In a move to enhance tax compliance in the digital asset market, the U.S. Department of the Treasury and IRS have unveiled final tax reporting rules for digital asset brokers. Crypto investors are urged to prepare as mandatory yearly reporting is set to phase in starting in 2026, covering gross sales from 2025.

Under the new regulations, digital currency brokers will be required to report gross proceeds from sales in 2025 via Form 1099-DA, with reporting on cost basis for certain digital asset sales in 2026. These rules are part of a larger effort to ensure that digital assets are not utilized to hide taxable income.

IRS Commissioner Danny Werfel emphasized the significance of these regulations, stating, "We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets."

The implementation of yearly digital asset reporting, enacted through the Inflation Reduction Act in 2021, was estimated to generate nearly $28 billion in revenue over a decade, as projected by the Joint Committee on Taxation. However, the original start date for reporting was postponed.

The newly released IRS regulations come after the recent hiring of two former crypto executives by the agency, signaling an increased focus on enhancing digital currency service, reporting, compliance, and enforcement programs.

Crypto investors have a limited time-frame to adapt to these new reporting requirements. Establishing a "reasonable allocation" of basis, or original purchase prices, for each crypto wallet is crucial before January 1, 2025, according to an IRS revenue procedure released on Friday. Taxpayers are advised to assign basis for each digital currency wallet by the end of 2024.

Matt Metras, an enrolled agent and owner of MDM Financial Services, highlights the importance of establishing digital currency basis, as failure to provide proof may result in the IRS considering the basis as zero, leading to larger calculated profits.

While the new rules will not apply to the upcoming tax season, tax attorney and certified public accountant Andrew Gordon emphasizes the significance of the 2024 tax year for crypto investors to report their activity accurately, including cost basis. Starting in 2025, the IRS will have access to a wealth of information to verify the accuracy of past reporting.

As the digital asset market continues to gain traction, these regulations aim to ensure transparency and promote tax compliance among investors. With the IRS bolstering its efforts in enforcing regulations in the crypto space, experts anticipate a wave of enforcement activity in the near future. Crypto investors are advised to prepare accordingly to avoid any potential penalties or noncompliance issues in the future.

Disclaimer: The information provided in this article is based solely on the content provided by the U.S. Department of the Treasury, IRS, and expert opinions. It is always recommended to consult with a professional tax advisor for personalized advice and guidance regarding individual tax obligations.