accessed through the

Internet. In addition, under these proposed

regulations, the determination of whether

an asset is a digital asset is made without

regard to whether each individual transaction involving that digital asset is actually

recorded on the cryptographically secured

distributed ledger. The use of cryptography, through the use of public and private

keys to transfer assets, distinguishes digital assets as defined by the Infrastructure

Act from other virtual assets and is therefore an essential part of the definition.

By not limiting the definition of digital assets to only those digital representations of value for which each transaction

is actually recorded or secured on a cryptographically secured distributed ledger,

the definition of digital assets covers

transactions involving digital representations of value that are recorded by a broker

only on its own centralized internal ledger.

For example, a broker may hold a number of units of a digital asset in its own

name, similar to holding shares of stock

in street name, and carry out transactions

between customers that wish to buy or sell

units of that digital asset by first matching

transactions internally and executing only

net purchases or sales on the distributed

ledger. Additionally, the definition covers

transactions involving digital representations of value that are recorded on ledgers

that may or may not be widely or publicly

distributed.

The definition of digital assets includes

digital representations of value that are

capable of being recorded using technology that is similar to technology that

uses cryptography to secure transactions.

These proposed regulations include this

similar technology standard to ensure that

the definition of digital assets captures

September 18, 2023

digital representations of value that reflect

advancements to the techniques, methods,

and technology, upon which digital assets

are based.

Section 80603(b)(1)(B) of the

Infrastructure Act provides authority to the

Secretary to modify the definition of digital assets for purposes of reporting under

section 6045. The Treasury Department

and the IRS considered applying these

regulations to only virtual currency or a

variant thereof rather than to all digital

assets. The Treasury Department and the

IRS also considered whether newer forms

of digital assets, such as those referred to

as stablecoins or NFTs, should be subject

to the section 6045 broker reporting rules.

The proposed regulations would require

broker reporting for all types of digital

assets, for multiple reasons. First, the definition of digital assets in the Infrastructure

Act is expansive. Second, because the disposition of digital assets may give rise to

gain or loss, reporting of gross proceeds

and basis information is useful to taxpayers as well as the IRS. For example, some

NFTs are readily being bought and sold,

often as speculative investments on digital

asset trading platforms, giving rise to gain

or loss that is subject to reporting by taxpayers. The Treasury Department and the

IRS are aware of concerns that applying

these proposed regulations to such NFTs

would create disparate reporting of transactions involving the subject of the NFT

(such as ownership or license interests in

artwork or sports memorabilia) depending

on whether those interests are transferred

using an NFT or as a traditional sale or

license contract. But given that NFTs are

popular investments, the buying and selling of NFTs raise tax administration concerns similar to the concerns associated

with other types of digital assets that the

physical analogues of NFTs do not. For

example, like other digital assets, NFTs

can readily be transferred to a private wallet or an offshore account, while the transfer of a physical artwork or trading card

may be more difficult or costly. Third,

there is a continuing evolution in the types

of digital assets that can be used for payment transactions, investment, or for other

purposes and this inclusive approach is

designed to provide clarity as these types

of digital assets continue to evolve. For

example, a taxpayer may acquire an NFT

September 18, 2023

to enjoy its artistic merit or for investment,

or both. The treatment of any particular

type of digital asset as reportable under

these proposed regulations is not intended

to imply any characterization of that type

of digital asset as a matter of substantive

law. See Part I.K of this Explanation of

Provisions for further discussion of the

reasons why privately issued stablecoins

are treated as digital assets for purposes of

these regulations.

Finally, it is intended that the definition

of digital assets used in these proposed

regulations would not apply to other types

of virtual assets, such as assets that exist

only in a closed system (such as video

game tokens that can be purchased with

U.S. dollars or other fiat currency but can

be used only in-game and that cannot be

sold or exchanged outside the game or

sold for fiat currency). It is also intended

that the regulations would not apply to

uses of distributed ledger technology or

similar technology for ordinary commercial purposes that do not create new transferable assets, such as tracking inventory

or processing orders for purchase and sale

transactions, which are unlikely to give

rise to sales as defined for purposes of the

regulations. Comments are requested on

whether the proposed definition of digital assets accurately and appropriately

defines the type of assets to which these

regulations should apply.

2. Coordination with Reporting Rules for

Securities, Commodities, and Real Estate

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

proposed under sections 1001 and 1012

discussed in Part II of this Explanation of

Provisions, these proposed regulations are

information reporting regulations, and are

therefore not the appropriate vehicle for

answering those questions. Because the

existing regulations under section 6045

require reporting with respect to sales for

cash of securities and certain commodities, and with respect to real estate transactions in which gross proceeds are paid

836

in cash (or consideration treated as cash),

coordination rules have been included to

provide certainty to brokers with respect

to whether a particular transaction, or

portion thereof, is reportable under those

existing rules or under the proposed rules

for digital assets and to avoid duplicate

reporting obligations. Accordingly, the

treatment of an asset as reportable as a

security, commodity, digital asset or otherwise in these proposed rules applies

only for purposes of sections 1001, 1012,

3406, 6045, 6045A, 6045B, 6050W, 6721,

and 6722 and should not be construed to

apply for any other purpose of the Code to

determine whether a digital asset should

or should not be properly classified as a

security, commodity, option, securities

futures contract, regulated futures contract, or forward contract. See proposed

§1.6045-1(a)(19)(ii). Similarly, 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 proposed regulations.

The Treasury Department and the IRS

are aware that some digital asset tokens

may be classified as securities for U.S.

Federal income tax purposes, and that it

is possible that tokens constituting securities issued by certain U.S. issuers or companies could be traded on certain digital

asset trading platforms that are subject

to these rules. If those tokens are securities for Federal income tax purposes, and

also qualify as digital assets (as defined

in proposed §1.6045-1(a)(19)), the sale

of those tokens for cash could be subject

to the existing regulations requiring brokers to provide information reporting with

respect to the sale of securities for cash

(that is, gross proceeds and basis information) as well as to these proposed regulations relating to the sale of digital assets.

The Treasury Department and the IRS

considered several different alternatives

for addressing this potential overlap.

The Treasury Department and the IRS

considered providing a rule that would

treat the sale for cash of any digital asset

treated as a security under current law as

a sale of securities and not a sale of digital assets for purposes of these proposed

regulations. The Treasury Department

and the IRS, however, have not issued

Bulletin No. 2023–38

guidance addressing when a digital asset

should be treated as a security for substantive U.S. Federal income tax purposes.

Because digital asset trading platforms

may not be certain whether a particular

asset should be reported as a security or as

a digital asset without that guidance, and

for the additional reasons described in the

next paragraph, the Treasury Department

and the IRS determined that this alternative would not provide the clarity and certainty necessary for information reporting

purposes.

The Treasury Department and the IRS

also considered providing a more limited

exception to the definition of digital assets

for digital representations of value that

represent interests in one or more units of

a security to provide the same information

reporting rules for a sale of stock for cash

as for a sale of tokenized stock for cash.

This alternative would have several undesirable results. First, digital asset trading

platforms that trade both tokenized stock

and other digital assets would be subject to

two different sets of reporting rules when

such assets were sold for cash. Second,

tokenized stock would be subject to one

set of reporting rules if sold for cash – that

is, the existing regulations relating to the

reporting of sales of securities for cash –

and to a different set of reporting rules if

sold for another digital asset or other consideration – that is, these proposed regulations for sales of digital assets. Moreover,

the tax compliance concerns associated

with transactions in digital assets are different from the tax compliance concerns

associated with trading in conventional

or non-digital asset securities, including

as a result of the common market practice

of transferring digital assets from a centralized platform to a private wallet and

back again. Accordingly, different reporting rules are warranted for digital assets

regardless of whether they would also

qualify as a security.

As a result of these considerations,

these proposed regulations make no

changes to the definition of the term security (as defined in existing §1.6045-1(a)

(3)) but instead provide a coordination

rule in proposed §1.6045-1(c)(8)(i) applicable to transactions involving the sale of

a digital asset that also constitutes a sale

of a security as so defined (other than

options that constitute contracts covered

Bulletin No. 2023–38

by section 1256(b)). Under this proposed

coordination rule, the broker must report

the sale of an asset that qualifies both

as such a security and as a digital asset

only as a sale of a digital asset and not as

a sale of a security. See Part I.B of this

Explanation of Provisions, however, for

a discussion of the additional information

that the broker may be required to provide for transactions involving the sale of

a digital asset that also constitutes a sale

of such a security. See Part I.B.3 of this

Explanation of Provisions for a discussion

of the applicable rules for digital assets

that are also financial contracts, including

contracts that are section 1256 contracts

within the meaning of section 1256(b).

The Treasury Department and the IRS

are aware that the financial services industry is exploring the use of distributed ledger technology or similar technology, such

as a blockchain or a shared ledger, to process orders associated with conventional

or non-digital asset securities transactions.

Using distributed ledger technology or

similar technology to process orders associated with securities transactions may

require the temporary creation of digital representations of securities that may

fit within the definition of digital assets

in these proposed regulations. It may be

appropriate for these regulations not to

apply to these transactions because these

transactions would typically involve securities being transferred from one traditional

brokerage or custodial account to another.

Nonetheless, these proposed regulations

do not provide a specific exception for

these transactions because the Treasury

Department and the IRS would like to

understand whether an exception is necessary. Comments are requested on whether

the definition of digital asset or the reporting requirements with respect to digital

assets inadvertently capture transactions

involving conventional or non-digital

asset securities that may use distributed

ledger technology, shared ledgers, or similar technology merely to facilitate the processing, clearing, or settlement of orders.

Comments also are requested on whether

and, if so, how the definitions or reporting

rules should be modified to address other

transactions involving tokenized or digitized financial instruments that are used

to facilitate back-office processing of the

transaction. If an exception for these types

837

of transactions is necessary, the Treasury

Department and the IRS would also like

to understand how it should be drafted so

that it does not sweep in other transactions

(such as tokenized securities, or other digital assets treated as securities) that should

not be exempted from reporting.

The Treasury Department and the IRS

also considered how to apply section

6045A and section 6045B to assets that

qualify both as specified securities under

existing §1.6045-1(a)(14)(i) through (iv)

for basis reporting purposes and as digital

assets under proposed §1.6045-1(a)(19)

(dual classification assets) for the period

of time until rules are promulgated dealing with the application of sections 6045A

and 6045B to digital assets. Although the

existing regulations under section 6045A

operate to provide important information

to brokers required to report adjusted basis

information to the IRS (and taxpayers), it

is unclear whether digital asset brokers

currently have the mechanisms in place

to provide transfer statements to receiving

brokers that receive these dual classification assets in transfers that are recorded

on a blockchain. With regard to section

6045B, issuers of dual classification assets

may not have procedures in place to report

information affecting basis. Accordingly,

the Treasury Department and the IRS have

decided to delay transfer statement reporting under section 6045A(a) and issuer

reporting under section 6045B for these

dual classification assets and will consider

rules for dual classification assets as part

of the implementation of more general

transfer statement reporting and issuer

reporting rules for digital asset brokers as

part of a later phase of information reporting guidance for broker effected digital

asset transfers. Proposed §§1.6045A-1(a)

(1)(vi) and 1.6045B-1(a)(6) have been

added to specifically exempt from transfer

and issuer reporting any specified security

that is also a digital asset. See Proposed

§§1.6045A-1 and 1.6045B-1 in Part IV of

this Explanation of Provisions.

The definition of commodity under

existing §1.6045-1(a)(5) was first promulgated in 1983 as part of TD 7873, 48 FR

10302, 10304 (Mar. 11, 1983). Under that

definition, the term includes any type of

personal property or interest therein, the

trading of futures contracts in which have

been approved by the CFTC. Sometime

September 18, 2023

after the promulgation of this definition,

the CFTC added a new self-certification

mechanism under which new exchangetraded contracts become subject to the

jurisdiction of the CFTC. Some digital

asset trading platforms have taken the

position that assets underlying futures

contracts that are subject to the jurisdiction of the CFTC pursuant to the CFTC’s

self-certification procedures are not commodities under existing §1.6045-1(a)(5)

because the CFTC did not affirmatively

approve the listing of these contracts on

an exchange. The Treasury Department

and the IRS believe that the reporting regulations should reflect the current practice

of the CFTC and therefore have modified

this rule in proposed §1.6045-1(a)(5)(i)

to ensure that assets that are subject to

the jurisdiction of the CFTC pursuant to

the CFTC’s self-certification procedures

are included in the definition of commodity for purposes of information reporting

under section 6045.

This modification applies broadly to

all types of commodities subject to the

jurisdiction of the CFTC for purposes of

section 6045. However, because there has

been some uncertainty about the scope of

the term commodity for purposes of section 6045, reporting under section 6045

for sales of commodities as to which contracts have been self-certified to the CFTC

is proposed to apply to any sale that occurs

on or after January 1, 2025, without regard

to the date the self-certification procedures

were undertaken. Thus, if an asset became

subject to the jurisdiction of the CFTC

pursuant to the CFTC’s self-certification

procedures prior to January 1, 2025, sales

of that asset for cash on or after January

1, 2025, will be subject to reporting as a

result of the revised definition of commodity under proposed §1.6045-1(a)(5).

This change to the definition of commodity does not affect the broker’s obligation

under existing §1.6045-1(a)(9) and (c) to

report on regulated futures contracts. For a

detailed discussion of the broker reporting

rules for financial contracts, see Part I.A.3

of this Explanation of Provisions.

Consequently, a digital asset, the trading of regulated futures contracts in which

has been approved by or, pursuant to proposed §1.6045-1(a)(5)(i), self-certified

to the CFTC, would be treated as a commodity for purposes of reporting under

September 18, 2023

section 6045 absent other changes to the

existing regulations. Those assets would

also be digital assets for purposes of these

regulations. This dual classification could

result in confusion as to whether sales of

these digital assets should be reported as

sales of commodities on Form 1099-B,

sales of digital assets on a form prescribed

by the Secretary for digital asset sales, or

both—potentially resulting in duplicative

reporting. To avoid confusion and potential duplicative reporting of sales made on

or after January 1, 2025, these proposed

regulations provide a coordination rule in

proposed §1.6045-1(c)(8)(i) applicable to

transactions involving the sale of a digital

asset that also constitutes a sale of a commodity. Under this proposed coordination

rule, the broker must report the sale of an

asset that qualifies both as a commodity

and as a digital asset only as a sale of a

digital asset (along with the additional

information that this characterization

requires) and not as a sale of a commodity.

Finally, the Treasury Department and

the IRS are aware that distributed ledger

technology or similar technology may

be used in connection with transactions

involving real estate. Using distributed

ledger technology or similar technology

to settle real estate transactions requires

the creation of digital representations of

real estate that may fit within the definition of digital assets in these proposed

regulations. To avoid duplicative reporting for digital assets that also constitute

reportable real estate and to avoid having

real estate reporting persons report seller

proceeds under an entirely new reporting regime, proposed §1.6045-1(c)(8)(ii)

provides a coordination rule applicable to

transactions involving the sale of a digital

asset that also constitutes reportable real

estate (as defined under existing §1.60454(b)(2)) that is subject to reporting under

existing §1.6045-4(a). Under this coordination rule, the broker must report the sale

of reportable real estate only as a sale of

reportable real estate (and not as a sale of

a digital asset).

3. Rules Applicable to Financial

Contracts on Digital Assets

To ensure reporting of sales of financial contracts involving or referencing

digital assets, these proposed regulations

838

expand the existing rules for certain financial products, such as options, futures,

and forward contracts. Proposed §1.60451(m)(1) expands the type of option transactions subject to reporting to generally

include options on digital assets and

options on derivatives with a digital asset

as an underlying property. Generally, under

these proposed regulations, how an option

transaction is reported will depend on: (i)

whether the option is a section 1256 contract within the meaning of section 1256(b)

(section 1256 contract); (ii) whether the

transaction is a disposition of the option

itself or whether the transaction involves

the delivery of the underlying property;

and (iii) whether the option is itself a digital

asset (digital asset option) or is not a digital

asset (non-digital asset option).

For a disposition of an option that is

not a section 1256 contract, the nature of

the option itself determines the appropriate reporting treatment; that is, reporting would be required under proposed

§1.6045-1(a)(9)(i) if the option itself is

a non-digital asset option and under proposed §1.6045-1(a)(9)(ii) if the option

itself is a digital asset option. Because

the asset that is disposed of is the option

itself, this proposed reporting treatment

applies without regard to whether the digital asset option or non-digital asset option

was issued with respect to digital asset or

non-digital asset underlying property. In

contrast, when an option that is not a section 1256 contract is settled by the delivery of the underlying property, reporting

under these proposed regulations is based

on the nature of the underlying property,

with the delivery of non-digital asset

underlying property reportable as a sale

under proposed §1.6045-1(a)(9)(i) and the

delivery of digital asset underlying property reportable as a sale under proposed

§1.6045-1(a)(9)(ii). Because the asset

that is disposed of is the asset underlying

the option, this proposed reporting treatment for the sale of underlying property

that is physically delivered applies without regard to whether the option is itself a

digital asset option or a non-digital asset

option.

Because the Treasury Department

and the IRS are currently unaware of

any digital asset options that are also

section 1256 contracts, these proposed

regulations do not provide new rules for

Bulletin No. 2023–38

such options. Rather, proposed §1.60451(c)(8)(iii) provides that reporting of

these dual classification options should

be under the existing rules for options

that are section 1256 contracts and not

under the proposed rules for digital

assets. Accordingly, for a disposition

of an option that is a section 1256 contract, reporting is required under existing

§1.6045-1(c)(5) regardless of whether

the option disposed of is a non-digital asset option or a digital asset option

or whether the option was issued with

respect to digital asset or non-digital

asset underlying property. Further, as

required by existing §1.6045-1(m)(3)

and proposed §1.6045-1(a)(9)(i) and (c)

(8)(iii), when an option that is a section

1256 contract is settled by the delivery of

the underlying property, the profit or loss

on the contract itself is reportable under

existing §1.6045-1(c)(5), but the underlying sale will be subject to reporting under

these proposed regulations based on the

nature of the underlying property, with

the delivery of non-digital asset underlying property reportable under proposed

§1.6045-1(a)(9)(i) and the delivery of

digital asset underlying property reportable under proposed §1.6045-1(a)(9)(ii).

The Treasury Department and the IRS

invite comments regarding the above-described option transactions, including

comments about how common are digital

asset options that are also section 1256

contracts. Comments are also requested

regarding whether there are other less

burdensome alternatives for reporting

the above-described option transactions.

For example, whether it would be less

burdensome to allow brokers to report

transactions involving section 1256 contracts that are also digital assets or the

delivery of non-digital assets that underlie a digital asset option as a sale under

proposed §1.6045-1(a)(9)(ii).

No changes have been made to the rules

relating to regulated futures contracts in

the existing regulations because the definition of a regulated futures contract in

existing §1.6045-1(a)(6) can apply to a

regulated futures contract on digital assets

and to regulated futures contracts that are

themselves digital assets. Accordingly,

pursuant to proposed §1.6045-1(c)(8)(iii),

regulated futures contracts will continue

to be reported under the rules in existing

Bulletin No. 2023–38

§1.6045-1(c)(5) and not under the proposed rules for digital assets.

Proposed §1.6045-1(a)(7)(iii) expands

the definition of a forward contract subject to reporting to include executory contracts requiring delivery of digital assets

in exchange for cash, different digital

assets, or any other property or services

that would result in a sale of digital assets

under proposed §1.6045-1(a)(9)(ii) if the

exchange occurred at the time the contract

was executed. When a forward contract is

disposed of without delivery of its underlying property, the nature of the forward

contract itself determines the appropriate

reporting treatment. Specifically, reporting is required under proposed §1.60451(a)(9)(i) if the forward contract itself is

a non-digital asset forward contract and

under proposed §1.6045-1(a)(9)(ii) if the

forward contract is a digital asset forward contract. Because the asset that is

disposed of is the forward contract itself,

this proposed reporting treatment applies

without regard to whether the forward

contract was issued with respect to digital asset or non-digital asset underlying

property. The reporting on the delivery of

the underlying property with respect to a

forward contract, in contrast, does turn

on the nature of that underlying property. That is, when the underlying asset

is non-digital asset property, the delivery

is reportable under proposed §1.60451(a)(9)(i); whereas when the underlying

asset is digital asset property, the delivery

is reportable under proposed §1.60451(a)(9)(ii). Because the asset that is disposed of when there is delivery is the

asset underlying the forward contract,

this proposed reporting treatment for the

sale of underlying property that is physically delivered applies without regard

to whether or not the forward contract is

itself a digital asset.

The Treasury Department and the IRS

request comments with respect to whether

there is anything factually unique in the

way short sales of digital assets, options

on digital assets, and other financial product transactions involving digital assets

are undertaken compared to similar transactions involving non-digital assets, and

whether these transactions with respect to

digital assets raise any additional reporting issues that have not been addressed in

these proposed regulations.

839

B. Definition of brokers required to report

As described in Part II.C. of the

Background, 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.

Existing regulations under section 6045

apply 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 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. See existing §1.6045-1(a)(1) and

(a)(10)(i)(A).

Section 80603(a) of the Infrastructure

Act clarifies that the definition of broker

under section 6045 includes 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. The change

was not intended to limit the Secretary’s

authority to interpret the definition of

broker. 167 Cong. Rec. S5702, 5703

(daily ed. Aug. 3, 2021) (Joint Committee

on Taxation, Technical Explanation of

Section 80603 of the Infrastructure Act).

To reflect this clarification made by the

Infrastructure Act, proposed §1.6045-1(a)

(1) retains the existing definition of broker

as any person that in the ordinary course

of a trade or business stands ready to effect

sales to be made by others. However,

the definition of effect under existing

§1.6045-1(a)(10)(i) and (ii), which sets

forth the various roles under which a broker may take actions on behalf of customers, has been revised to provide that any

person that provides facilitative services

that effectuate sales of digital assets by

customers will be considered 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

September 18, 2023

transaction potentially giving rise to gross

proceeds. This definition is similar to the

definition in the existing regulations with

respect to agents and is similarly intended

to limit the definition of broker to persons

who have the ability to obtain information

that is relevant for tax compliance purposes. The modified definition of effect

takes into account whether a person is

in a position to know information about

the identity of a customer, rather than

whether a person ordinarily would know

such information, in recognition of the

fact that some digital asset trading platforms that have a policy of not requesting customer information or requesting

only limited information have the ability

to obtain information about their customers by updating their protocols as they do

with other upgrades to their platforms.

The ability to modify the operation of a

platform to obtain customer information is

treated as being in a position to know that

information. The Treasury Department

and the IRS expect that this clarified proposed definition will ultimately require

operators of some platforms generally

referred to as decentralized exchanges to

collect customer information and report

sales information about their customers, if

those operators otherwise qualify as brokers. This decision was made because the

reasons for requiring information reporting on dispositions of digital assets do not

depend on the manner by which a business

operating a platform effects customers’

transactions. Customers need information

about gross proceeds and basis to prepare their tax returns; the IRS needs that

information in order to collect the taxes

that are imposed under laws enacted by

Congress and in order to focus its compliance efforts on taxpayers who fail to comply with their obligations to report their

tax liability; and policy makers need that

information in order to understand what

taxpayers are doing so that they can make

informed judgments about further laws or

other guidance relating to digital assets.

Moreover, if the manner in which a digital

asset trading platform operates reduces or

eliminates its obligation to report information on customer transactions, digital

asset trading platforms might modify their

operations to avoid reporting or customers who wish to evade taxes might elect

to use a non-reporting platform in order to

September 18, 2023

reduce the IRS’s ability to identify them as

non-compliant.

The Treasury Department and the

IRS recognize that some stakeholders

may have concerns that providing personal identity information may raise privacy concerns, and request comments on

whether there are alternative approaches

that would satisfy tax compliance objectives while reducing privacy concerns.

The Treasury Department and the IRS

also request comments on any technological or other technical issues that might

affect the ability of a non-custodial digital asset trading platform that is a person

who qualifies as a broker to obtain and

transmit the information required under

these proposed regulations and how these

issues might be overcome. The Treasury

Department and the IRS understand that

digital asset trading platforms operate

with varying degrees of centralization and

effective control by founders or others, and

request comments on whether the application of reporting rules only to “persons”

(as described in the next paragraph) adequately limits the scope of reporting obligations to platforms that have one or more

individuals or entities that can update,

amend, or otherwise cause the platform to

carry out the diligence and reporting rules

of these proposed regulations.

As used in these proposed regulations,

the term person generally has the meaning provided by section 7701(a)(1), which

provides that the term generally includes

an individual, a legal entity, and an unincorporated group or organization through

which any business, financial operation or

venture is carried on, such as a partnership. The term person includes a business

entity that is treated as an association or a

partnership for Federal tax purposes under

§301.7701-3(b). Accordingly, a group of

persons providing facilitative services that

are in a position to know the customer’s

identity and the nature of the transaction

effectuated by customers may be treated

as a broker whether or not the group operates through a legal entity if the group is

treated as a partnership or other person for

U.S. Federal income tax purposes.

These clarifying changes are intended

to apply the reporting rules to digital asset

trading platforms that provide facilitative

services and that are in a position to know

the customer’s identity and the nature of

840

the transaction effectuated by customers

regardless of the manner in which they are

organized or operate if the platform or its

operator (or operators) is a person subject

to reporting. Thus, for example, the reporting rules apply to custodial digital asset

trading platforms that act as their customers’ legal agents in trading their customers’ digital assets as well as to operators of

non-custodial trading platforms that provide digital asset middleman services that

bring buyers and sellers together and rely

on smart contracts to execute the transactions without further intervention from the

operators, despite the fact that such digital

asset middlemen may not necessarily be

acting as legal agents of the customers in

those transactions. Accordingly, under this

definition, in addition to acting as either

a principal with respect to sales of digital

assets in the ordinary course of a trade or

business, or as an agent (including as a custodial agent) if the nature of the agency is

such that the agent ordinarily would know

the gross proceeds of the sale, a broker

also includes a person who acts as a digital asset middleman for a party in a sale

of digital assets. Proposed §1.6045-1(a)

(21)(i) defines a digital asset middleman

as any person who provides a facilitative

service with respect to a sale wherein the

nature of the arrangement 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 from the sale.

A facilitative service is defined in proposed §1.6045-1(a)(21)(iii)(A) as any 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;

access to digital asset trading platforms;

order matching services; market making

functions to offer buy and sell prices; or

escrow or escrow-like services to ensure

both parties to an exchange act in accordance with their obligations. Because

some persons providing these services

or products may not be in a position to

know the identity of the parties making

a sale and the nature of the transaction,

proposed §1.6045-1(a)(21)(iii)(A) specifically excludes from the definition of

facilitative service persons solely engaged

in the business of providing distributed

Bulletin No. 2023–38

ledger validation services—whether

through proof-of-work, proof-of-stake,

or any other similar consensus mechanism—without providing other functions

or services. For the same reason, proposed

§1.6045-1(a)(21)(iii)(A) also excludes

from the definition of facilitative service

persons solely engaged in the business

of selling hardware or licensing 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. This latter exclusion does

not, therefore, exclude wallet software

providers from the definition of facilitative service if the software also provides users with direct access to trading

platforms from the wallet platform. The

Treasury Department and the IRS invite

comments regarding whether the provision of connection software by wallet providers to trading platforms (that customers

of the trading platforms can then use to

access their wallets from the trading platform) should be considered a facilitative

service resulting in the wallet provider

being treated as a broker. In addition, the

Treasury Department and the IRS invite

comments regarding what additional functions wallet providers might provide that

would be considered facilitative services.

Finally, the definition of customer under

proposed §1.6045-1(a)(2) has also been

revised to include persons that make sales

of digital assets using brokers who act as

digital asset middlemen.

Under proposed §1.6045-1(a)(21)(ii)

(A), a person is in a position to know the

identity of the party that makes the sale

if that person maintains sufficient control

or influence over the facilitative services

provided so as to have the ability to set

or change the terms under which its services are provided to request that the party

making the sale provide that party’s name,

address, and taxpayer identification number, in advance of the sale. This rule is

similar to the standard, recommended by

the Financial Action Task Force (FATF),

to be used to determine whether a creator,

owner, operator, or other person involved

in a decentralized application providing

financial services should be considered

to be a virtual asset service provider and

should, thus, be subject to anti-money

laundering (AML) and counter-terrorist financing (CFT) requirements. FATF

Bulletin No. 2023–38

(2021), Updated Guidance for a RiskBased Approach to Virtual Assets and

Virtual Asset Service Providers, p. 26-28,

FATF, Paris. https://www.fatf-gafi.org/

publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.

html. Similarly, under proposed §1.60451(a)(21)(ii)(B), a person is in a position to

know the nature of the transaction potentially giving rise to gross proceeds from

a sale if that person maintains sufficient

control or influence over the facilitative

services provided so as to have the ability to determine whether and the extent

to which the transfer of digital assets

involved in a transaction gives rise to

gross proceeds. Thus, a person will be

considered to be in a position to know the

nature of the transaction potentially giving

rise to gross proceeds from a sale if the

person can determine that the transaction

is a sale (and the gross proceeds from that

sale) based on the consideration received

when a sale transaction is completed. As

a result, a person will be considered to

be in a position to know the nature of the

transaction potentially giving rise to gross

proceeds from a sale if the person has the

ability to modify an automatically executing contract or protocol to which that

person provides access to ensure that this

information is provided upon the execution of a sale. For both of these standards,

a person will be considered as maintaining sufficient control or influence over

the provided facilitative services so as to

have the ability to determine customer

identities or the nature of transactions if

that person has the ability to change the

fees charged for the facilitative services,

whether by modifying the existing service

arrangement or by substituting a new service arrangement. The fact that a digital

asset trading platform operator has modified an automatically executing contract

or protocol in the past, or has replaced

such a contract with another contract in its

protocol, strongly suggests that the operator has sufficient control or influence over

the facilitative services provided to obtain

the information about either the identity of

the party that makes the sale or whether

and the extent to which the transfer of

digital assets involved in a transaction

gives rise to gross proceeds. The Treasury

Department and the IRS invite comments regarding what other factors should

841

be considered relevant to determining

whether a person maintains sufficient control or influence over provided facilitative

services.

The Treasury Department and the IRS

understand that in some cases tokens

that enable those who hold them to control the ability to change the underlying

protocol of a platform described as a

decentralized exchange (referred to as

governance tokens) may be held in significant part by founders, development

teams, or one or more investors and that

in other cases those governance tokens

may be more widely distributed. There

may also be fact patterns in which a

holder of a significant amount of governance tokens routinely takes actions

that benefit the platform, for example

reimbursing users whose tokens have

been stolen, which actions are then ratified by or compensated by the broader

group of holders of governance tokens.

Consequently, there can be a range of

effective control that ownership of governance tokens can provide, based on

how widely the tokens are disbursed

and whether or not a group of persons

(normally the founders/development

teams/investors) retain enough tokens

as a group to make decisions. Some

decentralized autonomous organizations

(DAOs) are an example of this organizational structure. Even in structures where

governance tokens may be widely distributed, individuals or groups of token

holders can have the ability to maintain

practical control. In addition, in some

cases, so-called “administration keys”

exist to allow developers or founders

to modify or replace the automatically

executing contracts or protocols underpinning digital asset trading platforms

without requiring the vote of governance

token holders. The Treasury Department

and the IRS invite comments regarding

the circumstances under which an operator does or does not maintain sufficient

control or influence over the facilitative

services offered by a digital asset trading platform. Additionally, comments

are requested regarding whether, and if

so, how should the ability of users of

the platform, shareholders or holders

of governance tokens to vote on aspects

of the platform’s operations be considered. Finally, comments are requested

September 18, 2023

regarding whether this conclusion

should be impacted by the existence of

full or even partial-access administration keys or the ability of the operator to

replace the existing protocol with a new

or modified protocol if that replacement

does not require holding a vote of governance tokens or complying with these

voting restrictions.

As noted, the statutory definition

of broker under section 6045(c)(1)(C)

refers to a person who “for a consideration” regularly acts as a middleman.

The revised definition of broker under the

Infrastructure Act also refers to a person

who, “for consideration,” is responsible

for regularly providing any service effectuating transfers of digital assets on behalf

of another person. The definition of broker

under existing and proposed §1.6045-1(a)

(1) implements this “for consideration”

qualification by limiting the definition

of broker to a person who effects sales

made by others “in the ordinary course of

a trade or business.” Persons engaged in

a trade or business necessarily are “those

so engaged for gain or profit.” See e.g.,

Treas. Reg. §1.6041-1(b)(1); Groetzinger

v. Commissioner, 480 U.S. 23 (1987). A

business may receive different forms of

consideration for its goods and services.

The receipt of fees may be a relevant factor in determining whether a person is

engaged in the ordinary course of a trade or

business. However, there may be persons

who facilitate transfers of digital assets for

a fee or other consideration, such as individuals who occasionally facilitate transfers but do not do so on a regular basis,

who are not engaged in a business activity.

It is intended that this “trade or business”

requirement will result in a more limited

definition of broker than that which would

apply under a less restrictive “for consideration” standard. Accordingly, as long as

a broker effects the sales made by others

in the ordinary course of its trade or business, it will have a reporting obligation

under section 6045.

Proposed §1.6045-1(a)(10)(i)(B) also

revises the definition of effect to clarify

that a person who acts as a principal with

respect to a sale is to be treated as effecting a sale only to the extent such person

is acting in the sale as a broker. Thus, for

example, because an obligor that regularly

issues and retires its own debt obligations

September 18, 2023

is a broker, that obligor will be treated

as effecting a sale when it retires its own

debt as part of those regular activities.

Similarly, a corporation that regularly

issues and redeems its own stock will be

treated as effecting a sale when it redeems

its own shares as part of these regular

activities. Additionally, an issuer of digital

assets that regularly offers to redeem those

digital assets will be treated as effecting a

sale when it redeems those digital assets

as part of these regular activities. Finally,

proposed §1.6045-1(a)(10)(i)(C) has been

revised to clarify that a person who acts

as a principal in a sale will be treated as

effecting sales only if that principal is

acting as a dealer with respect to the sale

that is subject to reporting under section

6045. Thus, for example, a retailer who

accepts digital assets from a customer as

payment for the sale of goods is not effecting the sale of digital assets on behalf of

that customer if that retailer is not otherwise a dealer of digital assets. Similarly,

an artist in the business of creating and

selling NFTs that represent interests in the

artist’s work is not effecting the sale of

digital assets on behalf of purchasers, provided that artist is not otherwise a dealer

in digital assets. This result is appropriate

regardless of whether the artist regularly

sells NFTs to the purchasers directly or

through digital asset brokers.

Proposed §1.6045-1(b)(1)(vi) through

(xi) adds examples of persons who are

generally considered to be brokers under

the above definition. Specifically, digital

asset trading platforms that also provide

custodial (hosted wallet) services, operators of non-custodial trading platforms

(including platforms that effect transactions through automatically executing

contracts or protocols), digital asset payment processors, and operators and owners of digital asset kiosks are included as

examples of persons who in the ordinary

course of their trade or business stand

ready to effect sales of digital assets on

behalf of customers. These examples also

clarify that even if a person’s principal

business does not meet the definition of

broker, the person will be considered a

broker under the definition if that person

also regularly stands ready to effect sales

of digital assets on behalf of customers.

Thus, digital asset hosted wallet providers

and persons who sell or license software

842

to unhosted wallet users will be considered brokers if they also facilitate or offer

services to facilitate the purchase or sale

of digital assets.

Conversely, proposed §1.6045-1(b)(2)

(viii) through (x) illustrate that the term

broker does not extend to merchants who

sell goods or services in return for digital

assets, persons who are solely engaged in

the business of validating distributed ledger transactions through proof-of-work,

proof-of-stake, or any other consensus

mechanism, without providing other functions or services, and persons who are

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.

1. Digital Asset Broker

Proposed §1.6045-1(a)(1) provides that

a broker means 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. As applied to

brokers standing ready to effect sales for

others of digital assets (referred to in the

preamble as a digital asset broker) the term

includes not only businesses with physical

locations, such as digital asset kiosks and

other brick and mortar facilities, but also

online businesses, such as operators of

trading platforms that hold custody of their

customers’ digital assets and operators

with sufficient control or influence over

non-custodial trading platforms that effect

sales of digital assets made for others by

providing access to automatically executing contracts, protocols, or other software programs that automatically effect

sales. As noted in the definition of effect

discussed in Part I.B of this Explanation

of Provisions, operators of non-custodial trading platforms would know or be

in a position to know the identity of their

customers and the gross proceeds of their

sales, for example, because these operators

have the ability to request that new potential customers provide this information and

can require that their customers use automatically executing exchange contracts

that provide these operators with the gross

proceeds information.

Bulletin No. 2023–38

As noted, the term person generally

includes an individual, a legal entity, and

an unincorporated group or organization

through which any business, financial operation or venture is carried on. Accordingly,

an operator of a digital asset trading platform that is an individual or legal entity

may be treated as a broker, and an operator of a digital asset trading platform that

is comprised of a group that shares fees

from the operation of the trading platform,

or is otherwise treated as an association or

a partnership under §301.7701-3(b), may

also be treated as a broker even though

there is no centralized legal entity through

which trades are carried out. For example, a DAO may be a person that could be

treated as a broker under these proposed

regulations. For a discussion of digital

asset trading platforms that issue governance tokens providing holders with the

power to vote on major platform decisions—such as new features to be offered

or revised governance rights, see Part I.B

of this Explanation of Provisions. The

Treasury Department and the IRS request

comments regarding the extent to which

holders of governance tokens should be

treated as operating a digital asset trading

platform business as an unincorporated

group or organization.

A merchant that accepts digital assets

directly from a customer as payment for

its provision of goods or services generally is not a broker under these rules.

A person is treated as a broker with

respect to digital assets only if it effects

sales of digital assets for customers. As

described in Part I.C of this Explanation

of Provisions, a sale by a broker generally includes a disposition of digital assets

for cash, one or more stored-value cards,

broker services, or certain other property

(including different digital assets) that are

subject to reporting under section 6045.

While a merchant who provides goods,

services, or other property (rather than

digital assets or cash) in exchange for a

customer’s digital assets may be facilitating the disposition of the customer’s digital assets, that merchant generally would

not be treated as effecting sales of digital

assets for customers as a broker because

the customer’s digital assets are not being

exchanged for cash or the types of assets

that cause the transaction to be treated as a

sale under the proposed regulations. If the

Bulletin No. 2023–38

merchant’s exchange of goods or services

for digital assets is effected through a digital asset payment processor, however, the

digital assets payment processor may be

treated as a broker.

2. Digital Asset Hosted Wallet Providers

Under existing regulations, a broker

includes an agent with respect to a sale in

the ordinary course of a trade or business

if the nature of the agency is such that the

agent ordinarily would know the gross

proceeds of the sale. Consequently, under

current law, certain securities custodians

and other agents are treated as brokers.

Under the multiple broker rule of existing

§1.6045-1(c)(3)(iii), which exempts brokers who conduct sales on behalf of other

brokers, only the broker that has the closest relationship to the customer is required

to report information under section 6045.

In the digital asset industry, some persons stand ready in the ordinary course of

a trade or business to take custody of and

electronically store the public and private

keys to digital assets held on behalf of others. These digital asset hosted wallet providers in some cases also effect sales or

possess information regarding the digital

asset sales of their customers in much the

way a bank custodian or other custodian

does for securities. The proposed definition of broker includes such a digital asset

hosted wallet provider to the extent that

the digital asset hosted wallet provider

also functions as a principal in the sale of

digital assets, acts as an agent for a party

in the sale if it would ordinarily know the

gross proceeds from the sale, or acts as a

digital asset middleman and would ordinarily know or be in a position to know

the identity of the party that makes the

sale and the gross proceeds from the sale.

If a hosted wallet provider solely holds

and transfers digital assets on behalf of its

customers, without possessing, or having

the ability to possess, any knowledge of

gross proceeds from sales, the hosted wallet provider would not qualify as a broker.

3. Digital Asset Payment Processors

A number of payment processors permit customers to make payment in digital

assets. These transactions may take various forms. In many cases the customer

843

pays in digital assets, and the payment

processor exchanges those digital assets

for a U.S. dollar amount that is then paid

to a merchant, for example, in exchange

for goods or services, or to another intermediary recipient as with a payment card

purchase. In other cases, the payment processor transfers the digital assets to the

merchant or other recipient. In both cases,

the customer has disposed of its digital

assets in a transaction that ordinarily is

a gain (or loss) recognition transaction.

These proposed regulations would require

digital asset payment processors to provide information on those dispositions.

Payment processors (and in certain circumstances merchant acquiring entities

within the same network as payment card

issuers) may separately be required to provide information on the merchant transaction under section 6050W, which requires

reporting by TPSOs and merchant acquiring entities. Therefore, for example, where

a TPSO effects a transaction involving

the exchange of merchandise for digital

assets, the TPSO will need to report on the

disposition of the merchandise under section 6050W and on the digital asset disposition under section 6045, assuming no

exceptions apply.

A digital asset payment processor is

defined in proposed §1.6045-1(a)(22)

(i)(A) as a person who in the ordinary

course of its business regularly stands

ready to effect digital 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 some

cases, payment recipients are willing to

receive payments in digital assets rather

than cash and those payments are facilitated by an intermediary. To facilitate

a payment transaction in these circumstances, a digital asset payment processor

might provide the payment recipient with

a temporarily fixed exchange rate on a

digital assets payment that is transferred

directly from a customer to that payment recipient. This temporarily fixed

exchange rate may also be available to

the merchant if it wishes to immediately

exchange the digital assets for cash. In a

transaction of this kind, similar to other

merchant transactions involving intermediaries that provide cash to the merchants

September 18, 2023

in exchange for the merchant’s provision

of goods or services to the customer, the

customer disposes of its digital assets

in a transaction that gives rise to gain

(or loss) and receives goods or services,

while the merchant receives or can

choose to receive cash. This customer

consequently has the same obligation to

determine and report its gain or loss as

in the other type of merchant transaction, and similar reporting rules therefore

should apply to the digital asset payment

processor. To address these transactions,

for purposes of the definition of a digital

asset payment processor, these proposed

regulations treat 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 digital asset payment processor in exchange for different

digital assets or cash paid to the second

person.

This characterization of the transaction as a transfer of digital assets by the

customer to the digital asset payment

processor in exchange for the payment of

different digital assets or cash to the second person applies solely for purposes of

certain definitions in these regulations, to

ensure that customer dispositions of digital assets for consideration are subject

to reporting regardless of the details of

the arrangements made by the merchant

for receiving payment. No inference is

intended with respect to whether these

transactions should or may be treated as

dispositions for cash for any other purpose of the Code. The characterization

of the transaction as involving a payment

of cash to the merchant for purposes of

these proposed regulations will apply

regardless of whether the merchant subsequently exchanges the digital assets

received pursuant to the temporarily fixed

exchange rate, because the fixed exchange

rate provided by the digital asset payment

processor both facilitates the transaction

and serves as a foundation to determine

the fair market value received by the

customer in the exchange. Accordingly,

to meet their information reporting obligations in these alternatively structured

September 18, 2023

payment transactions, digital asset payment processors will need to ensure that

they obtain the required personal identifying information (that is, name, address,

and tax identification number) from the

customer (that is, the party making the

payment in digital assets) in advance of

these transactions. It is anticipated that

digital asset payment processors will

report gross proceeds from the disposition

of digital assets by customers but may not

have the information necessary or available to report the basis of the disposed-of

digital assets unless they also hold digital

assets for those customers.

In addition, because a payment processor knows the gross proceeds with

respect to an exchange transaction when

it is participating in a transaction that

is potentially reportable under existing §1.6050W-1(a)(1), the definition of

a digital asset payment processor also

includes certain payment settlement entities and certain entities that make payments to payment settlement entities that

are potentially subject to reporting under

section 6050W. First, proposed §1.60451(a)(22)(i)(B) provides that a digital asset

payment processor includes a TPSO (as

defined in §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 §1.6050W1(a)(2). This treatment of a TPSO as a

digital asset payment processor applies

whether or not the TPSO actually makes

(or provides the instructions to make) the

payment or contracts with a third-party

electronic payment facilitator, pursuant

to §1.6050W-1(d)(2), to make (or provide

the instructions to make) the payment.

In addition, this treatment of a TPSO as

a digital asset payment processor applies

without regard to whether the payment

to the merchant is below the de minimis

threshold described in section 6050W(e)

and, thus, not reportable under section

6050W.

Second, the definition of a digital asset

payment processor in proposed §1.60451(a)(22)(i)(C) 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 §1.6050W-1(b)

(2), in a transaction that is associated

844

with a reportable payment transaction

under §1.6050W-1(a)(2) that is effected

by the merchant acquiring bank. Whether

a transaction is associated with a reportable payment transaction is determined

without regard to whether the merchant

acquiring bank contracts with an agent to

make (or submit the instructions to make)

its payments to the merchant.

Proposed §1.6045-1(a)(2)(ii)(A) clarifies that the customer in a digital assets

payment processor transaction includes

the person who transfers the digital assets

or directs the transfer of the digital assets

to the digital asset payment processor to

make payment to the second person. Thus,

for example, a digital asset payment processor’s customer is the person who transfers the digital assets to that processor even

if the processor has a contractual arrangement with only the second person, that is,

the person who will ultimately receive the

cash in the payment transaction.

The Treasury Department and the IRS

recognize that some stakeholders may

have concerns that providing personal

identity information in transactions where

the payment processor is an agent of a

merchant may raise privacy concerns and

request comments on whether there are

alternative approaches that would satisfy

tax compliance objectives while reducing

privacy concerns.

The Treasury Department and the IRS

considered whether a de minimis threshold should apply to the reporting of merchant transactions of the kind described

above, taking into account that the cost

and effort to build a reporting system may

increase if numerous small transactions

must be reported. Whether there would

in fact be an increase in cost and effort

is uncertain, as in some other information reporting contexts reporting entities

have elected not to take advantage of de

minimis thresholds in order to avoid the

need to monitor the size or amount of

the reportable item. Moreover, taxpayers

are required to report gain from dispositions of digital assets on their tax returns

regardless of the amount disposed of, and

a taxpayer that engages in many small

dispositions of digital assets may have an

aggregate amount of gain for the taxable

year that is significant. Because information reporting assists customers in determining the proper amount of gain or loss

Bulletin No. 2023–38

attributable to such dispositions, these

proposed regulations do not include a de

minimis rule for reporting these merchant

transactions.

4. Other Brokers

The definition of broker in existing

§1.6045-1(a)(1) is proposed to be modified

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. A stablecoin is

a form of digital asset that is intended to

have a stable value relative to another asset

or assets, typically a fiat currency. Some

stablecoin issuers effect redemptions on

behalf of all, or some, of their customers

and know the gross proceeds paid to their

customers. Stablecoin issuers that redeem

their stablecoins are included in the definition of broker because, notwithstanding

the nomenclature “stablecoin,” the value

of a stablecoin may not always be stable

and therefore may give rise to gain or loss.

See Additional Definitional Changes in

Part I.K of this Explanation of Provisions.

These proposed regulations apply to persons that regularly offer to redeem digital

assets rather than persons who regularly

carry out redemptions to ensure reporting

on the occasional redemptions by digital asset issuers that may not regularly

redeem their issued digital assets. The

Treasury Department and the IRS request

comments on the frequency with which

creators or issuers of digital assets redeem

digital assets. In addition, the Treasury

Department and the IRS request comments

regarding whether the broker reporting

regulations should apply to include initial coin offerings, simple agreements for

future tokens, and similar contracts.

5. Real Estate Reporting Persons

Proposed §1.6045-1(a)(1) was also

modified to provide 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 be required to make an information return with respect to that real estate

transaction under proposed §1.6045-4(a),

without regard to any reporting exceptions provided under section 6045(e)(5) or

Bulletin No. 2023–38

proposed or existing §1.6045-4(c) or (d),

such as the exception for certain sales of

principal residences or the exception for

exempt real estate sellers. Thus, for example, a real estate reporting person would be

required to report on a real estate buyer’s

exchange of digital assets for real estate as

a sale of those digital assets even though

the real estate reporting person is not

required to report on the real estate seller’s exchange of the real estate for digital

assets due to the fact that the seller of that

real estate is an exempt seller, such as a

corporation, under existing §1.6045-4(d).

C. Expansion of the types of sales subject

to reporting

Digital assets are unique among the

types of assets that are subject to reporting under section 6045 because it is common for digital assets to be exchanged for

different digital assets. In addition, some

digital assets can readily function as a

payment method as well as an investment

asset. Digital assets can be exchanged

for cash, stored-value cards, services, or

other property (including different digital assets). To avoid gaps in information

reporting with respect to this broad range

of taxable exchanges, proposed §1.60451(a)(9)(ii) expands the definition of a sale

subject to reporting. Proposed §1.60451(a)(9)(ii)(A)(1) and (2) provide that a

sale includes the disposition of a digital

asset in exchange for cash, one or more

stored-value cards, or a different digital asset. An exchange for cash for these

purposes includes a payment received

through the use of a check, credit card,

or debit card. Proposed §1.6045-1(a)(25)

defines a stored-value card as a card—

whether in physical or digital form—with

a prepaid value in U.S. dollars, any convertible foreign currency, or any digital

asset. A stored-value card includes a gift

card. The Treasury Department and the

IRS request comments on whether the

types of consideration for which digital

assets may be exchanged in a sale transaction is sufficiently broad to capture current

and anticipated transactions in which taxpayers regularly dispose of digital assets

for consideration.

In addition, proposed §1.6045-1(a)

(9)(ii)(B) provides that a sale of a digital

asset includes the disposition of a digital

845

asset by a customer in exchange for property (including securities and real property) of a type that is subject to reporting

under section 6045. Thus, for example, if

a stockbroker accepts a digital asset from

a customer as payment for the customer’s

purchase of stock, that disposition of the

digital asset in exchange for stock will be

treated as a sale of the digital asset by that

customer for purposes of section 6045.

Similarly, if a real estate reporting person, as defined in existing §1.6045-4(e),

is involved in a real estate transaction in

which the real estate buyer uses digital

assets as consideration in the exchange

for real property, that disposition of digital

assets in exchange for real property will

be treated as a sale of the digital assets by

that real estate buyer for purposes of section 6045.

Proposed §1.6045-1(a)(9)(ii)(C) provides that a sale of digital assets also

includes a disposition of digital assets by

a customer in consideration for the services of a broker as defined in proposed

§1.6045-1(a)(1). Whether a person is a

broker for purposes of this rule, however,

is determined without regard to whether

that person regularly as part of its trade or

business accepts digital assets in consideration for its services. Thus, if a stockbroker

accepts a digital asset as payment for the

commission charged for a stock purchase,

the customer’s disposition of the digital

asset in exchange for the broker’s services

will be treated as a sale of the digital asset

for purposes of section 6045 because the

stockbroker is a broker due to the fact

that it regularly effects sales of stock (not

because it regularly accepts digital assets

for services). In contrast, if a landscaper

accepts a digital asset as payment for landscaping services, the customer’s disposition of the digital asset in exchange for the

landscaper’s services will not be treated

as a sale of digital assets for purposes of

section 6045 because the determination of

whether the landscaper is a broker is made

without regard to whether that landscaper

regularly accepts digital assets in consideration for landscaping services as part

of a trade or business. Proposed §1.60451(a)(2)(ii)(B) provides that the customer

in these sales is the person who transfers

the digital assets or directs the transfer of

the digital assets to the broker regardless

of whether the broker is a digital asset

September 18, 2023

broker. Proposed §1.6045-1(a)(2)(ii)(C)

provides that in the case of a broker that is

a real estate reporting person with respect

to a real estate transaction, the customer is

the person who transfers the digital assets

or directs the transfer of the digital assets

to the seller of the real estate (or the seller’s nominee or agent) to acquire the real

estate. Finally, to ensure that these sales

of digital assets are treated as effected by

a broker, proposed §1.6045-1(a)(21)(iii)

(B) provides that the acceptance of digital

assets in consideration for the above-described property or services provided

by a broker is a facilitative service. As a

result, the broker will be treated as effecting these sales of digital assets as a digital

asset middleman under proposed §1.60451(a)(10)(i)(D).

In certain circumstances, a digital asset

broker (other than a digital asset payment

processor discussed earlier in Part I.B.3 of

this Explanation of Provisions) such as a

digital asset broker providing hosted wallet services might transfer digital assets

without knowing that the transfer was part

of a sale transaction. For example, a customer might direct such a custodial broker

to transfer digital assets to the wallet of

a merchant in connection with the purchase of goods or services from that merchant. The definition of effect in proposed

§1.6045-1(a)(10) limits the sales for which

such brokers must make a report to those

transactions in which the broker (as agent)

would ordinarily know the gross proceeds

from the sale or (as digital asset middleman) would ordinarily know or be in a

position to know the identity of the party

that makes the sale and the gross proceeds

from the sale. Although the custodial broker in this example would ordinarily know

or be in a position to know the identity of

its customer, it is not in a position to know

that the transfer was associated with a sale

or exchange transaction or the amount that

the customer received as gross proceeds

from the exchange (that is, the amount the

customer received in consideration for the

digital assets surrendered). Accordingly,

the transfer of digital assets by that custodial broker to the wallet of the merchant

does not constitute effecting a sale of digital assets by that broker. In contrast, a

digital asset payment processor would typically know whether the transfer was part

of a sale transaction because that broker

would have a contractual relationship with

the payment recipient as well as with the

transferor of the payment. Accordingly, in

these cases the transfer of digital assets

by the digital asset payment processor (or

the direction to the customer by the digital

asset payment processor to transfer digital

assets) to the wallet of the merchant would

constitute effecting a sale.

In view of the increasing use of digital assets to make payments for goods

and services or to satisfy other payment

obligations through the intermediation of

digital asset payment processors, digital

asset payment processors (which may also

function in other contexts as digital asset

trading platforms) are subject to these

rules. To achieve this result, proposed

§1.6045-1(a)(9)(ii)(D) provides that a

sale includes payments of a digital asset

by the customer to a digital asset payment

processor in exchange for that processor’s

payment of a different digital asset or cash

to a second person. A sale also includes

the transfer of a digital asset 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 asset received

by the second person, which is treated

(under the rules setting forth the definition

of a digital asset payment processor) as if

the digital asset was paid by the customer

to the digital asset payment processor in

exchange for a different digital asset or

cash paid to that second person.

In the case of a digital asset payment

processor that is a TPSO, a sale also

includes a customer’s payment in digital

assets to the digital asset payment processor (or pursuant to instructions provided

by that digital asset payment processor or

its agent) as part of a transaction in which

the digital asset payment processor pays

(or is treated as paying) the digital assets

to a merchant in settlement of a reportable

payment transaction under §1.6050W-1(a)

(2). This payment is a sale of digital assets

by the customer under these proposed

regulations without regard to whether

the amount paid to the merchant during

the calendar year exceeds the de minimis

threshold described in section 6050W(e)

or whether the digital asset payment

processor contracts with a third party to

make (or provide instructions to make)

the payment to the merchant pursuant to

§1.6050W-1(d)(2). Finally, to account for

payments that are reportable under section 6050W with respect to payment card

transactions where a digital asset payment

processor is also a payment card issuer, a

sale of digital assets also includes a payment made in digital assets by a customer

to the payment card issuer (or pursuant to

instructions provided by that card issuer

or its agent) in a transaction associated

with a reportable payment transaction

under §1.6050W-1(a)(2). This treatment

of the customer’s payment as a sale in

this case is determined without regard to

whether the merchant acquiring bank contracts with an agent to make (or submit

the instructions to make) payment to the

ultimate payee. Thus, under this rule, in

the case of a payment card purchase at a

merchant, the buyer’s payment in a digital asset to the payment card issuer will

be a sale even if that payment card issuer

pays the merchant acquiring entity in the

same type of digital asset because the

subsequent payment (whether in cash or

in digital assets) by the merchant acquiring entity (or its agent) to the merchant

is a reportable payment transaction under

§1.6050W-1(a)(2).

A broker’s customer may enter into

executory contracts, or other derivative

contracts involving the future delivery of

a digital asset, where delivery under the

contract also should be subject to reporting as a digital asset sale under these proposed regulations. To ensure that these

executory or other derivative contracts do

not circumvent the proposed information

reporting rules for digital assets, proposed

§1.6045-1(a)(9)(ii)(A)(3) defines a sale to

include 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 that would be treated as a sale

of the digital asset under the regulation if

the contract had not been executory.3 The

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 Commodity Exchange Act, or to otherwise

impact the interpretation or applicability of those laws, which are outside the scope of these regulations.

3

September 18, 2023

846

Bulletin No. 2023–38

rules in existing §1.6045-1(a)(9), redesignated in these proposed regulations as

proposed §1.6045-1(a)(9)(i), applicable to

making or taking delivery (for example,

treating a closing transaction as one or two

sales depending on the nature of the contract) are cross-referenced to apply to the

delivery of digital assets pursuant to transactions described in proposed §1.60451(a)(9)(ii)(A)(3). Additionally, the rules in

existing §1.6045-1(a)(9) applicable to the

circumstances under which a transaction

is treated as a sale with respect to certain

contracts and options are cross-referenced

to apply to determine if similar transactions related to digital assets constitute

sales described in proposed §1.6045-1(a)

(9)(ii)(A). Accordingly, the entering into

of a digital asset contract that requires

delivery of personal property, the initial

grant or purchase of a digital asset option,

or the exercise of a purchased digital asset

call option for physical delivery (except

for a contract described in section 988(c)

(5)) is not included in the definition of sale

under proposed §1.6045-1(a)(9)(ii)(A).

Thus, for example, the closing of a

regulated futures contract that involves

making a delivery of digital assets will

be treated as two sales, one under redesignated proposed §1.6045-1(a)(9)(i) with

respect to the profit or loss on the contract,

and the other under proposed §1.60451(a)(9)(ii)(A)(3) on the delivery of the

digital assets. The Treasury Department

and the IRS invite comments addressing the extent to which these rules create

logistical concerns for the reporting on

contracts involving the delivery of digital assets. Additionally, the delivery of a

digital asset under an executory contract

will be treated as a sale of the digital asset

under these rules if the underlying terms

of the contract (for example, an exchange

of one digital asset for a different digital asset) would have given rise to a sale

under these rules if the contract had been

executed when made. In contrast, if the

underlying terms of the contract would

not have been treated as a sale under these

rules (for example, the direct payment of a

digital asset by a consumer to a merchant

in exchange for merchandise without the

involvement of a digital asset payment

processor), then the delivery of the digital asset pursuant t

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