# Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-14004 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** July 9, 2024 - **Citation:** 89 FR 56480 ## Text DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 31, and 301 [TD 10000] RIN 1545-BP71 Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations regarding information reporting and the determination of amount realized and basis for certain digital asset sales and exchanges. The final regulations require brokers to file information returns and furnish payee statements reporting gross proceeds and adjusted basis on dispositions of digital assets effected for customers in certain sale or exchange transactions. These final regulations also require real estate reporting persons to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate. DATES: Effective date: These regulations are effective on September 9, 2024. Applicability dates: For dates of applicability, see §§ 1.1001-7(c); 1.1012-1(h)(5); 1.1012-1(j)(6); 1.6045-1(q); 1.6045-4(s); 1.6045B-1(j); 1.6050W-1(j); 31.3406(b)(3)-2(c); 31.3406(g)-1(f); 31.3406(g)-2(h); 301.6721-1(j); 301.6722-1(g). FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under sections 1001 and 1012, Alexa Dubert or Kyle Walker of the Office of the Associate Chief Counsel (Income Tax and Accounting) at (202) 317-4718; concerning the international sections of the final regulations under sections 3406 and 6045, John Sweeney or Alan Williams of the Office of the Associate Chief Counsel (International) at (202) 317-6933; and concerning the remainder of the final regulations under sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722, Roseann Cutrone of the Office of the Associate Chief Counsel (Procedure and Administration) at (202) 317-5436 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains amendments to the Regulations on Income Taxes (26 CFR part 1), the Regulations on Employment Tax and Collection of Income Tax at the Source (26 CFR part 31), and the Regulations on Procedure and Administration (26 CFR part 301) pursuant to amendments made to the Internal Revenue Code (Code) by section 80603 of the Infrastructure Investment and Jobs Act, Public Law 117-58, 135 Stat. 429, 1339 (2021) (Infrastructure Act) relating to information reporting by brokers under section 6045 of the Code. Specifically, the Infrastructure Act clarified the rules regarding how certain digital asset transactions should be reported by brokers, expanded the categories of assets for which basis reporting is required to include all digital assets, and provided a definition for the term digital assets. Additionally, the Infrastructure Act clarified that transfer statement reporting under section 6045A(a) of the Code applies to covered securities that are digital assets and added a new information reporting provision under section 6045A(d) to require brokers to report on transfers of digital assets that are covered securities, provided the transfer is not a sale and is not to an account maintained by a person, as defined in section 7701(a)(1) of the Code, that the broker knows or has reason to know is also a broker. Finally, the Infrastructure Act provided that these amendments apply to returns required to be filed, and statements required to be furnished, after December 31, 2023, and provided a rule of construction stating that these statutory amendments shall not be construed to create any inference for any period prior to the effective date of the amendments with respect to whether any person is a broker under section 6045(c)(1) or whether any digital asset is property which is a specified security under section 6045(g)(3)(B). On August 29, 2023, the Treasury Department and the IRS published in the Federal Register (88 FR 59576) proposed regulations (REG-122793-19) (proposed regulations) relating to information reporting under section 6045 by brokers, including real estate reporting persons and certain third party settlement organizations under section 6050W of the Code. Additionally, the proposed regulations included specific rules under section 1001 of the Code for determining the amount realized in a sale, exchange, or other disposition of digital assets and under section 1012 of the Code for calculating the basis of digital assets. The proposed regulations stated that written or electronic comments provided in response to the proposed regulations must be received by October 30, 2023. The Treasury Department and the IRS received over 44,000 written comments in response to the proposed regulations. Although https://www.regulations.gov indicated that over 125,000 comments were received, this larger number reflects the number of “submissions” that each submitted comment indicated were included in the posted comment, whether or not the comment actually included such separate submissions. All posted comments were considered and are available at https://www.regulations.gov or upon request. A public hearing was held on November 13, 2023. Several comments requested an extension of the time to file comments in response to the proposed regulations. These requests for extension ranged from a few weeks to several years, but most comments requested a 60-day extension. In response to these comments, the due date for the comments was extended until November 13, 2023. The comment period was not extended further for several reasons. First, information reporting rules are necessary to make digital asset investors aware of their taxable transactions and to make those transactions more transparent to the IRS to reduce the tax gap. It is, therefore, a priority that the publication of these regulations is not delayed more than is necessary. Second, although the Infrastructure Act amended section 6045 in November 2021 to broadly apply the information reporting rules for digital asset transactions to a wide variety of brokers, the broker reporting regulations for digital assets were added to the Treasury Priority Guidance Plan in late 2019. Brokers, therefore, have long been on notice that there would be proposed regulations on which to comment. Third, as discussed in Part VI. of this Summary of Comments and Explanation of Revisions, the Treasury Department and the IRS understand that brokers need time after these final regulations are published to develop systems to comply with the final reporting requirements. Without further delaying the applicability date of these much-needed regulations, therefore, extending the comment period would necessarily reduce the time brokers would have to develop these systems. Fourth, a 60-day comment period is not inherently short or inadequate. Executive Order (E.O.) 12866 provides that generally a comment period should be no less than 60 days, and courts have uniformly upheld comment periods of even shorter comment periods. See, e.g., Connecticut Light & Power Co. v. NRC, 673 F.2d 525, 534 (D.C. Cir. 1982), cert. denied, 459 U.S. 835, 103 S.Ct. 79, 74 L.Ed.2d 76 (1982) (denying petitioner's claim that a 30 day comment period was unreasonable, notwithstanding petitioner's complaint that the rule was a novel proposition); North American Van Lines v. ICC, 666 F.2d 1087, 1092 (7th Cir. 1981) (claim that 45 day comment period was insufficient rejected as “without merit”). Indeed, over 44,000 comments were received before the conclusion of the comment period ending on November 13, 2023, which demonstrates that this comment period was sufficient for interested parties to submit comments. Fifth, it has been a longstanding policy of the Treasury Department and the IRS to consider comments submitted after the published due date, provided consideration of those comments does not delay the processing of the final regulation. IRS Policy Statement 1-31, Internal Revenue Manual 1.2.1.15.4(6) (September 3, 1987). In fact, all comments received through the requested 60-day extension period were considered in promulgating these final regulations. Moreover, the Treasury Department and the IRS accepted late comments through noon eastern time on April 5, 2024. The Summary of Comments and Explanation of Revisions of the final regulations summarizes the provisions of the proposed regulations, which are explained in greater detail in the preamble to the proposed regulations. After considering the comments to the proposed regulations, the proposed regulations are adopted as amended by this Treasury decision in response to such comments as described in the Summary of Comments and Explanation Revisions. These final regulations concern Federal tax laws under the Internal Revenue Code only. No interference is intended with respect to any other legal regime, including the Federal securities laws and the Commodity Exchange Act, which are outside the scope of these regulations. Summary of Comments and Explanation of Revisions I. Final § 1.6045-1 A. Definition of Digital Assets Subject to Reporting The proposed regulations required reporting under section 6045 for certain dispositions of digital assets that are made in exchange for cash, different digital assets, stored-value cards, broker services, or property subject to reporting under existing section 6045 regulations or any other property in a payment transaction processed by a digital asset payment processor (referred to in these final regulations as a processor of digital asset payments or PDAP). The proposed regulations defined a digital asset as a digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology), without regard to whether each individual transaction involving that digital asset is actually recorded on the cryptographically secured distributed ledger. Additionally, the proposed regulations provided that a digital asset does not include cash in digital form. While some comments expressed support for the definition of digital asset in the proposed regulations, other comments raised concerns that the definition of digital asset goes beyond the statutory definition found in amended section 6045. For example, one comment recommended applying the definition only to assets held for investment and excluding any assets that are used for other functions, which include, in their view, nonfungible tokens (NFTs), stablecoins, tokenized real estate, and tokenized commodities. Another comment recommended narrowing the definition of digital asset to apply only to blockchain “native” digital assets and exempting all NFTs and other tokenized versions of traditional asset classes, such as tokenized securities, and other digital assets that don't function as a medium of exchange, unit of account, or store of value. Another comment recommended that the definition of digital asset distinguish between digital representations of what the comment referred to as “hard assets,” such as gold, where the digital asset is merely a proxy for the underlying asset versus digital assets that are not backed by hard assets. Another comment recommended that the definition of digital asset not include tokenized assets, including financial instruments that have been tokenized. The final regulations do not adopt these comments. As discussed more fully in Parts I.A.1. and A.2. of this Summary of Comments and Explanation of Revisions, neither the statutory language nor the legislative history to the Infrastructure Act suggest Congress intended such a narrow interpretation of the term. The Infrastructure Act made changes to the third party information reporting rules under section 6045. Third party information reporting generally contributes to lowering the income tax gap, which is the difference between taxes legally owed and taxes actually paid. GAO, Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance, GAO-19-558T at 6 (Washington, DC: May 9, 2019). It is anticipated that broker information reporting on digital asset transactions will lead to higher levels of taxpayer compliance because brokers will provide the information necessary for taxpayers to prepare their Federal income tax returns and reduce the number of inadvertent errors or intentional omissions or misstatements shown on those returns. Because digital assets can easily be held and transferred, including to offshore destinations, directly by a taxpayer rather than by an intermediary, digital asset transactions raise tax compliance concerns that are specific to digital assets in addition to the more general tax compliance concerns relevant to securities, commodities, and other assets that are reportable under section 6045 and to cash payments reportable under other reporting provisions. The Treasury Department and the IRS have consequently concluded that the definition of digital assets in section 6045(g)(3)(D) provides the appropriate scope for digital assets subject to broker reporting. To the extent sales of digital assets including NFTs, tokenized securities, and other digital assets that may not function as a medium of exchange, unit of account, or store of value, give rise to taxable gains and losses, these assets should be included in the definition of digital assets. See, however, Part I.D.3. of this Summary of Comments and Explanation of Revisions for a description of an optional reporting rule for many NFTs that would eliminate reporting on those NFTs when certain conditions are met, and Part I.A.4.a. of this Summary of Comments and Explanation of Revisions for a description of a special rule providing that assets that are both securities and digital assets are reportable as securities rather than as digital assets when specified conditions are met. Some comments asserted that the statutory definition of digital assets is or should be limited to assets that are financial instruments. These comments are discussed in Part I.A.2. of this Summary of Comments and Explanation of Revisions. Other comments raised a concern that the definition of digital assets is ambiguous and recommended adding examples that clarify the types of property that are and are not digital assets. For reasons discussed more fully in Parts I.A.1., A.2., and A.3. of this Summary of Comments and Explanation of Revisions, the final regulations include several additional examples that illustrate and further clarify certain types of digital assets that are included in the definition, such as qualifying stablecoins, specified nonfungible tokens (specified NFTs), and other fungible digital assets. One comment suggested that the term cryptographically secured distributed ledger be defined in the final regulations as a type of data storage and transmission file which uses cryptography to allow for a decentralized system of verifying transactions. This comment also stated that the definition should state that the stored information is an immutable database and includes an embedded system of operation, and that a blockchain is a type of distributed ledger. The final regulations do not adopt this recommendation because clarification of the term is not necessary and because the recommended changes are potentially unduly restrictive to the extent they operate to restrict future broker reporting obligations should advancements be made in how distributed ledgers are cryptographically secured. One comment suggested that the proposed definition of a digital asset is overly broad because it includes transactions recorded in the broker's books and records (commonly referred to as “off-chain” transactions) and not directly on a distributed ledger. Another comment specifically supported the decision to not limit the definition to only those digital representations for which each transaction is actually recorded or secured on a cryptographically secured distributed ledger. The Treasury Department and the IRS have determined that the definition of digital asset is not overly broad in this regard because eliminating digital assets that are traded in off-chain transactions from the definition would fail to provide information reporting on the significant amount of trading that occurs off-chain on the internal ledgers of custodial digital asset trading platforms. Moreover, since the mechanics of how an asset sale is recorded does not impact whether there has been a taxable disposition of that asset, those mechanics should not impact whether the underlying asset is or is not a digital asset. A comment suggested that the definition of a digital asset should eliminate the phrase “or any similar technology” because the scope of that phrase is unclear and could negatively impact future technology improvements, such as privacy-preserving technology, cryptography, distributed database systems, distributed network systems, or other evolving technology. Another comment requested that the definition of any similar technology be limited to instances in which the IRS identifies such future similar technologies in published guidance. The final regulations do not adopt this comment. Using the phrase “any similar technology” is consistent with the Infrastructure Act's use of the same term in its definition of digital assets in section 6045(g)(3)(D). Further, including any similar technology along with cryptographically secured ledgers is necessary to ensure that brokers continue to report on transactions involving these assets without regard to advancements in or changes to the techniques, methods, and technology, on which these assets are based. The Treasury Department and the IRS are not currently aware of any existing technology that would fit within this “or any similar technology” standard, but if brokers or other interested parties identify new technological developments and are uncertain whether they fit within the definition, they can make the Treasury Department and the IRS aware of the new technology and request guidance at that time. 1. Stablecoins As explained in the preamble to the proposed regulations, the definition of digital assets was intended to apply to all types of digital assets, including so-called stablecoins that are designed to have a stable value relative to another asset or assets. The preamble to the proposed regulations noted that such stablecoins can take multiple forms, may be backed by several different types of assets that are not limited to currencies, may not be fully collateralized or supported fully by reserves by the underlying asset, do not necessarily have a constant value, are frequently used in connection with transactions involving other types of digital assets, and are held and transferred in the same manner as other digital assets. In addition to fiat currency, other assets to which so-called stablecoins can be pegged include commodities or other financial instruments (including other digital assets). No comments were received that specifically advocated for the exclusion of a so-called stablecoin that has a fixed exchange rate with (that is, is pegged to) a commodity, another financial instrument, or any other asset other than a specific convertible currency issued by a government or a central bank (including the U.S. dollar) (sometimes referred to in this preamble as fiat currency). The Treasury Department and the IRS have determined that it would be inappropriate to exclude stablecoins that are pegged to such assets from the definition of digital assets. Accordingly, this preamble uses the term stablecoin to refer only to the subset of so-called stablecoins referred to in the proposed regulations that are pegged to a fiat currency. Numerous comments received specifically advocated for the exclusion from the definition of digital assets stablecoins that are pegged to a fiat currency. Numerous comments stated that failure to exclude stablecoins from the definition of digital assets would hinder the adoption of these stablecoins in the marketplace, deter their integration into commercial payment systems, and undermine Congressional efforts to establish a regulatory framework for stablecoins that can be used to make payments. Additional comments raised concerns about privacy, drew an analogy to the exemption in the existing regulations for reporting on shares of money market funds, or recommended that reporting on stablecoins be deferred until after the substantive tax treatment of stablecoins is clarified with guidance issued by the Treasury Department and the IRS or until a legislative framework is established by Congress. Several other comments recommended that reporting on stablecoins be required, noting that stablecoins can be volatile in value and regularly vary from a one-to-one parity with the fiat currency they are pegged to, and therefore may give rise to gain or loss on disposition. After consideration of the comments, the final regulations do not exclude stablecoins from the definition of digital assets. Stablecoins unambiguously fall within the statutory definition of digital assets as they are digital representations of the value of fiat currency that are recorded on cryptographically secured distributed ledgers. Moreover, because stablecoins are integral to the digital asset ecosystem, excluding stablecoins from the definition of digital assets would eliminate a source of information about digital asset transactions that the IRS can use in order to ensure compliance with taxpayers' reporting obligations. The Treasury Department and the IRS are aware that legislation has been proposed that would regulate the issuance and terms of stablecoins. If legislation is enacted regulating stablecoins, the Treasury Department and the IRS intend to take that legislation into account in considering whether to revise the rules for reporting on stablecoins provided in these final regulations. Notwithstanding that the final regulations include stablecoins in the definition of digital assets, the Secretary has broad authority under section 6045 to determine the extent of reporting required by brokers on transactions involving digital assets. In response to the request for comments in the preamble to the proposed regulations on whether stablecoins, or other coins whose value is pegged to a specified asset, should be excluded from reporting under the final regulations, numerous comments largely focused on stablecoins, rather than coins that track a commodity price or the price of another digital asset. Many of these comments requested that sales of stablecoins be exempted from broker reporting in whole or in part because reporting on all transactions involving stablecoins would result in a very large number of reports on transactions involving little to no gain or loss, on the grounds that these reports would be burdensome for brokers to provide, potentially confusing to taxpayers and of minimal utility to the IRS. These comments asserted that most transactions involved little or no gain or loss because, in their view, stablecoins closely track the value of the fiat currency to which they are pegged. Some comments recommended that certain types of stablecoin transactions be reportable, including requiring reporting of dispositions of stablecoins for cash or where there is active trading in the stablecoin that is intended to give rise to gain (or loss). The Treasury Department and the IRS agree that transaction-by-transaction reporting for stablecoins would result in a high volume of reports. Indeed, according to a report by Chainalysis on the “Geography of Cryptocurrency” analyzing public blockchain transactions (commonly referred to as “on-chain” transactions), stablecoins are the most widely used type of digital asset, making up more than half of all on-chain transactions to or from centralized services between July 2022 and March 2023. Chainalysis, The 2023 Geography of Cryptocurrency Report, p. 14 (October 2023). Given the popularity of stablecoins and the number of stablecoin sales that are unlikely to reflect significant gains or losses, the Treasury Department and the IRS have determined that it is appropriate to provide an alternative reporting method for certain stablecoin transactions to alleviate unnecessary and burdensome reporting. Accordingly, the final regulations have added a new optional alternative reporting method for sales of certain stablecoins to allow for aggregate reporting instead of transactional reporting, with a de minimis annual threshold below which no reporting is required. See Part I.D.2. of this Summary of Comments and Explanation of Revisions. Consistent with the proposed regulations, brokers that do not use this alternative reporting method must report sales of stablecoins under the same rules as for other digital assets. See Part I.D.2. of this Summary of Comments and Explanation of Revisions for the discussion of alternative reporting rules for certain stablecoins. 2. Nonfungible Tokens As with stablecoins, the definition of digital assets in the proposed regulations includes NFTs without regard to the nature of the underlying asset, if any, referenced by the NFT. Although some comments expressed agreement that the definition of digital asset in the statute is broad enough to include all NFTs, other comments raised concerns that the Secretary did not have the authority to include NFTs in broker reporting. That is, the comments argued that while NFTs have value, they do not constitute “representations of value” as required by the statutory definition in section 6045(g)(3)(D). Classifying an NFT as a “representation of value” merely because it has value, these comments asserted, would fail to give effect to the word “representation” in the statute. As support for this view, one comment cited to Senator Portman's floor colloquy reference to the intended application of the reporting rule to “cryptocurrency.” 167 Cong. Rec. S6095-6 (daily ed. August 9, 2021). Ultimately, these comments recommended excluding sales of NFTs from the definition of digital assets. The final regulations do not adopt these comments. Although NFTs may reference assets with value, this does not prevent them from also “representing value.” Moreover, that interpretation would lead to a result that would contravene the statutory changes to the broker reporting rules by the Infrastructure Act. Excluding all NFTs from the definition of digital assets merely because NFTs may reference assets with value rather than “represent value” would result in the exclusion of NFTs that reference traditional financial assets. These assets have been subject to reporting under section 6045 for nearly 40 years, and there is no reason to exclude them from reporting now based only on the circumstance of their trades through NFTs, rather than through other traditional means. Numerous comments asserted that the statutory reference to any “representation of value” should limit the definition of digital assets to only those digital assets that reference financial instruments or otherwise could be used to deliver value (such as a method of payment). Numerous comments expressed that many NFTs, such as, digital art and collectibles, are unique digital assets that are bought and sold for personal enjoyment rather than financial gain and therefore should not be subject to reporting. Similarly, other comments raised the series-qualifier canon of statutory construction, which provides that when a statute contains a list of closely related, parallel, or overlapping terms followed by a modifier, that modifier should be applied to all the terms in the list. Therefore, according to the comments, because “any digital asset” is included in the section 6045(g)(3)(B) list of assets defining specified security and because that list concludes with “any other financial instrument,” these comments argue that the definition of “digital asset” must be limited to assets that are, or are akin to, “financial instruments.” As additional support for this suggestion, one comment cited the rule of last antecedent, which is another canon of statutory construction and provides that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. That is, because the “other financial instrument” clause directly follows “any digital asset” in the list, the definition of any digital asset must be limited to only those digital assets that constitute financial instruments. The final regulations do not adopt these comments. The plain language of the digital asset definition in section 6045(g)(3)(D) reflects only two specific limitations on the definition: “[e]xcept as otherwise provided by the Secretary” and “recorded on a cryptographically secured distributed ledger or similar technology as specified by the Secretary.” The legislative history to the Infrastructure Act does not support the conclusion that Congress intended the “representation of value” phrase to limit the definition of digital assets to only those digital assets that are financial instruments. To the contrary, a report by the Joint Committee on Taxation published in the Congressional Record prior to the enactment of the Infrastructure Act cited to and relied on the Notice 2014-21, 2014-16 I.R.B. 938 (April 14, 2014) definition of virtual currency, which first used the phrase “representation of value.” 167 Cong. Rec. S5702, 5703 (daily ed. August 3, 2021) (Joint Committee on Taxation, Technical Explanation of Section 80603 of the Infrastructure Act). That virtual currency definition specifically limited the “representation of value” phrase to those assets that function “as a medium of exchange, unit of account, and/or store of value.” This limitation would not have been necessary had the “representation of value” phrase been limited to assets that function as financial instruments. Moreover, Congress' use of the term “digital asset” instead of “digital currency” also supports the broader interpretation of the term. The final regulations also do not adopt the interpretation of the referenced canons of statutory construction presented by the comments because those canons should not be used to limit the definition of digital assets in a statute that includes an explicit and unambiguous definition of that term. Moreover, the referenced canons do not lead to the result asserted by the comments. The series-qualifier canon is not applicable here because not all the items in the list at section 6045(g)(3)(B) are consistent with the “financial instrument” language following the list. For example, section 6045(g)(3)(B)(iii) references any commodity, which under § 1.6045-1(a)(5) of the final regulations effective before the effective date of these final regulations 1 and these final regulations, specifically includes physical assets, such as lead, palm oil, rapeseed, tea, and tin, which are not financial instruments. The term commodity also includes any type of personal property that is traded through regulated futures contracts approved by the U.S. Commodity Futures Trading Commission (CFTC), which include live cattle, natural gas, and wheat. See § 1.6045-1(a)(5) of the pre-2024 final regulations. (These final regulations also add to the definition of commodity personal property that is traded through regulated futures contracts certified to the CFTC.) These assets also are not financial instruments. Consequently, the term “any other financial instrument” in section 6045(g)(3)(B)(v) should not be read to limit the meaning of the items in the list that came before it. For similar reasons, the rule of last antecedent also does not limit the meaning of digital assets. Prior to the changes made to section 6045 by the Infrastructure Act, the financial instruments language followed the commodities clause. As such, when enacted the financial instruments phrase could not have been intended to limit the item in the list (commodity) that immediately preceded it. Accordingly, the Treasury Department and the IRS understand the inclusion of other financial instruments as potential specified securities as a grant of authority to expand the list of specified securities, not as a provision limiting the meaning of the other asset types listed as specified securities. 1 Numerous Treasury decisions have been published under § 1.6045-1. See T.D. 7873, 48 FR 10302 (Mar. 11, 1983); T.D. 7880, 48 FR 12940 (Mar 28, 1983); T.D. 7932, 48 FR 57485 (Dec. 30, 1983); T.D. 7960, 49 FR 22281 (May 29, 1984); T.D. 8445, 57 FR 53031 (Nov. 6, 1992); T.D. 8452, 57 FR 58983 (Dec. 14, 1992); T.D. 8683, 61 FR 53058 (Oct. 10, 1996); T.D. 8734, 62 FR 53387 (Oct. 14, 1997); T.D. 8772, 63 FR 35517 (Jun. 30, 1998); T.D. 8804, 63 FR 72183 (Dec. 31, 1998); T.D. 8856, 64 FR 73408 (Dec. 30, 1999); T.D. 8881, 65 FR 32152 (May 22, 2000), corrected 66 FR 18187 (April 6, 2001); T.D. 8895, 65 FR 50405 (Aug. 18, 2000); T.D. 9010, 67 FR 48754 (Jul. 26, 2002); T.D. 9241, 71 FR 4002 (Jan. 24, 2006); T.D. 9504, 75 FR 64072 (Oct. 18, 2010); T.D. 9616, 78 FR 23116 (April 18, 2013); T.D. 9658, 79 FR 12726 (Mar. 6, 2014); T.D. 9713, 80 FR 13233 (Mar. 13, 2015); T.D. 9750, 81 FR 8149 (Feb. 18, 2016), corrected 81 FR 24702 (Apr. 27, 2016); T.D. 9774, 81 FR 44508 (Jul. 8, 2016); T.D. 9808, 82 FR 2046 (Jan. 6, 2017), corrected 82 FR 29719 (Jun. 30, 2017); T.D. 9984, 88 FR 87696 (Dec. 19, 2023). The regulations effective before the effective date of these final regulations will collectively be referred to as the pre-2024 final regulations. One comment suggested that the final regulations should limit the definition of a digital asset to exclude NFTs not used as payment or investment instruments to align the section 6045 reporting rules with other rules and regulatory frameworks. One comment recommended limiting the definition to only digital assets that can be converted to U.S. dollars, another fiat currency, or an asset with market value. Several comments suggested that including all NFTs in the definition of digital assets would be inconsistent with the intended guidance announced in Notice 2023-27, Treatment of Certain Nonfungible Tokens as Collectibles, 2023-15 I.R.B. 634 (April 10, 2023), which indicated that the IRS intends to determine whether an NFT constitutes a collectible under section 408(m) of the Code by using a look-through analysis that looks to the NFT's associated right or asset. Other comments recommended that the final regulations limit the definition of digital assets to exclude NFTs not used as payment or investment instruments to align the section 6045 reporting rules with the reporting rules for digital assets by foreign governments, such as the Council directive (EU) 2023/2266 of 17 October amending Directive 2011/16/EU on administrative cooperation in the field of taxation, which is popularly known as DAC8. Yet other comments recommended that the final regulations conform to guidelines from the Financial Action Task Force (FATF), an inter-governmental body that sets international standards that aim to prevent money laundering and terrorism financing. FATF guidelines distinguish between those NFTs that are used “as collectibles” from those used “as payment or investment instruments.” Finally, one comment urged the Treasury Department and the IRS to follow the Financial Accounting Standards Board (FASB) standards, which completely exclude NFTs from their definition of digital assets due to their nonfungible nature. FASB, Accounting Standards Update, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60), No. 2023-08, December 2023. These final regulations do not adopt these comments because they would make the definition of digital assets unduly restrictive. The goal behind information reporting by brokers is to close or significantly reduce the income tax gap from unreported income and to provide information that assists taxpayers. Information reporting generally can achieve that objective when brokers report to the IRS and to their customers the information necessary for customers to report their income. The considerations relevant to a U.S. third party information reporting regime are not the same as the considerations that are relevant to the definition of collectibles under section 408(m), which applies in order to determine assets that have adverse tax consequences if acquired by certain retirement accounts and that are subject to special tax rates. While non-tax policies relating to combating money laundering and terrorism financing or guidelines for generally accepted accounting standards may have some relevance, they are not determinative for Federal tax purposes under the Code. Finally, the Treasury Department and the IRS understand that DAC8 is intended to apply in the same manner as a closely related OECD standard, discussed in the next paragraph. Moreover, NFTs that are actively traded on trading platforms appear to be used for investment purposes in addition to any other purposes. Publicly available information reports that trading in some NFT collections has been in the billions of dollars over time and that 24-hour trading volume in NFTs in 2024 has ranged from $60-410 million. This trading activity suggests that at least some NFT collections have sufficient volume and liquidity to facilitate their use as investments rather than as traditional collectibles. Another comment suggested that the final regulations should limit the definition of digital assets to exclude NFTs to align the section 6045 definition of digital assets with the definition of “Relevant Crypto-Asset” under the Crypto-Asset Reporting Framework (CARF), a framework for the automatic exchange of information between countries on crypto-assets developed by the Organisation for Economic Co-operation and Development (OECD) and to which the United States is a party. As discussed in Part I.G.2. of this Summary of Comments and Explanation of Revisions, once the United States implements the CARF, U.S. digital asset brokers will need to file information returns under both these final regulations with respect to their U.S. customers, and, under separate final regulations implementing the CARF reporting requirements, with respect to their non-U.S. customers that are resident in jurisdictions implementing the CARF. These final regulations generally attempt to align definitions with those used in the CARF to the extent possible. In this case, however, the final regulations do not adopt this comment because the CARF's definition of Relevant Crypto-Assets is already consistent with a definition of digital assets that includes NFTs. As noted in paragraph 12 of the CARF's Commentary on Section IV: Defined terms, although NFTs are often marketed as collectibles, this function does not prevent an NFT from being able to be used for payment or investment purposes. “NFTs that are traded on a marketplace can be used for payment or investment purposes and are therefore to be considered Relevant Crypto-Assets.” See Part I.G.1. of this Summary of Comments and Explanation of Revisions, for a discussion of the United States' implementation of the CARF. Notwithstanding that the final regulations include NFTs in the definition of digital assets under section 6045(g)(3)(D), the Treasury Department and the IRS have determined that, pursuant to discretion under section 6045(a), it is appropriate to provide an alternative reporting method for certain types of NFTs to alleviate burdensome reporting. As discussed in Part I.D.3. of this Summary of Comments and Explanation of Revisions, the final regulations have added a new optional alternative reporting method for sales of certain NFTs to allow for aggregate reporting instead of transactional reporting, with a de minimis annual threshold below which no reporting is required. The Treasury Department and the IRS anticipate that the de minimis annual threshold will eliminate reporting on many low-value NFT transactions that are less likely to be used for payment or investment purposes. 3. Closed Loop Assets The preamble to the proposed regulations stated that the definition of a digital asset was not intended to apply to the types of virtual assets that exist only in a closed system and cannot be sold or exchanged outside that system for fiat currency. The preamble also stated that the definition of digital assets was not intended to cover uses of distributed ledger technology for ordinary commercial purposes, such as tracking inventory or processing orders for purchase and sale transactions, that do not create transferable assets and are therefore not likely to give rise to sales as defined for purposes of the regulations. Several comments requested that the final regulations be revised to provide an exception for closed loop uses in the regulatory text and to add examples illustrating that these types of virtual assets are not included in the definition of a digital asset. Another comment recommended that the final regulations expressly limit the definition of digital assets to only those digital assets that function as currency as described in Notice 2014-21 or that have the capability of being purchased, sold, or exchanged. The Treasury Department and the IRS agree that the text of the final regulations should make clear that transactions involving digital assets in the above-described closed loop environments should not be subject to reporting. The final regulations do not limit the definition of a digital asset as requested to accommodate these comments, however, because it is not clear how the definition could narrowly carve out only these closed loop digital assets without also carving out other assets for which reporting is appropriate. Instead, to address these comments, the final regulations add transactions involving these closed loop digital assets to the list of excepted sales that are not subject to reporting under § 1.6045-1(c)(3)(ii). See Part I.C. of this Summary of Comments and Explanation of Revisions, for a discussion of the closed loop transactions added to the list of excepted sales at § 1.6045-1(c)(3)(ii). 4. Coordination With Reporting Rules for Securities, Commodities, and Real Estate The preamble to the proposed regulations noted that the Treasury Department and the IRS are aware that many provisions of the Code incorporate references to the terms security or commodity, and that questions exist as to whether, and if so, when, a digital asset may be treated as a security or a commodity for purposes of those Code sections. Apart from the rules under sections 1001 and 1012 discussed in Part II. of this Summary of Comments and Explanation of Revisions, these final regulations are information reporting regulations, and are therefore not the appropriate vehicle for answering those questions. Accordingly, the treatment of an asset as reportable as a security, commodity, digital asset, or otherwise in these rules applies for purposes of sections 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722 of the Code, and for certain purposes of sections 1001 and 1012, and should not be construed to apply for any other purpose of the Code, including but not limited to determining whether a digital asset should be classified as a security, commodity, option, securities futures contract, regulated futures contract, or forward contract. One comment expressed concern that promulgation of final regulations requiring brokers to report on digital asset transactions could be cited by other government agencies to support treating digital assets as securities for purpose of the securities statutes, rules, and regulations. This comment requested that these regulations not take any position on whether digital assets are securities for these other purposes. The Treasury Department and the IRS agree with this comment. The potential characterization of digital assets as securities, commodities, or derivatives for purposes of any other legal regime, such as the Federal securities laws and the Commodity Exchange Act, is outside the scope of these final regulations. a. Special Coordination Rules for Dual Classification Assets Because § 1.6045-1(a)(9) of the pre-2024 final regulations (redesignated in the proposed and final regulations as § 1.6045-1(a)(9)(i)) require reporting with respect to sales for cash of securities as defined in § 1.6045-1(a)(3) and certain commodities as defined in § 1.6045-1(a)(5), the proposed regulations included coordination rules to provide certainty to brokers with respect to whether a particular transaction involving securities or certain commodities is reportable as a securities or commodities sale under proposed § 1.6045-1(a)(9)(i) (sale of securities or commodities) or as a digital assets sale under proposed § 1.6045-1(a)(9)(ii) (sale of digital assets) and to avoid duplicate reporting obligations. Specifically, for transactions involving the sale of a digital asset that also constitutes the sale of a commodity or security (other than options that constitute contracts covered by section 1256(b) of the Code) (dual classification assets), the proposed regulations provided that the broker would report the sale only as a sale of a digital asset and not as a sale of a security or commodity. Numerous comments raised the concern that requiring brokers that have been historically reporting sales of securities and commodities on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions to report these transactions as sales of digital assets on Form 1099-DA, Digital Asset Proceeds From Broker Transactions would force these brokers to overhaul their existing reporting systems and potentially cause confusion for taxpayers who are not even aware that their securities and commodities have been tokenized. To address this concern, some comments recommended that the digital asset definition be revised to exclude some or all securities and commodities. Other comments recommended revising the coordination rule so that the reporting rules for sales of securities and commodities apply to digital assets that are also securities or commodities. One comment suggested applying the reporting rules for sales of securities and commodities to any digital asset that represents a fund subject to the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. (1940 Act Fund), or another highly regulated product outside of 1940 Act Funds. The final regulations do not adopt the comments recommending that sales of dual classification assets generally be reported as sales of securities or commodities. One of the benefits of treating dual classification assets as digital assets is that it avoids forcing brokers to make determinations about whether the dual classification asset is properly classified as a security or a commodity under current law. For example, a rule that treats all dual classification assets as securities and commodities would require brokers to determine whether a digital asset that represents a governance token is properly classified as a security under final § 1.6045-1(a)(3) to determine how to report sales of that digital asset. Moreover, such a rule would affect reporting on digital assets commonly referred to as cryptocurrencies that fit within the definition of a commodity under final § 1.6045-1(a)(5)(i) because the trading of regulated futures contracts in that digital asset has been certified to the CFTC. It would be inappropriate for brokers to report these assets as sales of commodities rather than as sales of digital assets because, as is discussed in Part I.F. of this Summary of Comments and Explanation of Revisions, it is important that brokers report basis for these sales. Other comments offered recommendations designed to limit reporting of dual classification assets under the rules governing sales of securities and commodities. For example, one comment recommended that the reporting rules for sales of securities and commodities apply to any digital asset representing readily ascertainable securities or commodities and not purely blockchain-based digital assets, such as cryptocurrencies or governance tokens, for which treatment as securities or commodities may be uncertain. Another comment recommended that the reporting rules for sales of securities and commodities apply to any digital asset that represents a non-digital asset security or commodity otherwise reportable on Form 1099-B under the reporting rules for sales of securities and commodities or is otherwise backed by collateral that represents such non-digital asset. One comment suggested applying the reporting rules for sales of securities and commodities to any digital asset, the blockchain ledger entry for which solely serves as a record of legal ownership of an underlying security or commodity that is not itself a digital asset. Another comment recommended applying the reporting rules for sales of securities and commodities to dual classification assets that are digitally native to a blockchain that is used simply to record ownership changes. Recognizing that identifying digital assets that represent securities and commodities that are not themselves digital assets could be burdensome, one comment recommended that when information is not available for brokers to make these determinations about dual classification assets, the broker should report the transaction as a sale of a digital asset. Another comment requested that the final regulations include a safe harbor rule providing that no penalties will be imposed on a broker who consistently and accurately reports the sale of dual classification assets under either the reporting rules for sales of securities and commodities (on Form 1099-B) or for sales of digital assets (on Form 1099-DA) based on the broker's reasonable determination that the chosen reporting method is correct because it may be administratively difficult for brokers to examine every dual classification asset to make a determination based on the nature of the asset. Numerous comments also focused on the circumstances that may give rise to securities and commodities being treated as digital assets. For example, one comment indicated that the proposed coordination rule would inadvertently capture transactions involving securities and commodities for which brokers use distributed ledger technology, shared ledgers, or similar technology merely to facilitate the processing, clearing, or settlement of orders between well-regulated brokers and other financial institutions. To address this concern, several comments recommended that the reporting rules for sales of securities and commodities apply only to digital assets that are more appropriately categorized within a traditional asset class (for example, as a security with an effective registration statement filed under the Securities Act of 1933) and that are issued, stored, or transferred through a distributed ledger that is a regulated clearing agency system in compliance with all applicable Federal and State securities laws. Another comment recommended addressing this problem by making the information required to be reported for digital asset sales (on Form 1099-DA) not more burdensome than that for securities and commodities (on Form 1099-B). Another comment requested that, if brokers are required to report these dual classification assets on the Form 1099-DA, the final regulations allow brokers to optionally make appropriate basis adjustments for dual classification assets that are securities. This comment also recommended revising the rules in § 1.6045-1(d)(2)(iv)(B) of the pre-2024 final regulations to permit (but not require) brokers to take into account information about a covered security other than what is furnished on a transfer statement or issuer statement and to provide penalty relief under certain circumstances to brokers that take such information into account. Finally, one comment recommended providing written clarity that even though wash sale adjustment rules do not apply to digital assets, they still apply to tokenized securities such as, for example, 1940 Act Funds. The Treasury Department and the IRS have concluded that it is generally not appropriate to permit optional approaches to reporting dual classification assets because the underlying reporting requirements for securities and commodities are significantly different from those for digital assets due, in large part, to industry differences and the timing of when the reporting rules were first implemented. Although the proposed requirement for brokers to report transaction identification numbers and digital asset addresses has been removed in these final regulations ( see Part I.D. of this Summary of Comments and Explanation of Revisions), there are several remaining differences in the basis reporting requirements for securities and commodities as compared to digital assets. For example, unlike brokers effecting sales of digital assets, brokers effecting sales of commodities are not required to report the customer's adjusted basis for those commodities because commodities are not included in the definition of covered securities. Additionally, brokers effecting sales of stock, other than stock for which the average basis method is available under § 1.1012-1(e), must generally report the adjusted basis of these shares to the extent they were acquired for cash in an account on or after January 1, 2011, and generally must report the adjusted basis on shares of stock for which the average basis method is available to the extent those shares were acquired for cash in an account on or after January 1, 2012. These brokers of stock that are covered securities under final § 1.6045-1(a)(15)(i)(A) or (B) must also send transfer statements to other brokers under section 6045A when their customers move that stock to another broker. In contrast, as discussed in Part I.F. of this Summary of Comments and Explanation of Revisions, under the final regulations, brokers effecting sales of digital assets that are covered securities under final § 1.6045-1(a)(15)(i)(J) are required to report the adjusted basis of those digital assets only if they were acquired for cash, stored-value cards, different digital assets, or certain other property or services in the customer's account by such brokers providing custodial services for such digital assets on or after January 1, 2026. Additionally, these brokers are not currently required to send transfer statements to other brokers under section 6045A when their customers transfer digital assets that are specified securities to another broker. Indeed, the details of how section 6045A reporting will apply to brokers of digital assets will not be addressed until a future notice of proposed rulemaking. Accordingly, whether the sale of a dual classification asset is treated as a sale of a security or commodity under final § 1.6045-1(a)(9)(i) or as a sale of a digital asset under final § 1.6045-1(a)(9)(ii) has consequences beyond the particular form that the broker must use when filing returns with respect to those sales. Given these different basis reporting requirements and transfer statement obligations under section 6045A, the Treasury Department and the IRS have determined that, except in the case of certain exceptions described in the next several paragraphs, it is not appropriate to treat dual classification assets as subject only to the pre-2024 final regulations (that is, required to report the transactions under final § 1.6045-1(d)(2)(i)(A) as sales described in final § 1.6045-1(a)(9)(i)) for securities and commodities if those assets can be traded on public blockchains and custodied by customers. Accordingly, final § 1.6045-1(c)(8)(i) provides that brokers must generally treat sales of dual classification assets only as a sale of a digital asset under final § 1.6045-1(a)(9)(ii) and only as a sale of a specified security that is a digital asset under final § 1.6045-1(a)(14)(v) or (vi). As such, the broker must apply the digital asset reporting rules for the information required to be reported for such sale and file the return on Form 1099-DA. Further, as discussed in Part IV. of this Summary of Comments and Explanation of Revisions, brokers are not required to send transfer statements under final § 1.6045A-1(a)(1)(vi) with respect to the transfer of these dual classification assets that are reportable as digital assets. Additionally, final § 1.6045-1(d)(2)(iv)(B) does not permit brokers to take into account any other information, including information received from a customer or third party, with respect to covered securities that are digital assets, although brokers may take customer-provided acquisition information into account for purposes of identifying which units are sold, disposed of, or transferred under final § 1.6045-1(d)(2)(ii)(A). However, to accommodate the comments relating to the application of the various basis adjustment rules, including the wash sale adjustment rules, and other important information applicable to dual classification assets that represent an interest in a traditional security, final § 1.6045-1(c)(8)(i)(D) requires the broker to report certain additional information with respect to any dual classification asset that is a tokenized security. For this purpose, any dual classification asset that provides the holder with an interest in another asset that is a security under final § 1.6045-1(a)(3), other than a security that is also a digital asset, is a tokenized security. This description is intended to apply when the digital asset represents an interest in a separate, traditional, financial asset that is reportable as a security. For example, a digital asset that represents an ownership interest in a traditional share of stock in a 1940 Act Fund or another corporation would be a tokenized security. A dual classification asset that is an interest in a trust or partnership that holds assets that are securities under final § 1.6045-1(a)(3), other than securities that are also digital assets, also would be a tokenized security. In addition, an asset the offer and sale of which was registered with the U.S. Securities and Exchange Commission (SEC) (other than an asset treated as a security for securities law purposes solely as an investment contract) is also treated as a tokenized security. This part of the description of tokenized securities is intended to refer to a digital asset that is also a security within the meaning of final § 1.6045-1(a)(3) but does not represent an interest in a separate financial asset. A bond that exists solely in tokenized form would be an example of such a tokenized security, if the bond was issued pursuant to a registration statement approved by the SEC. The reference to whether an asset's offer and sale was registered with the SEC, other than solely as an investment contract, is intended to limit the scope of the term tokenized security to digital forms of traditional financial assets, and not to capture assets native to the digital asset ecosystem. The reference to registration of an asset's offer and sale with the SEC is not intended to imply that such assets are necessarily securities for Federal income tax purposes or for purposes of final § 1.6045-1(a)(3). Additionally, no inference is intended as to how the Federal securities laws apply to sales of digital assets within the meaning of final § 1.6045-1(a)(19), as the interpretation or applicability of those laws are outside the scope of these final regulations. For the avoidance of doubt, final § 1.6045-1(c)(8)(i)(D) provides that a qualifying stablecoin is not treated as a tokenized security for purposes of these special rules. For sales of tokenized securities, final § 1.6045-1(c)(8)(i)(D) provides that the broker must report additional information required by final § 1.6045-1(d)(2)(i)(B)( 6 ), generally relating to gross proceeds. Final § 1.6045-1(d)(2)(i)(B)( 6 ) requires that the broker report the Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold, any information related to options required under final § 1.6045-1(m), any information related to debt instruments under final § 1.6045-1(n), and any other information required by the form or instructions. In addition, final § 1.6045-1(c)(8)(i)(D) provides that the broker must report additional information required by final § 1.6045-1(d)(2)(i)(D)( 4 ) (relating to reporting for basis and holding period) for sales of tokenized securities, except that the broker is not required to report such information for a tokenized security that is an interest in another asset that is a security under final § 1.6045-1(a)(3), other than a security that is also a digital asset, unless the tokenized security is also a specified security under final § 1.6045-1(a)(14)(i), (ii), (iii), or (iv). Accordingly, because a trust or partnership interest is not a specified security within the meaning of those paragraphs, a broker is not required to report basis information with respect to a tokenized security that is an interest in a trust or partnership that holds assets that are securities under final § 1.6045-1(a)(3), other than securities that are also digital assets. Final § 1.6045-1(d)(2)(i)(D)( 4 ) provides specific rules for reporting basis and related information for tokenized securities. It cross-references the wash sale rules in final § 1.6045-1(d)(6)(iii)(A)( 2 ) and (d)(7)(ii)(A)( 2 ), which rules have also been revised to specifically apply to tokenized securities. These wash sale reporting rules apply only to assets treated as stock or securities within the meaning of section 1091 of the Code. They apply regardless of whether the taxpayer buys or sells a tokenized security. For example, if a taxpayer sells a tokenized security (or the underlying traditional stock or security) at a loss and buys the same tokenized security (or the underlying traditional stock or security) within the 30-day period before or after the sale, and the other conditions to the wash sale reporting rules are satisfied, the broker would be required to take the wash sale reporting rules into account in reporting the loss and the basis of the newly acquired asset. Final § 1.6045-1(d)(2)(i)(D)( 4 ) also cross-references the average basis rules in final § 1.6045-1(d)(6)(v), which have been revised to apply to any stock that is also a tokenized security, and the rules related to options and debt instruments in final § 1.6045-1(m) and (n). Accordingly, the information reportable for tokenized securities on Form 1099-DA should be similar to the information reportable for traditional securities on Form 1099-B, except that under final § 1.6045A-1(a)(1)(vi), no transfer statement is required with respect to the transfer of tokenized securities, though penalty relief is provided if the broker voluntarily chooses to provide a transfer statement with respect to tokenized securities. Additionally, until the Treasury Department and the IRS determine which third party information is sufficiently reliable, final § 1.6045-1(d)(2)(iv)(B) provides that brokers are not permitted to take into account information about covered securities that are digital assets other than what is furnished on a transfer statement or issuer statement, although brokers may take customer-provided acquisition information into account for purposes of identifying which units are sold, disposed of, or transferred under final § 1.6045-1(d)(2)(ii)(A). The Treasury Department and the IRS intend to provide additional guidance on how to report tokenized securities in the instructions to Form 1099-DA. Final § 1.6045-1(d)(2)(i)(D)( 3 ) requires that, for purposes of determining the basis and holding period information required in final § 1.6045-1(d)(2)(i)(D)( 1 ) and ( 2 ), the rules related to options in final § 1.6045-1(m) apply, both with respect to the option and also with respect to any asset delivered in settlement of an option. Accordingly, an option that is itself a digital asset, on an asset that is also a digital asset, is subject to the same reporting rules as other options. Additionally, in response to the comments described above, the Treasury Department and the IRS have determined that the final regulations should include three exceptions to the rules requiring that dual classification assets be reported as digital assets, for the reasons described herein. Those exceptions apply to dual classification assets cleared or settled on a limited-access regulated network, to dual classification assets that are section 1256 contracts, and to dual classification assets that are shares in money market funds. First, the Treasury Department and the IRS agree that it is not appropriate to disrupt reporting on dual classification assets that are treated as digital assets solely because distributed ledger technology is used to facilitate the processing, clearing, or settlement of orders between regulated financial entities. Accordingly, in response to the comments submitted, final § 1.6045-1(c)(8)(iii) adds a new exception to the coordination rule for any sale of a dual classification asset that is a digital asset solely because the sale of such asset is cleared or settled on a limited-access regulated network. Under this exception, such a sale will be treated as a sale described in final § 1.6045-1(a)(9)(i) (reportable on the Form 1099-B) and not as a digital asset described in final § 1.6045-1(a)(9)(ii) (reportable on the Form 1099-DA). Additionally, such a sale must be treated as a sale of a specified security under final § 1.6045-1(a)(14)(i), (ii), (iii), or (iv) to the extent applicable, and not as a sale of a specified security that is a digital asset under final § 1.6045-1(a)(14)(v) or (vi). For all other purposes of this section including transfers, a dual classification asset that is a digital asset solely because it is cleared or settled on a limited-access regulated network is not treated as a digital asset and is not reportable as a digital asset. Accordingly, depending on the type of the asset, the asset may be a covered security under final § 1.6045-1(a)(15)(i)(A) through (G) (if purchased in an account on or after January 1, 2011 through 2016, as applicable) rather than a digital asset covered security under final § 1.6045-1(a)(15)(i)(H), (J) or (K) (if purchased in an account on or after January 1, 2026). Thus, brokers are required under section 6045A to provide transfer statements with respect to transfers of these dual classification assets, and the rules set forth in final § 1.6045-1(d)(2)(iv)(A) and (B), regarding the broker's obligation to take into account the information reported on those statements and certain other customer provided information also apply. Final § 1.6045-1(c)(8)(iii)(B) sets forth three different types of limited-access regulated network for which this rule applies. The first type of limited-access network is described as a cryptographically secured distributed ledger or network of interoperable distributed ledgers that provide clearance or settlement services and provide access only to a group of persons made up of registered dealers in securities or commodities, banks and similar financial institutions, common trust funds, or futures commission merchants. Final § 1.6045-1(c)(8)(iii)(B)( 1 )( i ). As used in this rule, an interoperable distributed ledger means a group of distributed ledgers that permit digital assets to travel from one permissioned distributed ledger (for example, at one securities broker) to another permissioned distributed ledger (at another securities broker). In such cases, while the clearance or settlement of the dual classification asset is on a network of permissioned distributed ledgers, it is anticipated that the asset will remain in a traditional securities or commodities account from the perspective of an investor in the asset and so can readily be reported as a security or commodity under existing rules. The second type of limited-access network is also described as a cryptographically secured distributed ledger or network of interoperable distributed ledgers that provide clearance or settlement services, but this type of limited-access network is distinguishable from the first type because it is provided by an entity that has registered with the SEC as a clearing agency, or has received an exemption order from the SEC as a clearing agency, under section 17A of the Securities Exchange Act of 1934. Additionally, the entity must provide access to the network exclusively to network participants, who are not required to be registered dealers in securities or commodities, banks and similar financial institutions, common trust funds, or futures commission merchants, although it is anticipated that participants typically will be securities brokers and other regulated financial institutions. Final § 1.6045-1(c)(8)(iii)(B)( 1 )( ii ). For example, dual classification assets cleared and settled through a central clearing agency that clears and settles high volumes of equity and debt transactions on a daily basis through automated systems for participants that are financial market participants may be reportable as securities under this exception if the clearance or settlement takes place on a cryptographically secured distributed ledger or network of interoperable distributed ledgers. Finally, the third type of limited-access regulated network is a cryptographically secured distributed ledger controlled by a single person that is a registered dealer in securities or commodities, a futures commission merchant, a bank or similar financial institution, a real estate investment trust, a common trust fund, or a 1940 Act Fund, that permits the ledger to be used solely by itself and its affiliates (and not to any customers or investors) to clear or settle sales of assets. Final § 1.6045-1(c)(8)(iii)(B)( 2 ). As with the other types of limited-access regulated network, it is anticipated that from an investor perspective the assets will remain in a traditional securities or commodities account. This exception in final § 1.6045-1(c)(8)(iii) is limited to dual classification assets that are digital assets solely because the sale of such dual classification asset is cleared or settled on a limited-access regulated network. Accordingly, a digital asset commonly referred to as a cryptocurrency that fits within the definition of commodity under final § 1.6045-1(a)(5)(i) because the trading of regulated futures contracts in that digital asset have been approved by or certified to the CFTC will not be eligible for this rule because the cryptocurrency meets the definition of a digital asset for reasons other than because it is cleared or settled on a limited-access regulated network. Given the requirement that the sole reason that the security or commodity is a digital asset is that transactions involving those assets are cleared or settled on a limited-access regulated network, it is anticipated that brokers will have sufficient information to be able to determine how to report the assets in question under these revised rules. Accordingly, the request for a safe harbor that would allow brokers to avoid penalties if they consistently and accurately report sales of dual classification assets under either final § 1.6045-1(d)(2)(i)(A) (on Form 1099-B) or final § 1.6045-1(d)(2)(i)(B) and (D) as a digital asset (on Form 1099-DA) is not adopted as it is unnecessary. The second exception to the general dual classification asset coordination rule in final § 1.6045-1(c)(8)(i) treating such assets as digital assets was included in the proposed regulations. Proposed § 1.6045-1(c)(8)(iii) provided that digital asset options or other contracts that are also section 1256 contracts should be reported under the rules set forth in § 1.6045-1(c)(5) of the pre-2024 final regulations for contracts that are section 1256 contracts and not under the proposed rules for digital assets. The final regulations retain this exception and redesignate it as final § 1.6045-1(c)(8)(ii). Accordingly, under this rule, for the disposition of a contract that is a section 1256 contract, reporting is required under § 1.6045-1(c)(5) of the pre-2024 final regulations regardless of whether the contract disposed of is a non-digital asset contract or a digital asset contract or whether the contract was issued with respect to digital asset or non-digital asset underlying property. One comment raised a concern that the proposed rule did not make it clear that information reporting for a section 1256 contract subject to information reporting under section 6045 should be reported on a Form 1099-B regardless of whether the contract is or is not a digital asset. The final regulations respond to this concern by providing additional clarification to the text of § 1.6045-1(c)(5)(i) of the pre-2024 final regulations to make it clear that reporting for all section 1256 contracts should be on Form 1099-B. Accordingly, information reporting for section 1256 contracts in digital asset form will be on Form 1099-B and not on Form 1099-DA. The third exception to the general dual classification asset coordination rule in final § 1.6045-1(c)(8)(i) treating such assets as digital assets applies to interests in money market funds. Final § 1.6045-1(c)(8)(iv) provides that brokers must treat sales of any dual classification asset that is a share in a regulated investment company that is permitted to hold itself out to investors as a money market fund under Rule 2a-7 under the Investment Company Act of 1940 (17 CFR 270.2a-7) only as a sale under final § 1.6045-1(a)(9)(i) and not as a digital asset sale under final § 1.6045-1(a)(9)(ii). Accordingly, under § 1.6045-1(c)(3)(vi) of the pre-2024 final regulations, no return of information is required for these shares. This exception is included in the final regulations because the reasons for not requiring reporting of money market shares in traditional form are also applicable for money market shares in digital asset form. Notably, in either case, the disposition of money market shares by non-exempt recipients like individuals generally will give rise to no, or de minimis, gain or loss. Moreover, money market funds are a special type of regulated investment company that provide a highly regulated product widely used as a surrogate for cash. In response to a number of comments, the Treasury Department and the IRS considered whether an exception should apply more broadly to tokenized shares of other 1940 Act Funds. Based on publicly available information, the Treasury Department and the IRS are aware that some 1940 Act Funds permit their shares to be bought and sold in secondary market transactions on a cryptographically secured distributed ledger on a direct peer-to-peer basis—that is, an investor may transfer the shares directly to another investor—and that those shares may be purchased in exchange for other digital assets. The Treasury Department and the IRS have determined that these transactions go beyond the scope of the pre-2024 final regulations, which are applicable to sales of securities for cash, and that such assets therefore should be reported as digital assets. However, as described in the discussion of tokenized securities above, the information reportable by brokers to investors with respect to such shares of 1940 Act Funds, including the availability of average basis reporting, generally should not change, although the information will be reported on Form 1099-DA rather than Form 1099-B. Finally, the proposed regulations would have included one additional exception to the general coordination rule that would have treated dual classification assets as digital assets. Specifically, proposed § 1.6045-1(c)(8)(ii) provided that a digital asset that also constitutes reportable real estate would be treated as reportable real estate to ensure that real estate reporting persons would only report transactions involving these sales as sales that are subject to reporting under § 1.6045-4(a) of the pre-2024 final regulations and not as sales of digital assets. One comment noted that currently, there is no State law that permits legal title to real estate to be held via a digital asset token. Instead, this comment explained that to transfer real estate using digital assets, the digital asset token must hold an interest in a legal entity (typically either a limited liability company (LLC) or a partnership) that in turn owns the real estate. Thus, according to this comment, each token holder owns an ownership interest in an entity, not a claim of ownership to real estate. This comment also noted that, even if a legal entity was not required to be formed to hold title to real estate, these digital asset interests could potentially constitute an unincorporated association of real estate co-owners meeting the definition of a partnership under § 301.7701-3(b)(1)(i). Either way, this comment asserted, reporting on the sale of these interests is not appropriate as a sale of real estate under § 1.6045-4. No comments received suggested that blockchain deeds do exist. The Treasury Department and the IRS are not aware of any current or proposed State law that authorizes legal title to real estate to be held in a digital asset token. Therefore, to address this comment, the final regulations remove this coordination rule for digital assets that constitute reportable real estate. Accordingly, brokers should report on sales of these interests as sales of digital assets under § 1.6045-1(a)(9)(ii) (unless the sales are eligible for the special rule under § 1.6045-1(c)(8)(iii) for securities and commodities cleared or settled on a limited-access regulated network) and not as sales of real estate under § 1.6045-4. The Treasury Department and the IRS will continue to track developments in this area for potential future guidance. b. Other Coordination Rule Issues The proposed regulations characterized assets as either digital assets or securities based on the nature of the rights held by the customer. Example 27 in proposed § 1.6045-1(b)(27) demonstrated that rule as applied to a fund formed to invest in digital assets, in which the units of the fund were not recorded using cryptographically secured distributed ledger technology. The Example concluded that investments in the units of this fund are not digital assets because transactions involving these fund units are not secured using cryptography and are not digitally recorded on a ledger, such as a blockchain. One comment requested that the final regulations clarify that if a unit in a trust is not itself traded on a distributed ledger, the unit in the trust should not be treated as a digital asset merely because the assets held by the trust are digital assets. Generally, the holder of an interest in a trust described in § 301.7701-4(c) (a fixed investment trust or FIT) is treated as directly holding its pro rata share of each asset held by the FIT. This comment raised the concern that this normal look through treatment could require a broker to report transactions in FIT units as digital assets on a Form 1099-DA even if the FIT units are not themselves digital assets. The final regulations amend the language of proposed § 1.6045-1(b)(27) (redesignated in these final regulations as Example 20 in § 1.6045-1(b)(20)) to clarify that for purposes of section 6045, if a FIT unit is not itself tradable on a cryptographically secured distributed ledger, the broker is not required to look through to the FIT's assets and should report the sale of a FIT unit under § 1.6045-1(d)(2)(i)(A) on Form 1099-B. The Example also provides that this answer would be the same if the fund is organized as a C corporation or partnership. The comment also requested expansion of § 1.6045-1(d)(9) of the pre-2024 final regulations, which eliminates the need for widely held fixed investment trusts (WHFITs) to provide duplicate reporting for sales of securities, so that the rule would also apply to WHFIT sales of digital assets. The Treasury Department and the IRS agree that this suggested change is appropriate and have revised the rule in final § 1.6045-1(d)(9) accordingly. As a result, if a WHFIT sells a digital asset, and interests in the WHFIT are held through a securities broker, the WHFIT would report the sale information to the broker pursuant to § 1.671-5 and the broker would in turn send a Form 1099-DA (the appropriate Form 1099) to the IRS and a copy thereof to any trust interest holder that is not an exempt recipient. Under the proposed regulations, a notional principal contract (NPC) that is executed in digital asset form is a digital asset. See proposed § 1.6045-1(a)(19). One comment noted that there is no broker reporting under the pre-2024 final regulations under section 6045 for an NPC that is not a digital asset. As a result, the comment recommended that an NPC that is a digital asset be excluded from reporting under section 6045. After consideration of this recommendation, the Treasury Department and the IRS concluded that certain payments related to NPCs in digital asset form should be reportable as digital asset transactions and therefore decline to adopt the recommendation in the final regulations. However, taking into account that payments on NPCs are generally not reportable under section 6045 under the pre-2024 final regulations, the Treasury Department and the IRS intend to continue to study the issues related to NPC payments. Therefore, Notice 2024-57, which is being issued contemporaneously with these final regulations that provides that brokers are not required to report on certain NPCs in digital form, and that the IRS will not impose penalties under section 6721 or section 6722 for failure to file correct information returns or failure to furnish correct payee statements with respect to these transactions until further guidance is issued. See Part I.C.2. of this Summary of Comments and Explanation of Revisions for a further discussion of Notice 2024-57. One comment requested that the final regulations provide examples to address the proper partnership reporting obligations with respect to digital asset interests that constitute an unincorporated association meeting the definition of a partnership. The final regulations do not adopt this comment as it is outside the scope of these regulations. Another comment requested that the final regulations exempt sales of tokenized partnerships investing in real estate from reporting under section 6045 altogether to avoid duplicative reporting because these partnerships are already subject to reporting such sales under the partnership rules on Form 1065, U.S. Return of Partnership Income, Schedule K-1, and because accountants and tax advisors that file Schedules K-1 have more accurate information than brokers regarding the proceeds and basis information partners need for preparing their Federal income tax returns. The Treasury Department and the IRS have concluded that partnership interests that invest in real estate should not be treated any differently than partnership interests that invest in other assets. Accordingly, no exception from reporting is made for digital assets representing partnership interests that invest in real estate. B. Definition of Brokers Required to Report 1. Custodial Digital Asset Brokers and Non-Custodial Digital Asset Brokers a. Custodial Industry Participants Prior to the enactment of the Infrastructure Act, section 6045(c)(1) defined a broker to include a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services. The pre-2024 final regulations under section 6045 applied the “middleman” portion of this definition to treat as a broker effecting a sale a person that as part of the ordinary course of a trade or business acts as either (1) an agent with respect to a sale, if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale, or (2) as a principal in the sale. See § 1.6045-1(a)(1), and (a)(10)(i) and (ii) of the pre-2024 final regulations (redesignated in these final regs as final § 1.6045-1(a)(1) and (a)(10)(i)(A) and (C), respectively). Under these rules, certain digital asset industry participants that take possession of a customer's digital assets, such as operators of custodial digital asset trading platforms and certain digital asset hosted wallet providers, as well as persons that interact as principals and counterparties to transactions with their customers, such as owners of digital asset kiosks and certain issuers of digital assets who regularly offer to redeem those digital assets, would also generally be considered brokers with respect to digital asset sales. These industry participants that act as principals and counterparties or as agents to effect digital asset transactions on behalf of their customers (custodial industry participants) are generally financial institutions, such as money services businesses (MSBs), under the Bank Secrecy Act (31 U.S.C. 5311 et seq. ). Fin-2019-G001, “Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currencies,” May 9, 2019 (2019 FinCEN Guidance). Anti-money laundering (AML) obligations apply to financial institutions, such as MSBs as defined by the Financial Crimes Enforcement Network (FinCEN), futures commission merchants and introducing brokers obligated to register with the CFTC, and broker-dealers and mutual funds obligated to register with the SEC. “Leaders of CFTC, FinCEN, and SEC Issue Joint Statement on Activities Involving Digital Assets,” October 11, 2019. For example, MSBs are required under regulations issued by the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department to develop, implement, and maintain an effective AML program that is reasonably designed to prevent the MSB from being used to facilitate the financing of terrorist activities and money laundering. See 31 CFR part 1022.210(a). AML programs for MSBs generally include, among other things, policies, procedures, and internal controls reasonably designed to assure compliance with FinCEN's regulations, as well as a requirement to verify customer-related information. MSBs are also required to register with, and make certain reports to FinCEN, and maintain certain records about transmittals of funds. See 31 CFR part 1022; 2019 FinCEN Guidance. Accordingly, operators of custodial digital asset trading platforms, digital asset hosted wallet providers, and digital asset kiosks have information about their customers and, in many cases, have already reported digital assets sales by these customers under either section 6045 or 6050W. Consistent with the statutory and regulatory definitions of broker that existed prior to the Infrastructure Act as well as amended section 6045, the final regulations apply to operators of custodial digital asset trading platforms, digital asset hosted wallet providers, and digital asset kiosks. Numerous comments agreed that custodial digital asset trading platforms were appropriately treated as brokers under the proposed regulations, and several comments agreed that digital asset hosted wallet providers should also be treated as brokers. One comment requested that the final regulations exclude from the definition of a broker digital asset hosted wallet providers that do not have direct access to the information necessary to know the nature of the transactions processed or the identities of the parties to the transaction. The Treasury Department and the IRS do not agree that a specific exclusion from the definition of broker for digital asset hosted wallet providers is necessary or appropriate. The pre-2024 final regulations defined broker generally to mean any person that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. The definition of effect under the pre-2024 final regulations treats agents as effecting sales only if the nature of the agency is such that the agent ordinarily would know the gross proceeds of the sale. Accordingly, a digital asset hosted wallet provider that acts as an agent for its customer would be subject to reporting under section 6045 with respect to its customer's sale of digital assets only to the extent that the digital asset hosted wallet provider ordinarily would know the gross proceeds from that sale. Another comment requested that the regulations make clear that acting as a broker with respect to one customer does not mean that the person has a reporting obligation with respect to all customers. This requested guidance relates to § 1.6045-1(c)(2) of the pre-2024 final regulations, which was not amended. This provision makes it clear that a broker is only required to make a return of information for sales that the broker effects for a customer (provided the broker effects that sale in the ordinary course of a trade or business to effect sales made by others). Accordingly, the final regulations do not adopt this comment because the change it requests is unnecessary. Another comment requested that the regulations be clarified to state that the determination of whether a person is a broker is determined on an annual basis and being a broker in one year does not mean that the person is a broker in another year. This requested guidance relates to a portion of § 1.6045-1(a)(1) from the pre-2024 final regulations that was not proposed to be amended and would apply broadly to all brokers under sections 6045 and 6045A, not just those who effectuate sales of digital assets. Accordingly, the final regulations do not adopt this comment because it is outside the scope of these regulations. b. Non-Custodial Industry Participants Unlike custodial industry participants, which generally act as principals or as agents to effect digital asset transactions on behalf of their customers, industry participants that do not take possession of a customer's digital assets (non-custodial industry participants), 2 such as operators of non-custodial digital asset trading platforms (sometimes referred to as decentralized exchanges or DeFi) and unhosted digital asset wallet providers, normally do not act as custodial agents or principals in effecting their customers' transactions. Instead, these non-custodial industry participants offer other services, such as providing interface services enabling their customers to interact with trading protocols. To resolve any uncertainty over whether these non-custodial digital asset service providers are brokers, section 80603(a) of the Infrastructure Act amended the definition of broker under section 6045 to add “any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person” (the new digital asset middleman rule). 167 Cong. Rec. S5702, 5703. To implement this new digital asset middleman rule, the proposed regulations provided that, subject to certain exclusions, any person that provides facilitative services that effectuate sales of digital assets by customers is a broker, provided the nature of the person's service arrangement with customers is such that the person ordinarily would know or be in a position to know the identity of the party that makes the sale and the nature of the transaction potentially giving rise to gross proceeds. Proposed § 1.6045-1(a)(21)(iii)(A) provided that a facilitative service includes the provision of a service that directly or indirectly effectuates a sale of digital assets, such as providing a party in the sale with access to an automatically executing contract or protocol, providing access to digital asset trading platforms, providing an automated market maker system, providing order matching services, providing market making functions, providing services to discover the most competitive buy and sell prices, or providing escrow or escrow-like services to ensure both parties to an exchange act in accordance with their obligations. The proposed regulations also carved out certain services from this definition, such as certain distributed ledger validation services—whether through proof-of-work, proof-of-stake, or any other similar consensus mechanism—without providing other functions or services, as well as certain sales of hardware, and certain licensing of software, where the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger. To ensure that existing brokers of property already subject to broker reporting would be considered to effect sales of digital assets when they accept, or otherwise process, certain digital asset payments and to ensure that digital asset brokers would be considered to effect sales of digital assets received as payment for digital asset transaction costs, proposed § 1.6045-1(a)(21)(iii)(B) provided that a facilitative service also includes the services performed by such brokers in accepting or processing those digital asset payments. 2 Some digital asset trading platforms that do not claim to offer custodial services may be able to exercise effective control over a user's digital assets. See Treasury Department, Illicit Finance Risk Assessment of Decentralized Finance (April 2023), https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf. No inference is intended as to the meaning or significance of custody under any other legal regime, including the Bank Secrecy Act and its implementing regulations, which are outside the scope of these regulations. The Treasury Department and the IRS received numerous comments directed at these new digital asset middleman rules. One comment recommended the adoption of an IRS-approved central entity service provider to the digital asset marketplace that could gather customer tax identification information and receive, aggregate, and reconcile information from various custodial and non-custodial industry participants. Another comment recommended allowing the use of an optional tax attestation token to facilitate tax compliance by non-custodial industry participants. Many other comments recommended that non-custodial industry participants not be treated as brokers. Comments also expressed concerns that the proposed definitions of a facilitative service in proposed § 1.6045-1(a)(21)(iii)(A) and position to know in proposed § 1.6045-1(a)(21)(ii) are overbroad and would, consequently, result in duplicative reporting of the same transactions. Numerous comments said the broad definition of a broker would stifle American innovation and drive the digital asset industry to move offshore. Additionally, many of the comments indicated that certain non-custodial industry participants have not collected customer information under AML programs, and therefore do not have systems in place to comply with the proposed reporting by the applicability date for transactions on or after January 1, 2025. The Treasury Department and the IRS do not agree that non-custodial industry participants should not be treated as brokers. Prior to the Infrastructure Act, section 6045(c)(1) defined the term broker to include a dealer, a barter exchange, and any other person who (for a consideration) regularly acts as a middleman with respect to property or services. Section 80603(a) of the Infrastructure Act clarified the definition of broker under section 6045 to include any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. According to a report by the Joint Committee on Taxation published in the Congressional Record prior to the enactment of the Infrastructure Act, the change clarified prior law “to resolve uncertainty over whether certain market participants are brokers.” 167 Cong. Rec. S5702, 5703. However, the Treasury Department and the IRS would benefit from additional consideration of issues involving non-custodial industry participants. The Treasury Department and the IRS have determined that the issuance of these final regulations requiring custodial brokers and brokers acting as principals to report digital asset transactions should not be delayed until additional consideration of issues involving non-custodial industry participants is completed because custodial brokers and brokers acting as principals carry out a substantial majority of digital asset transactions. Clarifying information reporting for the substantial majority of digital asset transactions, consistent with the applicability dates set forth in the proposed regulations, will benefit both taxpayers, who can use the reported information to prepare their Federal income tax returns, and the IRS, which can focus its enforcement resources on taxpayers who are more likely to have underreported their income from digital asset transactions and custodial brokers and brokers acting as principals who may not be meeting their reporting obligations. Accordingly, the proposed new digital asset middleman rules that apply to non-custodial industry participants are not being finalized with these final regulations. The Treasury Department and the IRS continue to study this area and, after full consideration of all comments received, intend to expeditiously issue separate final regulations describing information reporting rules for non-custodial industry participants. Until this further regulatory guidance is issued, the final regulations reserve on the definition of position to know in final § 1.6045-1(a)(21)(ii) and a portion of the facilitative service definition in final § 1.6045-1(a)(21)(iii)(A). Additionally, because comments were received addressing the breadth of the specific exclusions provided for certain validation services, certain sales of hardware, and certain licensing of software, the final regulations also reserve on these exclusions. The Treasury Department and the IRS recognize that persons that are solely engaged in the business of providing validation services without providing other functions or services, or persons that are solely engaged in the business of selling certain hardware, or licensing certain software, for which the sole function is to permit persons to control private keys which are used for accessing digital assets on a distributed ledger, are not digital asset brokers. Accordingly, notwithstanding reserving on the underlying rule to provide time to study the comments received, the final regulations retain the examples in final § 1.6045-1(b)(2)(ix) and (x), which conclude that persons conducting these actions do not constitute brokers. The final regulations do not, however, reserve on the portion of the facilitative services definition in final § 1.6045-1(a)(21)(iii)(B), which was included to ensure that sales of digital assets conducted by certain persons other than non-custodial industry participants are treated as effected by a broker under final § 1.6045-1(a)(10). For example, proposed § 1.6045-1(a)(21)(iii)(B), which provided that a facilitative service includes the acceptance of digital assets by a broker in consideration for property reportable under proposed § 1.6045-1(a)(9)(i) and for broker services, was retained and redesignated as final § 1.6045-1(a)(21)(iii)(B)( 1 ) and ( 3 ), respectively. Persons that conduct these actions have complete knowledge about the underlying transaction because they are typically acting as the counterparty. Thus, knowledge is not identified as a specific element of the definition of facilitative services for these persons to be treated as conducting facilitative services. Proposed § 1.6045-1(a)(21)(iii)(B) also provided that a facilitative service includes any service provided by a real estate reporting person with respect to a real estate transaction in which digital assets are paid by the buyer in full or partial consideration for the real estate. This rule has been retained with some modifications to the knowledge requirement which must be met before a real estate reporting person will be treated as conducting facilitative services. See Part I.B.4. of this Summary of Comments and Explanation of Revisions, for a discussion of the modified rule, now in final § 1.6045-1(a)(21)(iii)(B)( 2 ), with respect to treating real estate reporting persons as performing facilitative services and, thereby, as digital asset middlemen under the final regulations. Additionally, to ensure that a digital asset kiosk that does not act as an agent or dealer in a digital asset transaction will nonetheless be considered a digital asset middleman capable of effecting sales of digital assets under final § 1.6045-1(a)(10)(i)(D), final § 1.6045-1(a)(21)(iii)(B)( 5 ) provides that the acceptance of digital assets in return for cash, stored-value cards, or different digital assets by a physical electronic terminal or kiosk is a facilitative service. Like persons that accept digital assets in consideration for property reportable under proposed § 1.6045-1(a)(9)(i) and for broker services, knowledge is not identified as a specific element of the definition of facilitative services for these kiosks to be treated as conducting facilitative services because these kiosks are typically acting as the counterparty in the digital asset sale transaction. Finally, as discussed in Part I.B.2. of this Summary of Comments and Explanation of Revisions, final § 1.6045-1(a)(21)(iii)(B)( 4 ) treats certain PDAPs that receive digital asset payments from one party (buyer) and pay those digital assets, cash, or different digital assets to a second party as performing facilitative services and, thereby, as digital asset middlemen under the final regulations. Taken together, these final regulations apply only to digital asset industry participants that take possession of the digital assets being sold by their customers, such as operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, certain PDAPs, and digital asset kiosks, as well as to certain real estate reporting persons that are already subject to the broker reporting rules. As a result, this preamble does not set forth nor discuss comments received relating to the application of the proposed regulations to non-custodial industry participants (other than persons that operate digital asset kiosks and process payments without taking custody thereof). The Treasury Department and the IRS will continue to consider comments received addressing non-custodial arrangements and plan to expeditiously publish separate final regulations addressing information reporting rules for non-custodial digital asset service providers after issuance of these final regulations. 2. Processors of Digital Asset Payments PDAPs enable persons (buyers) to make payments to second parties (typically merchants) using digital assets. In some cases, the buyer pays digital assets to the PDAP, and the PDAP in turn pays those digital assets, U.S. dollars, or different digital assets to the merchant. In other cases, the PDAP may not take custody of the digital assets, but instead may instruct or otherwise give assistance to the buyer to transfer the digital assets directly to the merchant. The PDAP may also have a relationship with the merchant specifically obligating the PDAP to process payments on behalf of the merchant. a. The Proposed Regulations The proposed regulations used the term digital asset payment processors instead of PDAPs. To avoid confusion associated with the use of the acronym for digital asset payment processors, which may have a different meaning within the digital asset industry, and for ease in reading this preamble, this preamble solely uses the term PDAP, even when referencing the proposed regulations and comments made with respect to the proposed regulations. The proposed regulations treated PDAPs as brokers that effect sales of digital assets as agents for the buyer. Proposed § 1.6045-1(a)(22)(i)(A) defined a PDAP as a person who in the ordinary course of its business regularly stands ready to effect digital asset sales by facilitating payments from one party to a second party by receiving digital assets from the first party and exchanging them into different digital assets or cash paid to the second party, such as a merchant. In addition, recognizing that some payment recipients might be willing to receive payments facilitated by an intermediary in digital assets rather than cash in a circumstance in which the PDAP temporarily fixes the exchange rate on the digital asset payment that is transferred directly from a customer to that payment recipient, proposed § 1.6045-1(a)(22)(ii) treated the transfer of digital assets by a customer directly to a second person (such as a vendor of goods or services) pursuant to a processor agreement that provides for the temporary fixing of the exchange rate to be applied to the digital assets received by the second person as if the digital assets were transferred by the customer to the PDAP in exchange for different digital assets or cash paid to the second person. The proposed regulations also included in the definition of a PDAP certain payment settlement entities and certain entities that make payments to payment settlement entities that are potentially subject to reporting under section 6050W. Specifically, proposed § 1.6045-1(a)(22)(i)(B) provided that a PDAP includes a third party settlement organization (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 § 1.6050W-1(a)(2). Additionally, proposed § 1.6045-1(a)(22)(i)(C) provided that the definition of a PDAP includes a payment card issuer that makes (or submits the instruction to make) payments in one or more digital assets to a merchant acquiring entity, as defined under § 1.6050W-1(b)(2), in a transaction that is associated with a reportable payment transaction under § 1.6050W-1(a)(2) that is effected by the merchant acquiring bank. Proposed § 1.6045-1(a)(9)(ii)(D) provided that a sale includes all these types of payments processed by PDAPs. Finally, proposed § 1.6045-1(a)(2)(ii)(A) provided that the customer in a PDAP transaction includes the person who transfers the digital assets or directs the transfer of the digital assets to the PDAP to make payment to the second person. b. Definition of PDAP, PDAP Customer, and PDAP Sales Several comments stated that some PDAPs contract only with merchants to process and settle digital asset payments on the behalf of those merchants. That is, despite the buyer benefitting from the merchant's relationship with the PDAP, the buyer is not the customer of the PDAP in these transactions. Consequently, these comments warned, PDAPs are unable to leverage any customer relationship to collect personal identification information and other tax documentation—including Form W-9, Request for Taxpayer Identification Number and Certification, or Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) —from buyers. Another comment asserted that treating PDAPs as brokers conflicts with or expands the current FinCEN regulatory AML program requirements for regulated entities to perform due diligence on their customers. Several comments noted that this lack of customer relationship would exacerbate the privacy concerns of the buyers if PDAPs working for the merchant were required to collect tax documentation from buyers. Moreover, these comments raised the concern that collecting this documentation from buyers is even more challenging for one-time small retail purchases because buyers would be unwilling to comply with tax documentation requests at the point of sale. Other comments disagreed with these comments and stated that there is a business relationship between PDAPs and buyers that would make reporting appropriate. Indeed, one comment asserted that PDAPs are technically money transmitters under FinCEN regulations and, as such, are already subject to the AML program obligations, described in Part I.B.1. of this Summary of Comments and Explanation of Revisions, with respect to the person making payments. See 31 CFR part 1010.100(ff)(5). Other comments recommended that the definition of broker be aligned with the concepts outlined in FATF to, in their view, clarify that a broker must be a legal person who exercises some measure of control or dominion over digital assets on behalf of another person. In response to these comments, the Treasury Department and the IRS have concluded that the circumstances under which a person processing digital asset payments for others should be required to report information on those payments to the IRS under section 6045 should be narrowed pending additional consideration of the issues and comments received concerning non-custodial arrangements discussed in Part I.B.1.b. of this Summary of Comments and Explanation of Revisions. Under the final regulations, a PDAP is required to report digital asset payments by a buyer only if the processor already may obtain customer identification information from the buyer in order to comply with AML obligations. In such cases, the processor has the requisite relationship with the buyer to collect additional tax documentation to comply with information reporting requirements. Accordingly, final § 1.6045-1(a)(2)(ii)(A) modifies the proposed definition of customer as it applies to PDAPs to limit the circumstances under which a buyer would be considered the customer of a PDAP. Specifically, under this revised definition, the buyer will be treated as a customer of the PDAP only to the extent that the PDAP has an agreement or other arrangement with the buyer for the provision of digital asset payment services and that agreement or other arrangement provides that the PDAP may verify such person's identity or otherwise comply with AML program requirements, such as those under 31 CFR part 1010, applicable to that PDAP or any other AML program requirements. For this purpose, an agreement or arrangement with the PDAP includes any alternative payment services arrangement such as a computer or mobile application program under which, as part of the PDAP's customary onboarding procedures, the buyer is treated as having agreed to the PDAP's general terms and conditions. The PDAP may also be required to report information on the payment to the merchant on whose behalf the PDAP is acting. Several comments raised the concern that, to the extent there is no contractual relationship between the PDAP and the buyer, the buyer is not the PDAP's customer, and that the proposed regulations, therefore, exceed the Secretary's authority under section 6045(a), which requires persons doing business as a broker to “make a return . . . showing the name and address of each customer [of the broker], with such details regarding gross proceeds.” These comments recommended that the final regulations provide that a PDAP that does not have a contractual relationship with a buyer is not a broker with respect to that buyer. Another comment suggested the regulations should not apply to PDAPs at all without a clear congressional mandate. The Treasury Department and the IRS do not agree that section 6045 requires specific statutory language with respect to each type of broker that already fits within the definition of broker under section 6045(c)(1). Section 6045(c)(2) defines the term customer as “any person for whom the broker has transacted any business.” This definition does not require that the specific transaction at issue be conducted by the broker for the customer. Accordingly, if a PDAP transacts some business with the buyer—such as would be the case if the buyer sets up a payment account with the PDAP—then there is statutory authority to require that the PDAP report on the buyer's payments, even though the activities performed by that PDAP were performed pursuant to a separate contractual agreement with a merchant. One comment expressed confusion with the definition of PDAP in the proposed regulations. Specifically, this comment requested clarification as to why the definition listed a third party settlement organization separately in proposed § 1.6045-1(a)(22)(i)(B) rather than merely as a subset of the description provided in proposed § 1.6045-1(a)(22)(i)(A), in which the person regularly facilitates payments from one party to a second party by receiving digital assets from the first payment and exchanging those digital assets into cash or different digital assets paid the second party. Another comment expressed confusion over why the processor agreement rules in proposed § 1.6045-1(a)(22)(ii) and (iii) include a provision treating the payment of digital assets to a second party pursuant to a processor agreement that fixes the exchange rate (processor agreement arrangement) as a sale effected by the PDAP. This comment also recommended deleting the processor agreement arrangement paragraphs from the definition of a PDAP and moving them to the definition of gross proceeds. The definition of a PDAP in the proposed regulations included descriptions of ways that a person could facilitate a payment from one party to a second party. Many of these descriptions involved circumstances in which the buyer transfers the digital asset payment to the PDAP, followed by the PDAP transferring payment to a second party. Several of the descriptions involved circumstances in which the PDAP does not take possession of the payment, but instead instructs the buyer to make a direct transfer of the digital asset payment to the second party, or otherwise, pursuant to a processor agreement, temporarily fixes the exchange rate to be applied to the digital assets received by the second party. The Treasury Department and the IRS understand that many of the transactions described in the proposed regulations in which the PDAP does not take possession of the payment are undertaken today by non-custodial industry participants. In light of the decision discussed in Part I.B.1. of this Summary of Comments and Explanation of Revisions to further study the application of the broker reporting rules to non-custodial industry participants, the Treasury Department and the IRS have determined that the definition of PDAP and the definition of a sale effected by a PDAP (PDAP sales) in these final regulations should apply only to transactions in which PDAPs take possession of the digital asset payment. Additionally, given the complexity of the multi-part definition of PDAP in the proposed regulations and in response to the public comments, the Treasury Department and the IRS have determined that all types of payment transactions that were included in the various subparagraphs of the definition should be combined into a single simplified definition. This single definition includes the requirement that a person must receive the digital assets in order to be a PDAP and also covers all transactions—and not just those transactions described in proposed § 1.6045-1(a)(22)(i)(B) and (C)—in which the PDAP receives a digital asset and transfers that same digital asset to the second party. Accordingly, final § 1.6045-1(a)(22) defines a PDAP as a person who in the ordinary course of a trade or business stands ready to effect sales of digital assets by regularly facilitating payments from one party to a second party by receiving digital assets from the first party and paying those digital assets, cash, or different digital assets to the second party. Correspondingly, final § 1.6045-1(a)(9)(ii)(D) revises and simplifies the proposed regulation's definition of a sale processed by a PDAP to include the payment by a party of a digital asset to a PDAP in return for the payment of that digital asset, cash, or a different digital asset to a second party. Accordingly, if a buyer uses a stablecoin or other digital asset to make payment to a PDAP that then transfers the stablecoin, another digital asset, or cash to the merchant, the transaction is a PDAP sale. Additionally, as discussed in Part I.D.4. of this Summary of Comments and Explanation of Revisions, the final regulations provide that any PDAP sale that is also a sale under one of the other definitions of sale under final § 1.6045-1(a)(9)(ii)(A) through (C) (non-PDAP sale) that is subject to reporting due to the broker effecting the sale as a broker other than as a PDAP must be treated as a non-PDAP sale. Thus, for example, an exchange of digital assets that a custodial broker executes between customers will not be treated as a PDAP sale, but instead will be treated as a sale of digital assets in exchange for different digital assets under final § 1.6045-1(a)(9)(ii)(A)( 2 ). One comment recommended that the regulations be clarified so as not to treat the PDAP as a broker to the extent it does not have sufficient information about the transaction to know it is a sale. Another comment stated that PDAPs do, in fact, maintain detailed records of all transactions for both merchants and buyers. The final regulations adopt this comment by adding services performed by a PDAP to the definition of facilitative service provided the PDAP has actual knowledge or ordinarily would know the nature of the transaction and the gross proceeds therefrom to ensure that payments made using digital assets are treated as sales effected by a broker. Final § 1.6045-1(a)(21)(iii)(B)( 4 ). Accordingly, in a circumstance in which the PDAP processes a payment on behalf of a merchant and that payment comes from a buyer with an account at the PDAP, the PDAP would ordinarily have the information necessary to know that the transaction constitutes a sale and would know the gross proceeds. As such, that PDAP will be treated under the final regulations as effecting the sale transaction under § 1.6045-1(a)(10)(i)(D) for the buyer-customer as a digital asset middleman under § 1.6045-1(a)(21). In contrast, in a circumstance in which the PDAP does not process the payment on behalf of the merchant, the PDAP would ordinarily not have actual knowledge or other information that would allow the processor to ordinarily know the nature of the transaction. Accordingly, assuming nothing else about the transaction provides the PDAP with either actual knowledge or information that would allow the processor to ordinarily know the nature of the transaction, the payment processor would not be treated as providing a facilitative service that effects a sale transaction under these regulations. One comment stated that PDAPs do not have the infrastructure to collect and store customer identification information or to report transactions involving buyers who do not have accounts with the PDAP. Another comment expressed concern about asking individuals to provide personal identifying information to PDAPs, which could occur in the middle of a busy store. Another comment requested guidance on how PDAPs should collect sensitive taxpayer information. Several comments expressed concern about the increased risk these rules would create with respect to the personal identifying information collected by PDAPs because that information could be held by multiple brokers. Several other comments stated that extending information reporting to PDAPs would create surveillance concerns because it could allow the IRS to collect data on merchandise or services purchased or provided. The Treasury Department and the IRS understand that PDAPs that comply with FinCEN and other regulatory requirements are required [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-14004. Public record. Not legal advice.