[Federal Register Volume 88, Number 166 (Tuesday, August 29, 2023)]
[Proposed Rules]
[Pages 59576-59659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17565]



[[Page 59575]]

Vol. 88

Tuesday,

No. 166

August 29, 2023

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1, 31, and 301





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

  Federal Register / Vol. 88 , No. 166 / Tuesday, August 29, 2023 / 
Proposed Rules  

[[Page 59576]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[REG-122793-19]
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: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations regarding 
information reporting, the determination of amount realized and basis, 
and backup withholding, for certain digital asset sales and exchanges. 
Based on existing authority as well as changes to the applicable tax 
law made by the Infrastructure Investment and Jobs Act, these proposed 
regulations would require brokers, including digital asset trading 
platforms, digital asset payment processors, and certain digital asset 
hosted wallets, to file information returns, and furnish payee 
statements, on dispositions of digital assets effected for customers in 
certain sale or exchange transactions. These proposed regulations would 
also require real estate reporting persons, who are treated as brokers 
with respect to reportable real estate transactions, to include on 
filed information returns and furnished payee statements the fair 
market value of digital asset consideration received by real estate 
sellers in reportable real estate transactions. Additionally, these 
real estate reporting persons would also be required to file 
information returns and furnish payee statements with respect to real 
estate purchasers who use digital assets to acquire real estate in 
these transactions.

DATES: Written or electronic comments must be received by October 30, 
2023. A public hearing on this proposed regulation has been scheduled 
for November 7, 2023, at 10 a.m. ET. If the number of requests to speak 
at the hearing exceed the number that can be accommodated in one day, a 
second public hearing date for this proposed regulation will be held on 
November 8, 2023. Requests to speak and outlines of topics to be 
discussed at the public hearing must be received by October 30, 2023. 
If no outlines are received by October 30, 2023, the public hearing 
will be cancelled. Requests to attend the public hearing must be 
received by 5 p.m. ET on November 3, 2023. The public hearing will be 
made accessible to people with disabilities. Requests for special 
assistance during the public hearing must be received by 5 p.m. ET on 
November 2, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-122793-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish any comments submitted electronically or on paper 
to the public docket. Send paper submissions to: CC:PA:LPD:PR (REG-
122793-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben 
Franklin Station, Washington, DC 20044. Submissions may be hand-
delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. 
to CC:PA:LPD:PR (REG-122793-19), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under sections 1001 and 1012, Kyle Walker, (202) 317-4718, or Harith 
Razaa, (202) 317-7006, of the Office of the Associate Chief Counsel 
(Income Tax and Accounting); concerning the international sections of 
the proposed regulations under sections 3406 and 6045, John Sweeney or 
Alan Williams of the Office of the Associate Chief Counsel 
(International) at (202) 317-6933, and concerning the remainder of the 
proposed regulations under sections 3406, 6045, 6045A, 6045B, 6050W, 
6721, and 6722, Roseann Cutrone of the Office of the Associate Chief 
Counsel (Procedure and Administration) at (202) 317-5436 (not toll-free 
numbers). Concerning submissions of comments and requests to 
participate in the public hearing, Vivian Hayes at 
[email protected] (preferred) or at (202) 317-5306 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Background

    These proposed regulations extend the information reporting rules 
in Sec.  1.6045-1 to brokers who, in the ordinary course of a trade or 
business, act as agents, principals, or digital asset middlemen for 
others to effect sales or exchanges of digital assets for cash, broker 
services, or property of a type that is subject to reporting by the 
brokers (including different digital assets, securities, and real 
estate) under section 6045 of the Internal Revenue Code (Code) or 
effect on behalf of customers payments of digital assets associated 
with payment card and third party network transactions subject to 
reporting under section 6050W of the Code. These proposed regulations 
also clarify that the definition of broker for purposes of section 6045 
includes digital asset trading platforms, digital asset payment 
processors, certain digital asset hosted wallet providers, and persons 
who regularly offer to redeem digital assets that were created or 
issued by that person. In addition, these proposed regulations would 
require real estate reporting persons to report on real estate 
purchasers who use digital assets to acquire real estate in a 
reportable real estate transaction and extend the information that must 
be reported under Sec.  1.6045-4 with respect to sellers of real estate 
to include the fair market value of digital assets received by sellers 
in exchange for real estate. Additionally, in the case of a transaction 
involving the exchange of digital assets for goods (other than digital 
assets) or services, these proposed regulations treat the provision of 
the goods or services as reportable under section 6050W and the 
disposition of the digital assets as reportable under proposed Sec.  
1.6045-1 and not under section 6050W. These proposed regulations also 
provide that exchanges of digital assets for property or services are 
generally not reportable as barter exchange transactions under the 
existing rules under Sec.  1.6045-1(e). Finally, these proposed 
regulations provide specific rules under section 1001 for determining 
the amount realized in a sale, exchange, or other disposition of 
digital assets and under section 1012 for calculating the basis of 
digital assets.
    These proposed regulations concern Federal tax laws under the 
Internal Revenue Code only. No inference is intended with respect to 
any other legal regime, including the Federal securities laws and the 
Commodity Exchange Act, which are outside the scope of these 
regulations.

I. Background on Digital Assets and Virtual Currency

    Digital assets are digital representations of value that use 
cryptography to secure transactions that are digitally recorded using 
distributed ledger technology on a distributed ledger, such as a 
blockchain or similar technology. Digital assets do not exist in 
physical form. Depending on the particular digital asset, individual 
units of a digital asset may be referred to as

[[Page 59577]]

coins or tokens. Some digital assets are referred to as virtual 
currency or as cryptocurrency.
    Virtual currency is defined in Notice 2014-21, 2014-16 I.R.B. 938 
(April 14, 2014) (Notice 2014-21 or Notice), for Federal income tax 
purposes as a digital representation of value that functions as a 
medium of exchange, a unit of account, or a store of value other than 
the U.S. dollar or a foreign currency (fiat currency). The Notice 
provides that convertible virtual currency (that is, virtual currency 
that has an equivalent value in real currency or that acts as a 
substitute for real currency) is treated as property for Federal income 
tax purposes.
    A digital asset account or wallet generally provides its owner or 
custodian with the ability to store the public and private keys to 
digital asset holdings. These keys are required to conduct transactions 
with the digital assets associated with those keys and thus to control 
the ability to transfer those digital assets. References in this 
preamble and these proposed regulations to an owner holding digital 
assets generally or holding digital assets in a wallet or account are 
meant to refer to holding or controlling, whether directly or 
indirectly through a custodian, the keys to the digital assets and, 
thus, the ability to transfer those digital assets.
    Some wallets may provide additional or different capabilities 
beyond storing keys. Wallets can be digital (software) or physical 
(hardware) and can be connected to the internet (hot) or disconnected 
from the internet (cold). Wallets can be custodial (hosted) or non-
custodial (unhosted). Unhosted wallets are sometimes referred to as 
self-hosted or self-custodial wallets. Some owners use the services of 
a hosted wallet provider that stores their public and private keys. A 
hosted wallet provider may also maintain balance information, provide 
cybersecurity services, and facilitate the owners' ability to own, and 
conduct transactions using, digital assets. These services may also 
include providing owners with online platforms that directly link 
owners to third party services that allow owners to buy and sell 
digital assets held in their hosted wallets. Other owners do not use 
the services of a hosted wallet provider and instead store private keys 
in a software program or written record, often referred to as an 
unhosted wallet. In general, only the user of an unhosted wallet has 
access to both the public and private keys necessary to effect 
transactions in the digital assets associated with those keys. 
Additionally, some providers of unhosted wallets also provide their 
unhosted wallet users with online platform services, which may include 
links or other mechanisms for direct access to third party services 
that allow users to buy and sell digital assets held in their unhosted 
wallets.
    A person that operates a trading platform or website that allows 
users to exchange digital assets in return for different digital assets 
or cash (meaning the U.S. dollar or foreign currency) is referred to in 
this preamble as a digital asset trading platform. Some digital asset 
trading platforms also offer hosted wallet services. In some 
circumstances, the custodial digital asset trading platform will match 
up buy and sell orders from separate users, whereas in other 
circumstances, the digital asset trading platform will settle users' 
orders using the digital asset trading platform's own account. In 
either circumstance, the digital asset trading platform could elect to 
require users to deposit with the trading platform the digital assets 
traded on the platform. Users typically pay these digital asset trading 
platforms a transaction fee (sometimes in digital assets). A custodial 
digital asset trading platform might often record its users' digital 
asset sale and exchange transactions on a centralized, omnibus ledger 
without also recording the transactions on the relevant distributed 
ledgers of the digital asset sold or exchanged. In other instances, 
however, the custodial digital asset trading platform might record user 
transactions directly on the distributed ledgers of the applicable 
digital assets involved in the transaction. These custodial digital 
asset trading platforms may provide users with valuations (in fiat 
currency) of the digital asset involved in these exchanges and keep 
records of each user's exchange activity.
    Some digital asset trading platforms do not have access to the 
private keys and, therefore, do not take custody of their users' 
digital assets.\1\ Owners of digital assets using these non-custodial 
trading platforms can buy, sell, and trade digital assets directly with 
others using automatically executing contracts (so-called smart 
contracts) to ensure that transactions are executed as agreed. For 
example, some peer-to-peer trading platforms facilitate transactions 
between owners of digital assets by matching buyers and sellers without 
holding the funds or digital assets of buyers or sellers. Some peer-to-
peer trading platforms use software that connects buyers and sellers, 
who then effect the desired transactions off the platform. Other non-
custodial trading platforms use automated market maker (AMM) systems 
that rely on liquidity pools or liquidity providers to automatically 
facilitate buy and sell orders on a platform. Some non-custodial 
trading platforms involve persons (operators) who provide services 
beyond that provided by software that merely facilitates digital asset 
trading. For example, to enhance secure transactions, non-custodial 
trading platform operators might process a transaction by communicating 
(or providing software that will communicate) with the wallets of 
buyers and sellers. Operators of non-custodial trading platforms may 
charge fees for some or all of these services, which may also include 
advertising or other services closely related to the facilitation of 
sales of digital assets.
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    \1\ Some digital asset trading platforms that do not claim to 
offer custodial services may be able to exercise effective control 
over a user's digital assets. See Treasury Department, Illicit 
Finance Risk Assessment of Decentralized Finance (April 2023), 
https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf. No inference is intended as to the meaning or 
significance of custody under any other legal regime, which are 
outside the scope of these regulations.
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    In addition to buying, selling, and exchanging digital assets, 
taxpayers can participate in an increasing number and type of 
transactions that involve digital assets. For example, taxpayers can 
purchase or enter into derivative transactions involving digital 
assets, such as options, regulated futures contracts, and forward 
contracts. Some digital asset owners also use digital assets to make 
payments, including to purchase goods or services from merchants or to 
pay taxes or other fees to government entities. Digital assets may also 
be used as payment in consideration for the purchase of real estate. 
These payment transactions can be made directly to the seller through 
the use of smart contracts that can execute a transaction without an 
intermediary party, or through an intermediary that can process 
payments in digital assets (digital asset payment processor). To effect 
payment transactions using digital assets, some digital asset payment 
processors will, for a fee, accept digital assets directly from payors 
in exchange for the payment of cash at predetermined exchange rates to 
payment recipients or will facilitate the transfer of the payor's 
digital assets as part of a payment transaction. In some instances, 
digital asset payment processors will instead direct payors to transfer 
the digital asset payment directly to payment recipients, who may have 
the right to exchange the received digital asset for cash with the 
digital asset payment processors at predetermined fixed exchange rates.

[[Page 59578]]

II. Application of Existing Information Reporting Rules to Virtual 
Currency or Other Digital Assets

    Notice 2014-21 provides guidance on the application of the current 
information reporting requirements when virtual currency is used to pay 
wages (requiring the filing of Forms W-2, Wage and Tax Statement), to 
make miscellaneous payments (requiring the filing of Forms 1099-MISC, 
Miscellaneous Income), and to settle third party network transactions 
(requiring the filing of Forms 1099-K, Payment Card and Third Party 
Network Transactions). The guidance provided by the Notice, however, 
focuses only on information reporting for virtual currency payments 
received by payees. The guidance does not address the information 
reporting requirements for income realized by persons who dispose of 
virtual currency or other digital assets. Although there are several 
existing information reporting provisions in the Code that do, or may, 
apply to dispositions of virtual currency and other digital assets, 
those provisions do not provide clear and comprehensive rules for 
consistent reporting of these dispositions.
A. Sections 1001 and 1012
    Section 1001 of the Code provides rules for determining the amount 
of gain or loss recognized in a sale or exchange transaction. Under 
section 1001(a), gain from the sale or other disposition of property 
equals the excess of the amount realized from the transaction over the 
adjusted basis of the property, and loss from the sale or other 
disposition of property equals the excess of the adjusted basis of the 
property over the amount realized. Section 1.1001-1(a) provides that 
``[e]xcept as otherwise provided in subtitle A of the Code, the gain or 
loss realized from the conversion of property into cash, or from the 
exchange of property for other property differing materially either in 
kind or in extent, is treated as income or as loss sustained.'' These 
regulations do not specifically address the determination of gain or 
loss with respect to digital assets.
    Section 1012 of the Code provides that the basis of property is the 
cost of the property. The existing regulations under section 1012 
provide special rules regarding the calculation of basis for certain 
types of property. These regulations do not expressly address the 
calculation of basis for digital assets.
B. Section 6041
    Section 6041 of the Code requires any person who, in the course of 
a trade or business, makes payments of $600 or more that are deemed to 
be fixed or determinable income to file information returns, and 
furnish statements to the payee (payee statements), setting forth the 
amount of gains, profits, and income resulting from that payment and 
the name and address of the recipient of that payment. Published 
guidance states that the amount of gains, profits, or income resulting 
from a payment made in consideration for a capital asset is not fixed 
or determinable under section 6041 if the payor has no way of 
ascertaining the payee's basis in that asset. See, for example, Rev. 
Rul. 80-22, 1980-1 C.B. 286 (January 21, 1980). Thus, a payor otherwise 
required to report on a payment made in exchange for digital assets is 
required to report the payee's gain from that transaction under section 
6041 if the payor has a way to ascertain the payee's basis and if the 
gain (in addition to any other payments made by that payor to the payee 
during the calendar year) is equal to $600 or more. Reporting under 
section 6041, however, does not apply to brokers with respect to 
payments made to customers. See Sec.  1.6041-3(b). If a payment that is 
reportable under section 6041 is also subject to the information 
reporting rules under section 6050W, Sec.  1.6041-1(a)(1)(iv) provides 
that the transaction must instead be reported under section 6050W.
C. Sections 6045, 6045A, and 6045B
    Section 6045 and the regulations thereunder require a person doing 
business as a broker to file information returns, and furnish payee 
statements, in accordance with regulations, for each customer for whom 
the broker has sold stocks, certain commodities, options, regulated 
futures contracts, securities futures contracts, forward contracts or 
debt instruments, in exchange for cash, showing each customer's name 
and address, details regarding gross proceeds, the adjusted basis of 
certain categories of assets sold, and other information as the 
Secretary of the Treasury or her delegate (Secretary) may require by 
forms or regulations. Section 80603 of the Infrastructure Investment 
and Jobs Act, Public Law 117-58, 135 Stat. 429, 1339 (2021) 
(Infrastructure Act) made several changes to the broker reporting 
provisions under section 6045 to clarify the rules regarding how 
certain digital asset transactions should be reported by brokers, and 
to expand the categories of assets for which basis reporting is 
required to include all digital assets. These changes are discussed 
below in Part III of this Background. This Part II.C. of this 
Background discusses the rules in place prior to the changes made by 
the Infrastructure Act.
    The term broker is defined by section 6045(c)(1) to include a 
dealer, a barter exchange, and any other person who (for a 
consideration) regularly acts as a middleman with respect to property 
or services. The existing regulations under section 6045 (existing 
regulations), further refine the meaning of a broker. Under existing 
Sec.  1.6045-1(a)(1), a broker is defined to mean ``any person . . . , 
U.S. or foreign, that, in the ordinary course of a trade or business 
during the calendar year, stands ready to effect sales to be made by 
others.'' The term effect, as defined under existing Sec.  1.6045-
1(a)(10), means either to act as a principal with respect to a sale 
(for example, a dealer in securities who buys a security from one 
customer and then sells that security to another customer) or to act as 
an agent with respect to a sale if the nature of the agency is such 
that the agent ordinarily would know the gross proceeds of the sale. 
Accordingly, the term broker for purposes of gross proceeds reporting 
includes persons that may not otherwise be considered to act as a 
broker, including certain securities custodians, escrow agents, and 
stock transfer agents. The term broker for this purpose also includes 
persons that are not custodians. For example, a non-custodial executing 
broker that acts as an agent for customers to effect sales of 
securities is included in this definition. Finally, an obligor that 
regularly issues and retires its own debt obligations and a corporation 
(such as a mutual fund described in existing Sec.  1.6045-1(b) Example 
1 (i)) that regularly redeems its own stock also are treated as brokers 
under existing Sec.  1.6045-1(a)(1).
    The term commodity is defined in existing Sec.  1.6045-1(a)(5) to 
mean any type of personal property (or interest therein), the trading 
of regulated futures contracts in which has been approved by the 
Commodities Futures Trading Commission (CFTC). At the time existing 
Sec.  1.6045-1(a)(5) was promulgated, affirmative CFTC approval was 
required to list new regulated futures contracts on a commodities 
exchange. Since that time, however, the CFTC has revised its approval 
procedures pursuant to the Commodity Futures Modernization Act 
(``CFMA''), Public Law 106-554, 114 Stat. 2763 (2000). The CFTC now 
also allows new contracts to be listed if the listing market self-
certifies that the new contracts comply with the Commodity Exchange 
Act, 7 U.S.C. 1 et seq., and the CFTC's regulations. See CFTC, Listing 
of New Contracts by Self-Certification, https://cftc.gov/
IndustryOversight/

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ContractsProducts/index.htm and 17 CFR 40.2. Section 1.6045-1(a)(5) 
does not explicitly address whether digital assets, the trading of 
regulated futures contracts in which is permitted pursuant to the 
CFTC's self-certification procedures, are commodities subject to 
reporting.
    For brokers required to file an information return with respect to 
the sale of a covered security, section 6045(g) requires that the 
return include the adjusted basis of the security and whether any gain 
or loss with respect to the security is long-term or short-term 
(adjusted basis reporting). With the exception of stock, covered 
securities are defined under section 6045(g)(3) as specified securities 
that are acquired on or after January 1, 2013, or such later date as 
determined by the Secretary. For stock to be included in the definition 
of covered securities, it must be acquired on or after either January 
1, 2011, or January 1, 2012, depending on whether the average basis 
method is permissible with respect to the stock under section 1012. 
Under section 6045(g)(3)(B), specified securities generally include: 
(i) shares of corporate stock, (ii) notes, bonds, debentures, and other 
evidence of indebtedness, (iii) commodities, contracts, or derivatives 
with respect to commodities, if the Secretary determines that adjusted 
basis reporting is appropriate, and (iv) any other financial instrument 
with respect to which the Secretary determines that adjusted basis 
reporting is appropriate. The existing regulations under section 6045 
do not specifically include digital assets as a specified security.
    Section 6045A of the Code generally requires applicable persons who 
transfer securities that are covered securities in the hands of those 
applicable persons to a broker (the receiving broker) to furnish to the 
receiving broker a written statement setting forth such information as 
the Secretary may by regulations require. Existing Sec.  1.6045A-1(b) 
requires transfer statements to include the name of the person 
effecting the transfer, the receiving broker, the name and account 
number of the customer for whom the security is transferred, as well as 
information about the security itself, including the transfer date, the 
adjusted basis, and the original acquisition date of the security. 
Prior to amendments made by the Infrastructure Act, section 6045A did 
not address the extent to which these requirements applied to transfers 
of digital assets. These amendments are discussed below in Part III of 
this Background.
    Section 6045B of the Code requires certain securities issuers to 
report to the IRS as well as to shareholders or their nominees the 
effect on basis of certain organizational actions (such as a stock 
split, merger, or acquisition) that impact the basis of issued 
securities. These rules also do not explicitly address the reporting 
requirements with respect to digital assets.
    Any organization with members or clients that contract with each 
other or with the organization to trade or barter property or services 
is a barter exchange under existing Sec.  1.6045-1(a)(4). A barter 
exchange must file information returns, and furnish payee statements, 
with respect to the exchange of property or services by its members or 
clients. Property or services are considered exchanged through a barter 
exchange if payment is made by means of a credit on the books of the 
barter exchange or a scrip issued by the barter exchange, or if the 
barter exchange arranges a direct exchange of property or services 
between members. See existing Sec.  1.6045-1(e)(2).
    Section 6045(e) requires real estate reporting persons to file 
information returns, and furnish payee statements, including the 
seller's name and address, the gross proceeds paid to the seller, and 
other information as the Secretary may require by forms or regulations 
with respect to certain real estate transactions. A real estate 
reporting person is defined in section 6045(e)(2) to mean the person 
responsible for closing the transaction or, if no such person exists, 
the mortgage lender, the transferor's broker, the transferee's broker, 
or the person designated by the Secretary pursuant to regulations. Real 
estate reporting persons are treated as brokers under section 
6045(e)(2) for purposes of the reporting obligations under section 
6045. An exception to this real estate reporting rule is made for real 
estate reporting persons who rely on seller certifications setting 
forth written assurances in compliance with Rev. Proc. 2007-12, 2007-1 
C.B. 357 (January 22, 2007), that the real estate being sold is the 
seller's principal residence and the full amount of the gain on the 
sale or exchange of the principal residence is excludable from gross 
income under section 121 of the Code, which generally permits 
individuals to exclude from gross income gain up to $250,000 (and 
married individuals filing joint returns gain up to $500,000) on the 
sale or exchange of a principal residence if certain conditions are 
met. Section 1.6045-4(i) also limits gross proceeds reporting required 
under section 6045(e) to cash received and cash to be received (also 
referred to in the existing regulations as consideration treated as 
cash) by or on behalf of the real estate seller in connection with the 
real estate transaction. As a result, these rules do not require the 
reporting of payments using digital assets made to real estate sellers 
in partial or full consideration for the sale of real estate, except to 
the extent that a digital asset falls within the definition of 
consideration treated as cash under existing Sec.  1.6045-4(i)(1).
    The definition of broker in existing regulations generally excludes 
a person described as a non-U.S. payor or non-U.S. middleman under 
Sec.  1.6049-5(c)(5) with respect to a sale that is effected by the 
broker on behalf of a customer at an office outside the United States. 
Additionally, under existing regulations, regardless of a broker's 
status as U.S. or non-U.S. broker, a broker is not required to file an 
information return under section 6045 with respect to a sale for a 
customer whom the broker may treat as an exempt foreign person based 
primarily on documentation requirements that depend on whether the sale 
is effected at an office of the broker inside or outside the United 
States.\2\ Generally, the effect of these rules is that non-U.S. 
securities brokers (other than controlled foreign corporations (CFCs) 
and a limited class of other brokers with U.S. activities, such as U.S. 
branches of foreign brokers) are not required to report information to 
the IRS on their customers, and that both U.S. and non-U.S. securities 
brokers are not required to report information to the IRS on non-U.S. 
customers under section 6045.
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    \2\ See Part I.I.4 of the Explanation of Provisions footnote 5 
regarding the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the 
Financial Crimes Enforcement Network's (FinCEN) implementing 
regulations thereunder.
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D. Section 6050W
    Section 6050W requires payment settlement entities to file 
information returns, and furnish payee statements, with respect to each 
participating payee to whom they have made one or more payments in 
settlement of reportable payment transactions. Payment settlement 
entities are merchant acquiring entities, which are banks or other 
organizations that are contractually obligated to make payments to 
participating payees in settlement of payment card transactions, and 
third party settlement organizations (TPSOs). TPSOs are central 
organizations that are contractually obligated to make payments to 
participating payees with respect to third party network transactions 
for the purchase of goods or services sold through a third party 
payment network.
    Payments by TPSOs to settle third party network transactions are 
required to be reported only if they exceed a de

[[Page 59580]]

minimis threshold. Section 9674(a) of the American Rescue Plan Act of 
2021, Public Law 117-2, 135 Stat. 4, 185 (ARP), lowered and modified 
this threshold for calendar years beginning after December 31, 2021. 
Under the prior threshold, payments by TPSOs to settle third party 
network transactions were required to be reported only if the aggregate 
number of transactions with a payee exceeded 200 and the aggregate 
amount to be reported with respect to those transactions exceeded 
$20,000 for a calendar year. Under the ARP provision, TPSOs must report 
third party network transactions with any participating payee that 
exceed a minimum threshold of $600 in aggregate payments, regardless of 
the aggregate number of these transactions. The rules under section 
6050W, however, do not expressly address whether exchanges of digital 
assets for cash, services, or property effected through TPSOs are 
subject to reporting under section 6050W or whether the information 
reporting provisions under section 6045 would apply to such exchanges.

III. Infrastructure Investment and Jobs Act

    Section 80603 of the Infrastructure Act clarifies and expands the 
rules regarding how digital assets should be reported by brokers under 
sections 6045 and 6045A to improve IRS and taxpayer access to gross 
proceeds and adjusted basis information when taxpayers dispose of 
digital assets in transactions involving brokers. First, section 
80603(a) of the Infrastructure Act clarifies the definition of broker 
to include any person who, for consideration, is responsible for 
regularly providing any service effectuating transfers of digital 
assets on behalf of another person. Second, section 80603(b)(1) of the 
Infrastructure Act modifies the definition of specified securities 
under section 6045(g) to explicitly include digital assets and to 
provide that these specified securities are treated as covered 
securities for purposes of basis reporting if they are acquired on or 
after January 1, 2023. Third, section 80603(b)(1)(B) of the 
Infrastructure Act defines a digital asset broadly to mean any digital 
representation of value which is recorded on a cryptographically 
secured distributed ledger or any similar technology as specified by 
the Secretary, except as otherwise provided by the Secretary. Fourth, 
section 80603(b)(2) of the Infrastructure Act clarifies that transfer 
statement reporting under section 6045A(a) applies to covered 
securities that are digital assets, and also adds a new information 
reporting provision under section 6045A(d) to provide for broker 
reporting on transfers of digital assets that are covered securities, 
provided the transfer is not a sale and is not to an account maintained 
by a person that the broker knows or has reason to know is also a 
broker. Section 80603(c) of the Infrastructure Act provides that these 
amendments apply to returns required to be filed, and statements 
required to be furnished, after December 31, 2023. Finally, section 
80603(d) of the Infrastructure Act provides a rule of construction 
which states that these statutory amendments shall not be construed to 
create any inference for any period prior to the effective date of the 
amendments with respect to whether any person is a broker under section 
6045(c)(1) or whether any digital asset is property which is a 
specified security under section 6045(g)(3)(B).

IV. Reasons for New Information Reporting Rules for Digital Assets

    Digital assets have grown in popularity as both a payment method 
and an investment or trading asset. Proponents believe that digital 
assets may offer potential benefits over traditional fiat currencies, 
such as lower transaction costs and faster transaction speeds. Digital 
assets may also be popular, however, because the distributed ledger 
record of transactions does not include the identity of the parties 
involved in the transactions. This pseudonymity creates a significant 
risk to tax administration.
    Digital assets are increasingly common in ordinary course 
transactions of a type that may be subject to information reporting if 
carried out using fiat currency or traditional financial assets. For 
example, several payment processors and credit card issuers that handle 
large volumes of payments now facilitate payments made using digital 
assets. Taxpayers can buy and sell digital assets directly or invest in 
digital assets through investment funds. Taxpayers can also trade 
derivatives, including futures and option contracts, on digital assets. 
A number of traditional financial institutions are offering, or have 
announced plans to offer, custody and trading services with respect to 
digital assets for institutional investors. In addition, some 
institutions are converting, or tokenizing, stock and security 
ownership interests into digital tokens. These tokenized stock and 
security interests trade on some digital asset trading platforms, and 
other trading platforms offer unique digital assets referred to as non-
fungible tokens (NFTs) for sale in exchange for cash or other digital 
assets. Transactions of these kinds by U.S. taxpayers may take place 
either on U.S. custodial or non-custodial trading platforms or with 
U.S. financial intermediaries, or on foreign custodial or non-custodial 
trading platforms or with foreign financial intermediaries.
    According to the Government Accountability Office (GAO), limits on 
third party information reporting to the IRS is an important factor 
contributing to the tax gap, which is the difference between taxes 
legally owed and taxes actually paid. GAO, Tax Gap: Multiple Strategies 
Are Needed to Reduce Noncompliance, GAO-19-558T at 6 (Washington, DC: 
May 9, 2019). Third party information reporting generally leads to 
higher levels of taxpayer compliance because the income earned by 
taxpayers is made transparent to both the IRS and taxpayers (who will 
use the furnished information to avoid both inadvertent errors and 
intentional misstatements). With third party information reporting that 
specifically identifies digital asset transactions, the IRS could more 
easily identify taxpayers with digital asset transactions that are 
otherwise difficult to discover. An information reporting regime 
requiring reporting to the IRS on digital asset transactions would 
benefit tax compliance by helping to close the information gap with 
respect to digital assets. See TIGTA, Ref. No. 2020-30-066, The 
Internal Revenue Service Can Improve Taxpayer Compliance for Virtual 
Currency Transactions, 10 (Sept. 2020); GAO, Virtual Currencies: 
Additional Information Reporting and Clarified Guidance Could Improve 
Tax Compliance, 28, GAO-20-188 (Washington, DC: Feb. 2020). In addition 
to the loss of information with respect to the recipients of digital 
asset payments that the IRS otherwise might receive if these 
transactions were carried out using fiat currency or traditional 
investment assets, these transactions give rise to a separate tax 
compliance concern because the disposition of digital assets is itself 
a taxable event that may give rise to gain or loss to the transferor 
that is reportable on a tax return. Existing information reporting 
rules do not specifically address how certain transactions involving 
digital assets must be reported to the party who disposes of the 
digital assets in exchange for cash, services, stored-value cards, or 
other property (including different digital assets).
    Expanding information reporting for digital assets also benefits 
taxpayers. First, taxpayers use information provided to them by brokers 
to prepare their tax returns. The lack of such

[[Page 59581]]

information reporting for digital assets may make it difficult for 
taxpayers to properly track and report their gain or loss from 
dispositions of digital assets. Publicly available information 
indicates that this gap is being filled in part by voluntary tax 
reporting to customers by some digital asset platforms, and by digital 
asset tax service providers, including providers of tax software, who 
charge for the preparation of tax information. The existence of these 
services illustrates the benefits of information reporting to taxpayers 
because the same information that is reported by brokers to the IRS on 
dispositions of digital assets must also be furnished by brokers to 
their customers. A second benefit to taxpayers from information 
reporting is that it enables the IRS to focus its audit efforts on 
taxpayers who are more likely to have underreported their income from 
digital asset transactions.
    Consequently, tax compliance would be increased if brokers, 
including digital asset trading platforms, digital asset payment 
processors, certain digital asset hosted wallet providers, and persons 
who regularly offer to redeem digital assets that were created or 
issued by that person, were required to file information returns, and 
furnish payee statements, under section 6045 with respect to digital 
asset dispositions in exchange for cash, broker services, or other 
property the sale of which is separately subject to reporting under 
section 6045 or with respect to transactions that are subject to 
reporting (with respect to the digital asset recipient) under section 
6050W. Thus, for example, a digital asset trading platform, including 
an operator of a peer-to-peer or AMM trading platform, that facilitates 
a digital asset sale on behalf of a customer should be required to file 
an information return, and furnish a payee statement with respect to 
that sale, reporting the gross proceeds realized by the customer as a 
result of that sale. In addition, reporting should be required by 
digital asset payment processors who facilitate the use of digital 
assets to make payments of cash to others by either effecting the sale 
of digital assets on behalf of the person making payment (and paying 
the cash to the payment recipient) or by agreeing with the recipient of 
a digital asset payment in advance of the payment to exchange the 
digital assets received by that recipient for cash at a predetermined 
exchange rate. Further, digital asset payment processors who facilitate 
payments that are potentially subject to reporting under the existing 
section 6050W regulations should be required to report on the payor's 
exchange of digital assets in those transactions as well. Additionally, 
a stockbroker who accepts digital assets from a customer as payment for 
the customer's purchase of stock should be required to file an 
information return, and furnish a payee statement, reporting the gross 
proceeds realized by the customer as a result of that customer's 
exchange of digital assets for stock. Reporting should also be required 
in this example if the broker accepts digital assets in exchange for 
the broker's services (for example, transaction fees or commissions). 
Finally, to facilitate the filing by taxpayers of accurate information 
returns with respect to digital asset dispositions, substantive rules 
are needed for determining gain or loss in a digital asset sale or 
exchange transaction and for calculating the basis of digital assets.

Explanation of Provisions

    The Treasury Department and the IRS expect to make the changes to 
broker reporting for digital assets in multiple phases. These proposed 
regulations generally focus on changes to existing Sec.  1.6045-1 to 
require brokers to report on digital asset sales. Later phases will 
generally focus on implementing transfer statement reporting under 
section 6045A(a) and broker information reporting under section 
6045A(d) for covered security transfers that are not transfers to 
accounts maintained by persons known to be brokers or subject to 
reporting as sales.

I. Proposed Sec.  1.6045-1

    These proposed regulations generally follow the framework and 
concepts of the existing rules for broker information reporting but 
differ from those rules as necessary to reflect both the unique nature 
of digital assets and the clarifications and changes made to section 
6045 by the Infrastructure Act. These proposed regulations do not 
address every transaction involving digital assets that may give rise 
to income, such as the receipt of digital assets in hard forks, because 
it is more appropriate to address those transactions under other 
provisions of the Code.
A. Expansion of the Types of Property Subject to Reporting
    Under existing Sec.  1.6045-1(a)(9), brokers are generally required 
to file an information return for each sale effected on behalf of a 
customer. A disposition is treated as a sale subject to reporting only 
if the property disposed of is a security, commodity, option, regulated 
futures contract, securities futures contract, or forward contract and 
the disposition is for cash. These proposed regulations provide that 
reporting under section 6045 is also required for certain dispositions 
of digital assets that are made in exchange for cash, different digital 
assets, stored-value cards, broker services, or property subject to 
reporting under existing section 6045 regulations.

1. Definition of Digital Assets

    The definition of digital assets in these proposed regulations 
follows the definition in section 80603(b)(1)(B) of the Infrastructure 
Act. Specifically, proposed Sec.  1.6045-1(a)(19)(i) defines a digital 
asset as a digital representation of value that is recorded on a 
cryptographically secured distributed ledger (or similar technology). 
These proposed regulations also provide that a digital asset does not 
include cash, for example, a fiat currency in digital form such as 
funds in a bank or payment processor account accessed through the 
internet. In addition, under these proposed regulations, the 
determination of whether an asset is a digital asset is made without 
regard to whether each individual transaction involving that digital 
asset is actually recorded on the cryptographically secured distributed 
ledger. The use of cryptography, through the use of public and private 
keys to transfer assets, distinguishes digital assets as defined by the 
Infrastructure Act from other virtual assets and is therefore an 
essential part of the definition.
    By not limiting the definition of digital assets to only those 
digital representations of value for which each transaction is actually 
recorded or secured on a cryptographically secured distributed ledger, 
the definition of digital assets covers transactions involving digital 
representations of value that are recorded by a broker only on its own 
centralized internal ledger. For example, a broker may hold a number of 
units of a digital asset in its own name, similar to holding shares of 
stock in street name, and carry out transactions between customers that 
wish to buy or sell units of that digital asset by first matching 
transactions internally and executing only net purchases or sales on 
the distributed ledger. Additionally, the definition covers 
transactions involving digital representations of value that are 
recorded on ledgers that may or may not be widely or publicly 
distributed.
    The definition of digital assets includes digital representations 
of value that are capable of being recorded using technology that is 
similar to technology that uses cryptography to secure transactions. 
These proposed

[[Page 59582]]

regulations include this similar technology standard to ensure that the 
definition of digital assets captures digital representations of value 
that reflect advancements to the techniques, methods, and technology, 
upon which digital assets are based.
    Section 80603(b)(1)(B) of the Infrastructure Act provides authority 
to the Secretary to modify the definition of digital assets for 
purposes of reporting under section 6045. The Treasury Department and 
the IRS considered applying these regulations to only virtual currency 
or a variant thereof rather than to all digital assets. The Treasury 
Department and the IRS also considered whether newer forms of digital 
assets, such as those referred to as stablecoins or NFTs, should be 
subject to the section 6045 broker reporting rules. The proposed 
regulations would require broker reporting for all types of digital 
assets, for multiple reasons. First, the definition of digital assets 
in the Infrastructure Act is expansive. Second, because the disposition 
of digital assets may give rise to gain or loss, reporting of gross 
proceeds and basis information is useful to taxpayers as well as the 
IRS. For example, some NFTs are readily being bought and sold, often as 
speculative investments on digital asset trading platforms, giving rise 
to gain or loss that is subject to reporting by taxpayers. The Treasury 
Department and the IRS are aware of concerns that applying these 
proposed regulations to such NFTs would create disparate reporting of 
transactions involving the subject of the NFT (such as ownership or 
license interests in artwork or sports memorabilia) depending on 
whether those interests are transferred using an NFT or as a 
traditional sale or license contract. But given that NFTs are popular 
investments, the buying and selling of NFTs raise tax administration 
concerns similar to the concerns associated with other types of digital 
assets that the physical analogues of NFTs do not. For example, like 
other digital assets, NFTs can readily be transferred to a private 
wallet or an offshore account, while the transfer of a physical artwork 
or trading card may be more difficult or costly. Third, there is a 
continuing evolution in the types of digital assets that can be used 
for payment transactions, investment, or for other purposes and this 
inclusive approach is designed to provide clarity as these types of 
digital assets continue to evolve. For example, a taxpayer may acquire 
an NFT to enjoy its artistic merit or for investment, or both. The 
treatment of any particular type of digital asset as reportable under 
these proposed regulations is not intended to imply any 
characterization of that type of digital asset as a matter of 
substantive law. See Part I.K of this Explanation of Provisions for 
further discussion of the reasons why privately issued stablecoins are 
treated as digital assets for purposes of these regulations.
    Finally, it is intended that the definition of digital assets used 
in these proposed regulations would not apply to other types of virtual 
assets, such as assets that exist only in a closed system (such as 
video game tokens that can be purchased with U.S. dollars or other fiat 
currency but can be used only in-game and that cannot be sold or 
exchanged outside the game or sold for fiat currency). It is also 
intended that the regulations would not apply to uses of distributed 
ledger technology or similar technology for ordinary commercial 
purposes that do not create new transferable assets, such as tracking 
inventory or processing orders for purchase and sale transactions, 
which are unlikely to give rise to sales as defined for purposes of the 
regulations. Comments are requested on whether the proposed definition 
of digital assets accurately and appropriately defines the type of 
assets to which these regulations should apply.
2. Coordination With Reporting Rules for Securities, Commodities, and 
Real Estate
    The Treasury Department and the IRS are aware that many provisions 
of the Code incorporate references to the terms security or commodity, 
and that questions exist as to whether, and if so, when, a digital 
asset may be treated as a security or a commodity for purposes of those 
Code sections. Apart from the rules proposed under sections 1001 and 
1012 discussed in Part II of this Explanation of Provisions, these 
proposed regulations are information reporting regulations, and are 
therefore not the appropriate vehicle for answering those questions. 
Because the existing regulations under section 6045 require reporting 
with respect to sales for cash of securities and certain commodities, 
and with respect to real estate transactions in which gross proceeds 
are paid in cash (or consideration treated as cash), coordination rules 
have been included to provide certainty to brokers with respect to 
whether a particular transaction, or portion thereof, is reportable 
under those existing rules or under the proposed rules for digital 
assets and to avoid duplicate reporting obligations. Accordingly, the 
treatment of an asset as reportable as a security, commodity, digital 
asset or otherwise in these proposed rules applies only for purposes of 
sections 1001, 1012, 3406, 6045, 6045A, 6045B, 6050W, 6721, and 6722 
and should not be construed to apply for any other purpose of the Code 
to determine whether a digital asset should or should not be properly 
classified as a security, commodity, option, securities futures 
contract, regulated futures contract, or forward contract. See proposed 
Sec.  1.6045-1(a)(19)(ii). Similarly, the potential characterization of 
digital assets as securities, commodities, or derivatives for purposes 
of any other legal regime, such as the Federal securities laws and the 
Commodity Exchange Act, is outside the scope of these proposed 
regulations.
    The Treasury Department and the IRS are aware that some digital 
asset tokens may be classified as securities for U.S. Federal income 
tax purposes, and that it is possible that tokens constituting 
securities issued by certain U.S. issuers or companies could be traded 
on certain digital asset trading platforms that are subject to these 
rules. If those tokens are securities for Federal income tax purposes, 
and also qualify as digital assets (as defined in proposed Sec.  
1.6045-1(a)(19)), the sale of those tokens for cash could be subject to 
the existing regulations requiring brokers to provide information 
reporting with respect to the sale of securities for cash (that is, 
gross proceeds and basis information) as well as to these proposed 
regulations relating to the sale of digital assets. The Treasury 
Department and the IRS considered several different alternatives for 
addressing this potential overlap.
    The Treasury Department and the IRS considered providing a rule 
that would treat the sale for cash of any digital asset treated as a 
security under current law as a sale of securities and not a sale of 
digital assets for purposes of these proposed regulations. The Treasury 
Department and the IRS, however, have not issued guidance addressing 
when a digital asset should be treated as a security for substantive 
U.S. Federal income tax purposes. Because digital asset trading 
platforms may not be certain whether a particular asset should be 
reported as a security or as a digital asset without that guidance, and 
for the additional reasons described in the next paragraph, the 
Treasury Department and the IRS determined that this alternative would 
not provide the clarity and certainty necessary for information 
reporting purposes.
    The Treasury Department and the IRS also considered providing a 
more limited exception to the definition of digital assets for digital 
representations of value that represent interests in one

[[Page 59583]]

or more units of a security to provide the same information reporting 
rules for a sale of stock for cash as for a sale of tokenized stock for 
cash. This alternative would have several undesirable results. First, 
digital asset trading platforms that trade both tokenized stock and 
other digital assets would be subject to two different sets of 
reporting rules when such assets were sold for cash. Second, tokenized 
stock would be subject to one set of reporting rules if sold for cash--
that is, the existing regulations relating to the reporting of sales of 
securities for cash--and to a different set of reporting rules if sold 
for another digital asset or other consideration--that is, these 
proposed regulations for sales of digital assets. Moreover, the tax 
compliance concerns associated with transactions in digital assets are 
different from the tax compliance concerns associated with trading in 
conventional or non-digital asset securities, including as a result of 
the common market practice of transferring digital assets from a 
centralized platform to a private wallet and back again. Accordingly, 
different reporting rules are warranted for digital assets regardless 
of whether they would also qualify as a security.
    As a result of these considerations, these proposed regulations 
make no changes to the definition of the term security (as defined in 
existing Sec.  1.6045-1(a)(3)) but instead provide a coordination rule 
in proposed Sec.  1.6045-1(c)(8)(i) applicable to transactions 
involving the sale of a digital asset that also constitutes a sale of a 
security as so defined (other than options that constitute contracts 
covered by section 1256(b)). Under this proposed coordination rule, the 
broker must report the sale of an asset that qualifies both as such a 
security and as a digital asset only as a sale of a digital asset and 
not as a sale of a security. See Part I.B of this Explanation of 
Provisions, however, for a discussion of the additional information 
that the broker may be required to provide for transactions involving 
the sale of a digital asset that also constitutes a sale of such a 
security. See Part I.B.3 of this Explanation of Provisions for a 
discussion of the applicable rules for digital assets that are also 
financial contracts, including contracts that are section 1256 
contracts within the meaning of section 1256(b).
    The Treasury Department and the IRS are aware that the financial 
services industry is exploring the use of distributed ledger technology 
or similar technology, such as a blockchain or a shared ledger, to 
process orders associated with conventional or non-digital asset 
securities transactions. Using distributed ledger technology or similar 
technology to process orders associated with securities transactions 
may require the temporary creation of digital representations of 
securities that may fit within the definition of digital assets in 
these proposed regulations. It may be appropriate for these regulations 
not to apply to these transactions because these transactions would 
typically involve securities being transferred from one traditional 
brokerage or custodial account to another. Nonetheless, these proposed 
regulations do not provide a specific exception for these transactions 
because the Treasury Department and the IRS would like to understand 
whether an exception is necessary. Comments are requested on whether 
the definition of digital asset or the reporting requirements with 
respect to digital assets inadvertently capture transactions involving 
conventional or non-digital asset securities that may use distributed 
ledger technology, shared ledgers, or similar technology merely to 
facilitate the processing, clearing, or settlement of orders. Comments 
also are requested on whether and, if so, how the definitions or 
reporting rules should be modified to address other transactions 
involving tokenized or digitized financial instruments that are used to 
facilitate back-office processing of the transaction. If an exception 
for these types of transactions is necessary, the Treasury Department 
and the IRS would also like to understand how it should be drafted so 
that it does not sweep in other transactions (such as tokenized 
securities, or other digital assets treated as securities) that should 
not be exempted from reporting.
    The Treasury Department and the IRS also considered how to apply 
section 6045A and section 6045B to assets that qualify both as 
specified securities under existing Sec.  1.6045-1(a)(14)(i) through 
(iv) for basis reporting purposes and as digital assets under proposed 
Sec.  1.6045-1(a)(19) (dual classification assets) for the period of 
time until rules are promulgated dealing with the application of 
sections 6045A and 6045B to digital assets. Although the existing 
regulations under section 6045A operate to provide important 
information to brokers required to report adjusted basis information to 
the IRS (and taxpayers), it is unclear whether digital asset brokers 
currently have the mechanisms in place to provide transfer statements 
to receiving brokers that receive these dual classification assets in 
transfers that are recorded on a blockchain. With regard to section 
6045B, issuers of dual classification assets may not have procedures in 
place to report information affecting basis. Accordingly, the Treasury 
Department and the IRS have decided to delay transfer statement 
reporting under section 6045A(a) and issuer reporting under section 
6045B for these dual classification assets and will consider rules for 
dual classification assets as part of the implementation of more 
general transfer statement reporting and issuer reporting rules for 
digital asset brokers as part of a later phase of information reporting 
guidance for broker effected digital asset transfers. Proposed 
Sec. Sec.  1.6045A-1(a)(1)(vi) and 1.6045B-1(a)(6) have been added to 
specifically exempt from transfer and issuer reporting any specified 
security that is also a digital asset. See Proposed Sec. Sec.  1.6045A-
1 and 1.6045B-1 in Part IV of this Explanation of Provisions.
    The definition of commodity under existing Sec.  1.6045-1(a)(5) was 
first promulgated in 1983 as part of TD 7873, 48 FR 10302, 10304 (Mar 
11, 1983). Under that definition, the term includes any type of 
personal property or interest therein, the trading of futures contracts 
in which have been approved by the CFTC. Sometime after the 
promulgation of this definition, the CFTC added a new self-
certification mechanism under which new exchange-traded contracts 
become subject to the jurisdiction of the CFTC. Some digital asset 
trading platforms have taken the position that assets underlying 
futures contracts that are subject to the jurisdiction of the CFTC 
pursuant to the CFTC's self-certification procedures are not 
commodities under existing Sec.  1.6045-1(a)(5) because the CFTC did 
not affirmatively approve the listing of these contracts on an 
exchange. The Treasury Department and the IRS believe that the 
reporting regulations should reflect the current practice of the CFTC 
and therefore have modified this rule in proposed Sec.  1.6045-
1(a)(5)(i) to ensure that assets that are subject to the jurisdiction 
of the CFTC pursuant to the CFTC's self-certification procedures are 
included in the definition of commodity for purposes of information 
reporting under section 6045.
    This modification applies broadly to all types of commodities 
subject to the jurisdiction of the CFTC for purposes of section 6045. 
However, because there has been some uncertainty about the scope of the 
term commodity for purposes of section 6045, reporting under section 
6045 for sales of commodities as to which contracts have been self-
certified to the CFTC is proposed to apply to any sale that occurs on 
or after January 1, 2025,

[[Page 59584]]

without regard to the date the self-certification procedures were 
undertaken. Thus, if an asset became subject to the jurisdiction of the 
CFTC pursuant to the CFTC's self-certification procedures prior to 
January 1, 2025, sales of that asset for cash on or after January 1, 
2025, will be subject to reporting as a result of the revised 
definition of commodity under proposed Sec.  1.6045-1(a)(5). This 
change to the definition of commodity does not affect the broker's 
obligation under existing Sec.  1.6045-1(a)(9) and (c) to report on 
regulated futures contracts. For a detailed discussion of the broker 
reporting rules for financial contracts, see Part I.A.3 of this 
Explanation of Provisions.
    Consequently, a digital asset, the trading of regulated futures 
contracts in which has been approved by or, pursuant to proposed Sec.  
1.6045-1(a)(5)(i), self-certified to the CFTC, would be treated as a 
commodity for purposes of reporting under section 6045 absent other 
changes to the existing regulations. Those assets would also be digital 
assets for purposes of these regulations. This dual classification 
could result in confusion as to whether sales of these digital assets 
should be reported as sales of commodities on Form 1099-B, sales of 
digital assets on a form prescribed by the Secretary for digital asset 
sales, or both--potentially resulting in duplicative reporting. To 
avoid confusion and potential duplicative reporting of sales made on or 
after January 1, 2025, these proposed regulations provide a 
coordination rule in proposed Sec.  1.6045-1(c)(8)(i) applicable to 
transactions involving the sale of a digital asset that also 
constitutes a sale of a commodity. Under this proposed coordination 
rule, the broker must report the sale of an asset that qualifies both 
as a commodity and as a digital asset only as a sale of a digital asset 
(along with the additional information that this characterization 
requires) and not as a sale of a commodity.
    Finally, the Treasury Department and the IRS are aware that 
distributed ledger technology or similar technology may be used in 
connection with transactions involving real estate. Using distributed 
ledger technology or similar technology to settle real estate 
transactions requires the creation of digital representations of real 
estate that may fit within the definition of digital assets in these 
proposed regulations. To avoid duplicative reporting for digital assets 
that also constitute reportable real estate and to avoid having real 
estate reporting persons report seller proceeds under an entirely new 
reporting regime, proposed Sec.  1.6045-1(c)(8)(ii) provides a 
coordination rule applicable to transactions involving the sale of a 
digital asset that also constitutes reportable real estate (as defined 
under existing Sec.  1.6045-4(b)(2)) that is subject to reporting under 
existing Sec.  1.6045-4(a). Under this coordination rule, the broker 
must report the sale of reportable real estate only as a sale of 
reportable real estate (and not as a sale of a digital asset).
3. Rules Applicable to Financial Contracts on Digital Assets
    To ensure reporting of sales of financial contracts involving or 
referencing digital assets, these proposed regulations expand the 
existing rules for certain financial products, such as options, 
futures, and forward contracts. Proposed Sec.  1.6045-1(m)(1) expands 
the type of option transactions subject to reporting to generally 
include options on digital assets and options on derivatives with a 
digital asset as an underlying property. Generally, under these 
proposed regulations, how an option transaction is reported will depend 
on: (i) whether the option is a section 1256 contract within the 
meaning of section 1256(b) (section 1256 contract); (ii) whether the 
transaction is a disposition of the option itself or whether the 
transaction involves the delivery of the underlying property; and (iii) 
whether the option is itself a digital asset (digital asset option) or 
is not a digital asset (non-digital asset option).
    For a disposition of an option that is not a section 1256 contract, 
the nature of the option itself determines the appropriate reporting 
treatment; that is, reporting would be required under proposed Sec.  
1.6045-1(a)(9)(i) if the option itself is a non-digital asset option 
and under proposed Sec.  1.6045-1(a)(9)(ii) if the option itself is a 
digital asset option. Because the asset that is disposed of is the 
option itself, this proposed reporting treatment applies without regard 
to whether the digital asset option or non-digital asset option was 
issued with respect to digital asset or non-digital asset underlying 
property. In contrast, when an option that is not a section 1256 
contract is settled by the delivery of the underlying property, 
reporting under these proposed regulations is based on the nature of 
the underlying property, with the delivery of non-digital asset 
underlying property reportable as a sale under proposed Sec.  1.6045-
1(a)(9)(i) and the delivery of digital asset underlying property 
reportable as a sale under proposed Sec.  1.6045-1(a)(9)(ii). Because 
the asset that is disposed of is the asset underlying the option, this 
proposed reporting treatment for the sale of underlying property that 
is physically delivered applies without regard to whether the option is 
itself a digital asset option or a non-digital asset option.
    Because the Treasury Department and the IRS are currently unaware 
of any digital asset options that are also section 1256 contracts, 
these proposed regulations do not provide new rules for such options. 
Rather, proposed Sec.  1.6045-1(c)(8)(iii) provides that reporting of 
these dual classification options should be under the existing rules 
for options that are section 1256 contracts and not under the proposed 
rules for digital assets. Accordingly, for a disposition of an option 
that is a section 1256 contract, reporting is required under existing 
Sec.  1.6045-1(c)(5) regardless of whether the option disposed of is a 
non-digital asset option or a digital asset option or whether the 
option was issued with respect to digital asset or non-digital asset 
underlying property. Further, as required by existing Sec.  1.6045-
1(m)(3) and proposed Sec.  1.6045-1(a)(9)(i) and (c)(8)(iii), when an 
option that is a section 1256 contract is settled by the delivery of 
the underlying property, the profit or loss on the contract itself is 
reportable under existing Sec.  1.6045-1(c)(5), but the underlying sale 
will be subject to reporting under these proposed regulations based on 
the nature of the underlying property, with the delivery of non-digital 
asset underlying property reportable under proposed Sec.  1.6045-
1(a)(9)(i) and the delivery of digital asset underlying property 
reportable under proposed Sec.  1.6045-1(a)(9)(ii). The Treasury 
Department and the IRS invite comments regarding the above-described 
option transactions, including comments about how common are digital 
asset options that are also section 1256 contracts. Comments are also 
requested regarding whether there are other less burdensome 
alternatives for reporting the above-described option transactions. For 
example, whether it would be less burdensome to allow brokers to report 
transactions involving section 1256 contracts that are also digital 
assets or the delivery of non-digital assets that underlie a digital 
asset option as a sale under proposed Sec.  1.6045-1(a)(9)(ii).
    No changes have been made to the rules relating to regulated 
futures contracts in the existing regulations because the definition of 
a regulated futures contract in existing Sec.  1.6045-1(a)(6) can apply 
to a regulated futures contract on digital assets and to regulated 
futures contracts that are

[[Page 59585]]

themselves digital assets. Accordingly, pursuant to proposed Sec.  
1.6045-1(c)(8)(iii), regulated futures contracts will continue to be 
reported under the rules in existing Sec.  1.6045-1(c)(5) and not under 
the proposed rules for digital assets.
    Proposed Sec.  1.6045-1(a)(7)(iii) expands the definition of a 
forward contract subject to reporting to include executory contracts 
requiring delivery of digital assets in exchange for cash, different 
digital assets, or any other property or services that would result in 
a sale of digital assets under proposed Sec.  1.6045-1(a)(9)(ii) if the 
exchange occurred at the time the contract was executed. When a forward 
contract is disposed of without delivery of its underlying property, 
the nature of the forward contract itself determines the appropriate 
reporting treatment. Specifically, reporting is required under proposed 
Sec.  1.6045-1(a)(9)(i) if the forward contract itself is a non-digital 
asset forward contract and under proposed Sec.  1.6045-1(a)(9)(ii) if 
the forward contract is a digital asset forward contract. Because the 
asset that is disposed of is the forward contract itself, this proposed 
reporting treatment applies without regard to whether the forward 
contract was issued with respect to digital asset or non-digital asset 
underlying property. The reporting on the delivery of the underlying 
property with respect to a forward contract, in contrast, does turn on 
the nature of that underlying property. That is, when the underlying 
asset is non-digital asset property, the delivery is reportable under 
proposed Sec.  1.6045-1(a)(9)(i); whereas when the underlying asset is 
digital asset property, the delivery is reportable under proposed Sec.  
1.6045-1(a)(9)(ii). Because the asset that is disposed of when there is 
delivery is the asset underlying the forward contract, this proposed 
reporting treatment for the sale of underlying property that is 
physically delivered applies without regard to whether or not the 
forward contract is itself a digital asset.
    The Treasury Department and the IRS request comments with respect 
to whether there is anything factually unique in the way short sales of 
digital assets, options on digital assets, and other financial product 
transactions involving digital assets are undertaken compared to 
similar transactions involving non-digital assets, and whether these 
transactions with respect to digital assets raise any additional 
reporting issues that have not been addressed in these proposed 
regulations.
B. Definition of Brokers Required To Report
    As described in Part II.C. of the Background, prior to the 
Infrastructure Act, section 6045(c)(1) defined the term broker to 
include a dealer, a barter exchange, and any other person who (for a 
consideration) regularly acts as a middleman with respect to property 
or services. Existing regulations under section 6045 apply the 
``middleman'' portion of this definition to treat as a broker effecting 
a sale a person that as part of the ordinary course of a trade or 
business acts as an agent with respect to a sale if the nature of the 
agency is such that the agent ordinarily would know the gross proceeds 
of the sale. See existing Sec.  1.6045-1(a)(1) and (a)(10)(i)(A).
    Section 80603(a) of the Infrastructure Act clarifies that the 
definition of broker under section 6045 includes any person who, for 
consideration, is responsible for regularly providing any service 
effectuating transfers of digital assets on behalf of another person. 
According to a report by the Joint Committee on Taxation published in 
the Congressional Record prior to the enactment of the Infrastructure 
Act, the change clarified prior law to resolve uncertainty over whether 
certain market participants are brokers. The change was not intended to 
limit the Secretary's authority to interpret the definition of broker. 
167 Cong. Rec. S5702, 5703 (daily ed. Aug. 3, 2021) (Joint Committee on 
Taxation, Technical Explanation of Section 80603 of the Infrastructure 
Act).
    To reflect this clarification made by the Infrastructure Act, 
proposed Sec.  1.6045-1(a)(1) retains the existing definition of broker 
as any person that in the ordinary course of a trade or business stands 
ready to effect sales to be made by others. However, the definition of 
effect under existing Sec.  1.6045-1(a)(10)(i) and (ii), which sets 
forth the various roles under which a broker may take actions on behalf 
of customers, has been revised to provide that any person that provides 
facilitative services that effectuate sales of digital assets by 
customers will be considered a broker, provided the nature of the 
person's service arrangement with customers is such that the person 
ordinarily would know or be in a position to know the identity of the 
party that makes the sale and the nature of the transaction potentially 
giving rise to gross proceeds. This definition is similar to the 
definition in the existing regulations with respect to agents and is 
similarly intended to limit the definition of broker to persons who 
have the ability to obtain information that is relevant for tax 
compliance purposes. The modified definition of effect takes into 
account whether a person is in a position to know information about the 
identity of a customer, rather than whether a person ordinarily would 
know such information, in recognition of the fact that some digital 
asset trading platforms that have a policy of not requesting customer 
information or requesting only limited information have the ability to 
obtain information about their customers by updating their protocols as 
they do with other upgrades to their platforms. The ability to modify 
the operation of a platform to obtain customer information is treated 
as being in a position to know that information. The Treasury 
Department and the IRS expect that this clarified proposed definition 
will ultimately require operators of some platforms generally referred 
to as decentralized exchanges to collect customer information and 
report sales information about their customers, if those operators 
otherwise qualify as brokers. This decision was made because the 
reasons for requiring information reporting on dispositions of digital 
assets do not depend on the manner by which a business operating a 
platform effects customers' transactions. Customers need information 
about gross proceeds and basis to prepare their tax returns; the IRS 
needs that information in order to collect the taxes that are imposed 
under laws enacted by Congress and in order to focus its compliance 
efforts on taxpayers who fail to comply with their obligations to 
report their tax liability; and policy makers need that information in 
order to understand what taxpayers are doing so that they can make 
informed judgments about further laws or other guidance relating to 
digital assets. Moreover, if the manner in which a digital asset 
trading platform operates reduces or eliminates its obligation to 
report information on customer transactions, digital asset trading 
platforms might modify their operations to avoid reporting or customers 
who wish to evade taxes might elect to use a non-reporting platform in 
order to reduce the IRS's ability to identify them as non-compliant.
    The Treasury Department and the IRS recognize that some 
stakeholders may have concerns that providing personal identity 
information may raise privacy concerns, and request comments on whether 
there are alternative approaches that would satisfy tax compliance 
objectives while reducing privacy concerns. The Treasury

[[Page 59586]]

Department and the IRS also request comments on any technological or 
other technical issues that might affect the ability of a non-custodial 
digital asset trading platform that is a person who qualifies as a 
broker to obtain and transmit the information required under these 
proposed regulations and how these issues might be overcome. The 
Treasury Department and the IRS understand that digital asset trading 
platforms operate with varying degrees of centralization and effective 
control by founders or others, and request comments on whether the 
application of reporting rules only to ``persons'' (as described in the 
next paragraph) adequately limits the scope of reporting obligations to 
platforms that have one or more individuals or entities that can 
update, amend, or otherwise cause the platform to carry out the 
diligence and reporting rules of these proposed regulations.
    As used in these proposed regulations, the term person generally 
has the meaning provided by section 7701(a)(1), which provides that the 
term generally includes an individual, a legal entity, and an 
unincorporated group or organization through which any business, 
financial operation or venture is carried on, such as a partnership. 
The term person includes a business entity that is treated as an 
association or a partnership for Federal tax purposes under Sec.  
301.7701-3(b). Accordingly, a group of persons providing facilitative 
services that are in a position to know the customer's identity and the 
nature of the transaction effectuated by customers may be treated as a 
broker whether or not the group operates through a legal entity if the 
group is treated as a partnership or other person for U.S. Federal 
income tax purposes.
    These clarifying changes are intended to apply the reporting rules 
to digital asset trading platforms that provide facilitative services 
and that are in a position to know the customer's identity and the 
nature of the transaction effectuated by customers regardless of the 
manner in which they are organized or operate if the platform or its 
operator (or operators) is a person subject to reporting. Thus, for 
example, the reporting rules apply to custodial digital asset trading 
platforms that act as their customers' legal agents in trading their 
customers' digital assets as well as to operators of non-custodial 
trading platforms that provide digital asset middleman services that 
bring buyers and sellers together and rely on smart contracts to 
execute the transactions without further intervention from the 
operators, despite the fact that such digital asset middlemen may not 
necessarily be acting as legal agents of the customers in those 
transactions. Accordingly, under this definition, in addition to acting 
as either a principal with respect to sales of digital assets in the 
ordinary course of a trade or business, or as an agent (including as a 
custodial agent) if the nature of the agency is such that the agent 
ordinarily would know the gross proceeds of the sale, a broker also 
includes a person who acts as a digital asset middleman for a party in 
a sale of digital assets. Proposed Sec.  1.6045-1(a)(21)(i) defines a 
digital asset middleman as any person who provides a facilitative 
service with respect to a sale wherein the nature of the arrangement is 
such that the person ordinarily would know or be in a position to know 
the identity of the party that makes the sale and the nature of the 
transaction potentially giving rise to gross proceeds from the sale.
    A facilitative service is defined in proposed Sec.  1.6045-
1(a)(21)(iii)(A) as any service that directly or indirectly effectuates 
a sale of digital assets, such as providing: a party in the sale with 
access to an automatically executing contract or protocol; access to 
digital asset trading platforms; order matching services; market making 
functions to offer buy and sell prices; or escrow or escrow-like 
services to ensure both parties to an exchange act in accordance with 
their obligations. Because some persons providing these services or 
products may not be in a position to know the identity of the parties 
making a sale and the nature of the transaction, proposed Sec.  1.6045-
1(a)(21)(iii)(A) specifically excludes from the definition of 
facilitative service persons solely engaged in the business of 
providing distributed ledger validation services--whether through 
proof-of-work, proof-of-stake, or any other similar consensus 
mechanism--without providing other functions or services. For the same 
reason, proposed Sec.  1.6045-1(a)(21)(iii)(A) also excludes from the 
definition of facilitative service persons solely engaged in the 
business of selling hardware or licensing software for which the sole 
function is to permit persons to control private keys which are used 
for accessing digital assets on a distributed ledger. This latter 
exclusion does not, therefore, exclude wallet software providers from 
the definition of facilitative service if the software also provides 
users with direct access to trading platforms from the wallet platform. 
The Treasury Department and the IRS invite comments regarding whether 
the provision of connection software by wallet providers to trading 
platforms (that customers of the trading platforms can then use to 
access their wallets from the trading platform) should be considered a 
facilitative service resulting in the wallet provider being treated as 
a broker. In addition, the Treasury Department and the IRS invite 
comments regarding what additional functions wallet providers might 
provide that would be considered facilitative services. Finally, the 
definition of customer under proposed Sec.  1.6045-1(a)(2) has also 
been revised to include persons that make sales of digital assets using 
brokers who act as digital asset middlemen.
    Under proposed Sec.  1.6045-1(a)(21)(ii)(A), a person is in a 
position to know the identity of the party that makes the sale if that 
person maintains sufficient control or influence over the facilitative 
services provided so as to have the ability to set or change the terms 
under which its services are provided to request that the party making 
the sale provide that party's name, address, and taxpayer 
identification number, in advance of the sale. This rule is similar to 
the standard, recommended by the Financial Action Task Force (FATF), to 
be used to determine whether a creator, owner, operator, or other 
person involved in a decentralized application providing financial 
services should be considered to be a virtual asset service provider 
and should, thus, be subject to anti-money laundering (AML) and 
counter-terrorist financing (CFT) requirements. FATF (2021), Updated 
Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset 
Service Providers, p. 26-28, FATF, Paris. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html. Similarly, under proposed Sec.  1.6045-1(a)(21)(ii)(B), a 
person is in a position to know the nature of the transaction 
potentially giving rise to gross proceeds from a sale if that person 
maintains sufficient control or influence over the facilitative 
services provided so as to have the ability to determine whether and 
the extent to which the transfer of digital assets involved in a 
transaction gives rise to gross proceeds. Thus, a person will be 
considered to be in a position to know the nature of the transaction 
potentially giving rise to gross proceeds from a sale if the person can 
determine that the transaction is a sale (and the gross proceeds from 
that sale) based on the consideration received when a sale transaction 
is completed. As a result, a person will be considered to be in a 
position to know the nature of the transaction potentially

[[Page 59587]]

giving rise to gross proceeds from a sale if the person has the ability 
to modify an automatically executing contract or protocol to which that 
person provides access to ensure that this information is provided upon 
the execution of a sale. For both of these standards, a person will be 
considered as maintaining sufficient control or influence over the 
provided facilitative services so as to have the ability to determine 
customer identities or the nature of transactions if that person has 
the ability to change the fees charged for the facilitative services, 
whether by modifying the existing service arrangement or by 
substituting a new service arrangement. The fact that a digital asset 
trading platform operator has modified an automatically executing 
contract or protocol in the past, or has replaced such a contract with 
another contract in its protocol, strongly suggests that the operator 
has sufficient control or influence over the facilitative services 
provided to obtain the information about either the identity of the 
party that makes the sale or whether and the extent to which the 
transfer of digital assets involved in a transaction gives rise to 
gross proceeds. The Treasury Department and the IRS invite comments 
regarding what other factors should be considered relevant to 
determining whether a person maintains sufficient control or influence 
over provided facilitative services.
    The Treasury Department and the IRS understand that in some cases 
tokens that enable those who hold them to control the ability to change 
the underlying protocol of a platform described as a decentralized 
exchange (referred to as governance tokens) may be held in significant 
part by founders, development teams, or one or more investors and that 
in other cases those governance tokens may be more widely distributed. 
There may also be fact patterns in which a holder of a significant 
amount of governance tokens routinely takes actions that benefit the 
platform, for example reimbursing users whose tokens have been stolen, 
which actions are then ratified by or compensated by the broader group 
of holders of governance tokens. Consequently, there can be a range of 
effective control that ownership of governance tokens can provide, 
based on how widely the tokens are disbursed and whether or not a group 
of persons (normally the founders/development teams/investors) retain 
enough tokens as a group to make decisions. Some decentralized 
autonomous organizations (DAOs) are an example of this organizational 
structure. Even in structures where governance tokens may be widely 
distributed, individuals or groups of token holders can have the 
ability to maintain practical control. In addition, in some cases, so-
called ``administration keys'' exist to allow developers or founders to 
modify or replace the automatically executing contracts or protocols 
underpinning digital asset trading platforms without requiring the vote 
of governance token holders. The Treasury Department and the IRS invite 
comments regarding the circumstances under which an operator does or 
does not maintain sufficient control or influence over the facilitative 
services offered by a digital asset trading platform. Additionally, 
comments are requested regarding whether, and if so, how should the 
ability of users of the platform, shareholders or holders of governance 
tokens to vote on aspects of the platform's operations be considered. 
Finally, comments are requested regarding whether this conclusion 
should be impacted by the existence of full or even partial-access 
administration keys or the ability of the operator to replace the 
existing protocol with a new or modified protocol if that replacement 
does not require holding a vote of governance tokens or complying with 
these voting restrictions.
    As noted, the statutory definition of broker under section 
6045(c)(1)(C) refers to a person who ``for a consideration'' regularly 
acts as a middleman. The revised definition of broker under the 
Infrastructure Act also refers to a person who, ``for consideration,'' 
is responsible for regularly providing any service effectuating 
transfers of digital assets on behalf of another person. The definition 
of broker under existing and proposed Sec.  1.6045-1(a)(1) implements 
this ``for consideration'' qualification by limiting the definition of 
broker to a person who effects sales made by others ``in the ordinary 
course of a trade or business.'' Persons engaged in a trade or business 
necessarily are ``those so engaged for gain or profit.'' See e.g., 
Treas. Reg. Sec.  1.6041-1(b)(1); Groetzinger v. Commissioner, 480 U.S. 
23 (1987). A business may receive different forms of consideration for 
its goods and services. The receipt of fees may be a relevant factor in 
determining whether a person is engaged in the ordinary course of a 
trade or business. However, there may be persons who facilitate 
transfers of digital assets for a fee or other consideration, such as 
individuals who occasionally facilitate transfers but do not do so on a 
regular basis, who are not engaged in a business activity. It is 
intended that this ``trade or business'' requirement will result in a 
more limited definition of broker than that which would apply under a 
less restrictive ``for consideration'' standard. Accordingly, as long 
as a broker effects the sales made by others in the ordinary course of 
its trade or business, it will have a reporting obligation under 
section 6045.
    Proposed Sec.  1.6045-1(a)(10)(i)(B) also revises the definition of 
effect to clarify that a person who acts as a principal with respect to 
a sale is to be treated as effecting a sale only to the extent such 
person is acting in the sale as a broker. Thus, for example, because an 
obligor that regularly issues and retires its own debt obligations is a 
broker, that obligor will be treated as effecting a sale when it 
retires its own debt as part of those regular activities. Similarly, a 
corporation that regularly issues and redeems its own stock will be 
treated as effecting a sale when it redeems its own shares as part of 
these regular activities. Additionally, an issuer of digital assets 
that regularly offers to redeem those digital assets will be treated as 
effecting a sale when it redeems those digital assets as part of these 
regular activities. Finally, proposed Sec.  1.6045-1(a)(10)(i)(C) has 
been revised to clarify that a person who acts as a principal in a sale 
will be treated as effecting sales only if that principal is acting as 
a dealer with respect to the sale that is subject to reporting under 
section 6045. Thus, for example, a retailer who accepts digital assets 
from a customer as payment for the sale of goods is not effecting the 
sale of digital assets on behalf of that customer if that retailer is 
not otherwise a dealer of digital assets. Similarly, an artist in the 
business of creating and selling NFTs that represent interests in the 
artist's work is not effecting the sale of digital assets on behalf of 
purchasers, provided that artist is not otherwise a dealer in digital 
assets. This result is appropriate regardless of whether the artist 
regularly sells NFTs to the purchasers directly or through digital 
asset brokers.
    Proposed Sec.  1.6045-1(b)(1)(vi) through (xi) adds examples of 
persons who are generally considered to be brokers under the above 
definition. Specifically, digital asset trading platforms that also 
provide custodial (hosted wallet) services, operators of non-custodial 
trading platforms (including platforms that effect transactions through 
automatically executing contracts or protocols), digital asset payment 
processors, and operators and owners of digital asset kiosks are 
included as examples of persons who in the ordinary course of their 
trade or business stand ready to effect sales of digital assets on 
behalf of customers. These examples also clarify that even if

[[Page 59588]]

a person's principal business does not meet the definition of broker, 
the person will be considered a broker under the definition if that 
person also regularly stands ready to effect sales of digital assets on 
behalf of customers. Thus, digital asset hosted wallet providers and 
persons who sell or license software to unhosted wallet users will be 
considered brokers if they also facilitate or offer services to 
facilitate the purchase or sale of digital assets.
    Conversely, proposed Sec.  1.6045-1(b)(2)(viii) through (x) 
illustrate that the term broker does not extend to merchants who sell 
goods or services in return for digital assets, persons who are solely 
engaged in the business of validating distributed ledger transactions 
through proof-of-work, proof-of-stake, or any other consensus 
mechanism, without providing other functions or services, and persons 
who are solely engaged in the business of selling hardware or licensing 
software, the sole function of which is to permit a person to control 
private keys which are used for accessing digital assets on a 
distributed ledger, without providing other functions or services.
1. Digital Asset Broker
    Proposed Sec.  1.6045-1(a)(1) provides that a broker means any 
person that in the ordinary course of a trade or business during the 
calendar year stands ready to effect sales to be made by others. As 
applied to brokers standing ready to effect sales for others of digital 
assets (referred to in the preamble as a digital asset broker) the term 
includes not only businesses with physical locations, such as digital 
asset kiosks and other brick and mortar facilities, but also online 
businesses, such as operators of trading platforms that hold custody of 
their customers' digital assets and operators with sufficient control 
or influence over non-custodial trading platforms that effect sales of 
digital assets made for others by providing access to automatically 
executing contracts, protocols, or other software programs that 
automatically effect sales. As noted in the definition of effect 
discussed in Part I.B of this Explanation of Provisions, operators of 
non-custodial trading platforms would know or be in a position to know 
the identity of their customers and the gross proceeds of their sales, 
for example, because these operators have the ability to request that 
new potential customers provide this information and can require that 
their customers use automatically executing exchange contracts that 
provide these operators with the gross proceeds information.
    As noted, the term person generally includes an individual, a legal 
entity, and an unincorporated group or organization through which any 
business, financial operation or venture is carried on. Accordingly, an 
operator of a digital asset trading platform that is an individual or 
legal entity may be treated as a broker, and an operator of a digital 
asset trading platform that is comprised of a group that shares fees 
from the operation of the trading platform, or is otherwise treated as 
an association or a partnership under Sec.  301.7701-3(b), may also be 
treated as a broker even though there is no centralized legal entity 
through which trades are carried out. For example, a DAO may be a 
person that could be treated as a broker under these proposed 
regulations. For a discussion of digital asset trading platforms that 
issue governance tokens providing holders with the power to vote on 
major platform decisions--such as new features to be offered or revised 
governance rights, see Part I.B of this Explanation of Provisions. The 
Treasury Department and the IRS request comments regarding the extent 
to which holders of governance tokens should be treated as operating a 
digital asset trading platform business as an unincorporated group or 
organization.
    A merchant that accepts digital assets directly from a customer as 
payment for its provision of goods or services generally is not a 
broker under these rules. A person is treated as a broker with respect 
to digital assets only if it effects sales of digital assets for 
customers. As described in Part I.C of this Explanation of Provisions, 
a sale by a broker generally includes a disposition of digital assets 
for cash, one or more stored-value cards, broker services, or certain 
other property (including different digital assets) that are subject to 
reporting under section 6045. While a merchant who provides goods, 
services, or other property (rather than digital assets or cash) in 
exchange for a customer's digital assets may be facilitating the 
disposition of the customer's digital assets, that merchant generally 
would not be treated as effecting sales of digital assets for customers 
as a broker because the customer's digital assets are not being 
exchanged for cash or the types of assets that cause the transaction to 
be treated as a sale under the proposed regulations. If the merchant's 
exchange of goods or services for digital assets is effected through a 
digital asset payment processor, however, the digital assets payment 
processor may be treated as a broker.
2. Digital Asset Hosted Wallet Providers
    Under existing regulations, a broker includes an agent with respect 
to a sale in the ordinary course of a trade or business if the nature 
of the agency is such that the agent ordinarily would know the gross 
proceeds of the sale. Consequently, under current law, certain 
securities custodians and other agents are treated as brokers. Under 
the multiple broker rule of existing Sec.  1.6045-1(c)(3)(iii), which 
exempts brokers who conduct sales on behalf of other brokers, only the 
broker that has the closest relationship to the customer is required to 
report information under section 6045.
    In the digital asset industry, some persons stand ready in the 
ordinary course of a trade or business to take custody of and 
electronically store the public and private keys to digital assets held 
on behalf of others. These digital asset hosted wallet providers in 
some cases also effect sales or possess information regarding the 
digital asset sales of their customers in much the way a bank custodian 
or other custodian does for securities. The proposed definition of 
broker includes such a digital asset hosted wallet provider to the 
extent that the digital asset hosted wallet provider also functions as 
a principal in the sale of digital assets, acts as an agent for a party 
in the sale if it would ordinarily know the gross proceeds from the 
sale, or acts as a digital asset middleman and would ordinarily know or 
be in a position to know the identity of the party that makes the sale 
and the gross proceeds from the sale. If a hosted wallet provider 
solely holds and transfers digital assets on behalf of its customers, 
without possessing, or having the ability to possess, any knowledge of 
gross proceeds from sales, the hosted wallet provider would not qualify 
as a broker.
3. Digital Asset Payment Processors
    A number of payment processors permit customers to make payment in 
digital assets. These transactions may take various forms. In many 
cases the customer pays in digital assets, and the payment processor 
exchanges those digital assets for a U.S. dollar amount that is then 
paid to a merchant, for example, in exchange for goods or services, or 
to another intermediary recipient as with a payment card purchase. In 
other cases, the payment processor transfers the digital assets to the 
merchant or other recipient. In both cases, the customer has disposed 
of its digital assets in a transaction that ordinarily is a gain (or 
loss) recognition transaction. These proposed regulations

[[Page 59589]]

would require digital asset payment processors to provide information 
on those dispositions. Payment processors (and in certain circumstances 
merchant acquiring entities within the same network as payment card 
issuers) may separately be required to provide information on the 
merchant transaction under section 6050W, which requires reporting by 
TPSOs and merchant acquiring entities. Therefore, for example, where a 
TPSO effects a transaction involving the exchange of merchandise for 
digital assets, the TPSO will need to report on the disposition of the 
merchandise under section 6050W and on the digital asset disposition 
under section 6045, assuming no exceptions apply.
    A digital asset payment processor is defined in proposed Sec.  
1.6045-1(a)(22)(i)(A) as a person who in the ordinary course of its 
business regularly stands ready to effect digital sales by facilitating 
payments from one party to a second party by receiving digital assets 
from the first party and exchanging them into different digital assets 
or cash paid to the second party, such as a merchant. In some cases, 
payment recipients are willing to receive payments in digital assets 
rather than cash and those payments are facilitated by an intermediary. 
To facilitate a payment transaction in these circumstances, a digital 
asset payment processor might provide the payment recipient with a 
temporarily fixed exchange rate on a digital assets payment that is 
transferred directly from a customer to that payment recipient. This 
temporarily fixed exchange rate may also be available to the merchant 
if it wishes to immediately exchange the digital assets for cash. In a 
transaction of this kind, similar to other merchant transactions 
involving intermediaries that provide cash to the merchants in exchange 
for the merchant's provision of goods or services to the customer, the 
customer disposes of its digital assets in a transaction that gives 
rise to gain (or loss) and receives goods or services, while the 
merchant receives or can choose to receive cash. This customer 
consequently has the same obligation to determine and report its gain 
or loss as in the other type of merchant transaction, and similar 
reporting rules therefore should apply to the digital asset payment 
processor. To address these transactions, for purposes of the 
definition of a digital asset payment processor, these proposed 
regulations treat the transfer of digital assets by a customer directly 
to a second person (such as a vendor of goods or services) pursuant to 
a processor agreement that provides for the temporary fixing of the 
exchange rate to be applied to the digital assets received by the 
second person as if the digital assets were transferred by the customer 
to the digital asset payment processor in exchange for different 
digital assets or cash paid to the second person.
    This characterization of the transaction as a transfer of digital 
assets by the customer to the digital asset payment processor in 
exchange for the payment of different digital assets or cash to the 
second person applies solely for purposes of certain definitions in 
these regulations, to ensure that customer dispositions of digital 
assets for consideration are subject to reporting regardless of the 
details of the arrangements made by the merchant for receiving payment. 
No inference is intended with respect to whether these transactions 
should or may be treated as dispositions for cash for any other purpose 
of the Code. The characterization of the transaction as involving a 
payment of cash to the merchant for purposes of these proposed 
regulations will apply regardless of whether the merchant subsequently 
exchanges the digital assets received pursuant to the temporarily fixed 
exchange rate, because the fixed exchange rate provided by the digital 
asset payment processor both facilitates the transaction and serves as 
a foundation to determine the fair market value received by the 
customer in the exchange. Accordingly, to meet their information 
reporting obligations in these alternatively structured payment 
transactions, digital asset payment processors will need to ensure that 
they obtain the required personal identifying information (that is, 
name, address, and tax identification number) from the customer (that 
is, the party making the payment in digital assets) in advance of these 
transactions. It is anticipated that digital asset payment processors 
will report gross proceeds from the disposition of digital assets by 
customers but may not have the information necessary or available to 
report the basis of the disposed-of digital assets unless they also 
hold digital assets for those customers.
    In addition, because a payment processor knows the gross proceeds 
with respect to an exchange transaction when it is participating in a 
transaction that is potentially reportable under existing Sec.  
1.6050W-1(a)(1), the definition of a digital asset payment processor 
also includes certain payment settlement entities and certain entities 
that make payments to payment settlement entities that are potentially 
subject to reporting under section 6050W. First, proposed Sec.  1.6045-
1(a)(22)(i)(B) provides that a digital asset payment processor includes 
a TPSO (as defined in Sec.  1.6050W-1(c)(2)) that makes (or submits 
instructions to make) payments using one or more digital assets in 
settlement of reportable payment transactions as described in Sec.  
1.6050W-1(a)(2). This treatment of a TPSO as a digital asset payment 
processor applies whether or not the TPSO actually makes (or provides 
the instructions to make) the payment or contracts with a third-party 
electronic payment facilitator, pursuant to Sec.  1.6050W-1(d)(2), to 
make (or provide the instructions to make) the payment. In addition, 
this treatment of a TPSO as a digital asset payment processor applies 
without regard to whether the payment to the merchant is below the de 
minimis threshold described in section 6050W(e) and, thus, not 
reportable under section 6050W.
    Second, the definition of a digital asset payment processor in 
proposed Sec.  1.6045-1(a)(22)(i)(C) includes a payment card issuer 
that makes (or submits the instruction to make) payments in one or more 
digital assets to a merchant acquiring entity, as defined under Sec.  
1.6050W-1(b)(2), in a transaction that is associated with a reportable 
payment transaction under Sec.  1.6050W-1(a)(2) that is effected by the 
merchant acquiring bank. Whether a transaction is associated with a 
reportable payment transaction is determined without regard to whether 
the merchant acquiring bank contracts with an agent to make (or submit 
the instructions to make) its payments to the merchant.
    Proposed Sec.  1.6045-1(a)(2)(ii)(A) clarifies that the customer in 
a digital assets payment processor transaction includes the person who 
transfers the digital assets or directs the transfer of the digital 
assets to the digital asset payment processor to make payment to the 
second person. Thus, for example, a digital asset payment processor's 
customer is the person who transfers the digital assets to that 
processor even if the processor has a contractual arrangement with only 
the second person, that is, the person who will ultimately receive the 
cash in the payment transaction.
    The Treasury Department and the IRS recognize that some 
stakeholders may have concerns that providing personal identity 
information in transactions where the payment processor is an agent of 
a merchant may raise privacy concerns and request comments on whether 
there are alternative approaches that would satisfy tax

[[Page 59590]]

compliance objectives while reducing privacy concerns.
    The Treasury Department and the IRS considered whether a de minimis 
threshold should apply to the reporting of merchant transactions of the 
kind described above, taking into account that the cost and effort to 
build a reporting system may increase if numerous small transactions 
must be reported. Whether there would in fact be an increase in cost 
and effort is uncertain, as in some other information reporting 
contexts reporting entities have elected not to take advantage of de 
minimis thresholds in order to avoid the need to monitor the size or 
amount of the reportable item. Moreover, taxpayers are required to 
report gain from dispositions of digital assets on their tax returns 
regardless of the amount disposed of, and a taxpayer that engages in 
many small dispositions of digital assets may have an aggregate amount 
of gain for the taxable year that is significant. Because information 
reporting assists customers in determining the proper amount of gain or 
loss attributable to such dispositions, these proposed regulations do 
not include a de minimis rule for reporting these merchant 
transactions.
4. Other Brokers
    The definition of broker in existing Sec.  1.6045-1(a)(1) is 
proposed to be modified to include persons that regularly offer to 
redeem digital assets that were created or issued by that person, such 
as in an initial coin offering or redemptions by an issuer of a so-
called stablecoin. A stablecoin is a form of digital asset that is 
intended to have a stable value relative to another asset or assets, 
typically a fiat currency. Some stablecoin issuers effect redemptions 
on behalf of all, or some, of their customers and know the gross 
proceeds paid to their customers. Stablecoin issuers that redeem their 
stablecoins are included in the definition of broker because, 
notwithstanding the nomenclature ``stablecoin,'' the value of a 
stablecoin may not always be stable and therefore may give rise to gain 
or loss. See Additional Definitional Changes in Part I.K of this 
Explanation of Provisions. These proposed regulations apply to persons 
that regularly offer to redeem digital assets rather than persons who 
regularly carry out redemptions to ensure reporting on the occasional 
redemptions by digital asset issuers that may not regularly redeem 
their issued digital assets. The Treasury Department and the IRS 
request comments on the frequency with which creators or issuers of 
digital assets redeem digital assets. In addition, the Treasury 
Department and the IRS request comments regarding whether the broker 
reporting regulations should apply to include initial coin offerings, 
simple agreements for future tokens, and similar contracts.
5. Real Estate Reporting Persons
    Proposed Sec.  1.6045-1(a)(1) was also modified to provide that a 
real estate reporting person is a broker with respect to digital assets 
used as consideration in a real estate transaction if the reporting 
person would be required to make an information return with respect to 
that real estate transaction under proposed Sec.  1.6045-4(a), without 
regard to any reporting exceptions provided under section 6045(e)(5) or 
proposed or existing Sec.  1.6045-4(c) or (d), such as the exception 
for certain sales of principal residences or the exception for exempt 
real estate sellers. Thus, for example, a real estate reporting person 
would be required to report on a real estate buyer's exchange of 
digital assets for real estate as a sale of those digital assets even 
though the real estate reporting person is not required to report on 
the real estate seller's exchange of the real estate for digital assets 
due to the fact that the seller of that real estate is an exempt 
seller, such as a corporation, under existing Sec.  1.6045-4(d).

C. Expansion of the Types of Sales Subject To Reporting

    Digital assets are unique among the types of assets that are 
subject to reporting under section 6045 because it is common for 
digital assets to be exchanged for different digital assets. In 
addition, some digital assets can readily function as a payment method 
as well as an investment asset. Digital assets can be exchanged for 
cash, stored-value cards, services, or other property (including 
different digital assets). To avoid gaps in information reporting with 
respect to this broad range of taxable exchanges, proposed Sec.  
1.6045-1(a)(9)(ii) expands the definition of a sale subject to 
reporting. Proposed Sec.  1.6045-1(a)(9)(ii)(A)(1) and (2) provide that 
a sale includes the disposition of a digital asset in exchange for 
cash, one or more stored-value cards, or a different digital asset. An 
exchange for cash for these purposes includes a payment received 
through the use of a check, credit card, or debit card. Proposed Sec.  
1.6045-1(a)(25) defines a stored-value card as a card--whether in 
physical or digital form--with a prepaid value in U.S. dollars, any 
convertible foreign currency, or any digital asset. A stored-value card 
includes a gift card. The Treasury Department and the IRS request 
comments on whether the types of consideration for which digital assets 
may be exchanged in a sale transaction is sufficiently broad to capture 
current and anticipated transactions in which taxpayers regularly 
dispose of digital assets for consideration.
    In addition, proposed Sec.  1.6045-1(a)(9)(ii)(B) provides that a 
sale of a digital asset includes the disposition of a digital asset by 
a customer in exchange for property (including securities and real 
property) of a type that is subject to reporting under section 6045. 
Thus, for example, if a stockbroker accepts a digital asset from a 
customer as payment for the customer's purchase of stock, that 
disposition of the digital asset in exchange for stock will be treated 
as a sale of the digital asset by that customer for purposes of section 
6045. Similarly, if a real estate reporting person, as defined in 
existing Sec.  1.6045-4(e), is involved in a real estate transaction in 
which the real estate buyer uses digital assets as consideration in the 
exchange for real property, that disposition of digital assets in 
exchange for real property will be treated as a sale of the digital 
assets by that real estate buyer for purposes of section 6045.
    Proposed Sec.  1.6045-1(a)(9)(ii)(C) provides that a sale of 
digital assets also includes a disposition of digital assets by a 
customer in consideration for the services of a broker as defined in 
proposed Sec.  1.6045-1(a)(1). Whether a person is a broker for 
purposes of this rule, however, is determined without regard to whether 
that person regularly as part of its trade or business accepts digital 
assets in consideration for its services. Thus, if a stockbroker 
accepts a digital asset as payment for the commission charged for a 
stock purchase, the customer's disposition of the digital asset in 
exchange for the broker's services will be treated as a sale of the 
digital asset for purposes of section 6045 because the stockbroker is a 
broker due to the fact that it regularly effects sales of stock (not 
because it regularly accepts digital assets for services). In contrast, 
if a landscaper accepts a digital asset as payment for landscaping 
services, the customer's disposition of the digital asset in exchange 
for the landscaper's services will not be treated as a sale of digital 
assets for purposes of section 6045 because the determination of 
whether the landscaper is a broker is made without regard to whether 
that landscaper regularly accepts digital assets in consideration for 
landscaping services as part of a trade or business. Proposed Sec.  
1.6045-1(a)(2)(ii)(B) provides that the customer in these sales is the 
person who transfers the digital

[[Page 59591]]

assets or directs the transfer of the digital assets to the broker 
regardless of whether the broker is a digital asset broker. Proposed 
Sec.  1.6045-1(a)(2)(ii)(C) provides that in the case of a broker that 
is a real estate reporting person with respect to a real estate 
transaction, the customer is the person who transfers the digital 
assets or directs the transfer of the digital assets to the seller of 
the real estate (or the seller's nominee or agent) to acquire the real 
estate. Finally, to ensure that these sales of digital assets are 
treated as effected by a broker, proposed Sec.  1.6045-1(a)(21)(iii)(B) 
provides that the acceptance of digital assets in consideration for the 
above-described property or services provided by a broker is a 
facilitative service. As a result, the broker will be treated as 
effecting these sales of digital assets as a digital asset middleman 
under proposed Sec.  1.6045-1(a)(10)(i)(D).
    In certain circumstances, a digital asset broker (other than a 
digital asset payment processor discussed earlier in Part I.B.3 of this 
Explanation of Provisions) such as a digital asset broker providing 
hosted wallet services might transfer digital assets without knowing 
that the transfer was part of a sale transaction. For example, a 
customer might direct such a custodial broker to transfer digital 
assets to the wallet of a merchant in connection with the purchase of 
goods or services from that merchant. The definition of effect in 
proposed Sec.  1.6045-1(a)(10) limits the sales for which such brokers 
must make a report to those transactions in which the broker (as agent) 
would ordinarily know the gross proceeds from the sale or (as digital 
asset middleman) would ordinarily know or be in a position to know the 
identity of the party that makes the sale and the gross proceeds from 
the sale. Although the custodial broker in this example would 
ordinarily know or be in a position to know the identity of its 
customer, it is not in a position to know that the transfer was 
associated with a sale or exchange transaction or the amount that the 
customer received as gross proceeds from the exchange (that is, the 
amount the customer received in consideration for the digital assets 
surrendered). Accordingly, the transfer of digital assets by that 
custodial broker to the wallet of the merchant does not constitute 
effecting a sale of digital assets by that broker. In contrast, a 
digital asset payment processor would typically know whether the 
transfer was part of a sale transaction because that broker would have 
a contractual relationship with the payment recipient as well as with 
the transferor of the payment. Accordingly, in these cases the transfer 
of digital assets by the digital asset payment processor (or the 
direction to the customer by the digital asset payment processor to 
transfer digital assets) to the wallet of the merchant would constitute 
effecting a sale.
    In view of the increasing use of digital assets to make payments 
for goods and services or to satisfy other payment obligations through 
the intermediation of digital asset payment processors, digital asset 
payment processors (which may also function in other contexts as 
digital asset trading platforms) are subject to these rules. To achieve 
this result, proposed Sec.  1.6045-1(a)(9)(ii)(D) provides that a sale 
includes payments of a digital asset by the customer to a digital asset 
payment processor in exchange for that processor's payment of a 
different digital asset or cash to a second person. A sale also 
includes the transfer of a digital asset by a customer directly to a 
second person (such as a vendor of goods or services) pursuant to a 
processor agreement that provides for the temporary fixing of the 
exchange rate to be applied to the digital asset received by the second 
person, which is treated (under the rules setting forth the definition 
of a digital asset payment processor) as if the digital asset was paid 
by the customer to the digital asset payment processor in exchange for 
a different digital asset or cash paid to that second person.
    In the case of a digital asset payment processor that is a TPSO, a 
sale also includes a customer's payment in digital assets to the 
digital asset payment processor (or pursuant to instructions provided 
by that digital asset payment processor or its agent) as part of a 
transaction in which the digital asset payment processor pays (or is 
treated as paying) the digital assets to a merchant in settlement of a 
reportable payment transaction under Sec.  1.6050W-1(a)(2). This 
payment is a sale of digital assets by the customer under these 
proposed regulations without regard to whether the amount paid to the 
merchant during the calendar year exceeds the de minimis threshold 
described in section 6050W(e) or whether the digital asset payment 
processor contracts with a third party to make (or provide instructions 
to make) the payment to the merchant pursuant to Sec.  1.6050W-1(d)(2). 
Finally, to account for payments that are reportable under section 
6050W with respect to payment card transactions where a digital asset 
payment processor is also a payment card issuer, a sale of digital 
assets also includes a payment made in digital assets by a customer to 
the payment card issuer (or pursuant to instructions provided by that 
card issuer or its agent) in a transaction associated with a reportable 
payment transaction under Sec.  1.6050W-1(a)(2). This treatment of the 
customer's payment as a sale in this case is determined without regard 
to whether the merchant acquiring bank contracts with an agent to make 
(or submit the instructions to make) payment to the ultimate payee. 
Thus, under this rule, in the case of a payment card purchase at a 
merchant, the buyer's payment in a digital asset to the payment card 
issuer will be a sale even if that payment card issuer pays the 
merchant acquiring entity in the same type of digital asset because the 
subsequent payment (whether in cash or in digital assets) by the 
merchant acquiring entity (or its agent) to the merchant is a 
reportable payment transaction under Sec.  1.6050W-1(a)(2).
    A broker's customer may enter into executory contracts, or other 
derivative contracts involving the future delivery of a digital asset, 
where delivery under the contract also should be subject to reporting 
as a digital asset sale under these proposed regulations. To ensure 
that these executory or other derivative contracts do not circumvent 
the proposed information reporting rules for digital assets, proposed 
Sec.  1.6045-1(a)(9)(ii)(A)(3) defines a sale to include the delivery 
of a digital asset pursuant to the settlement of a forward contract, 
option, regulated futures contract, any similar instrument, or any 
other executory contract that would be treated as a sale of the digital 
asset under the regulation if the contract had not been executory.\3\ 
The rules in existing Sec.  1.6045-1(a)(9), redesignated in these 
proposed regulations as proposed Sec.  1.6045-1(a)(9)(i), applicable to 
making or taking delivery (for example, treating a closing transaction 
as one or two sales depending on the nature of the contract) are cross-
referenced to apply to the delivery of digital assets pursuant to 
transactions described in proposed Sec.  1.6045-1(a)(9)(ii)(A)(3). 
Additionally, the rules in existing Sec.  1.6045-1(a)(9) applicable to 
the circumstances under which a transaction is treated as a sale with 
respect to certain contracts and options are cross-referenced to apply 
to determine if similar transactions related to digital assets 
constitute sales described in proposed Sec.  1.6045-1(a)(9)(ii)(A). 
Accordingly, the entering into of a digital asset contract that

[[Page 59592]]

requires delivery of personal property, the initial grant or purchase 
of a digital asset option, or the exercise of a purchased digital asset 
call option for physical delivery (except for a contract described in 
section 988(c)(5)) is not included in the definition of sale under 
proposed Sec.  1.6045-1(a)(9)(ii)(A).
---------------------------------------------------------------------------

    \3\ No inference is intended as to when a sale of a digital 
asset occurs under any other legal regime, including the Federal 
securities laws and the Commodity Exchange Act, or to otherwise 
impact the interpretation or applicability of those laws, which are 
outside the scope of these regulations.
---------------------------------------------------------------------------

    Thus, for example, the closing of a regulated futures contract that 
involves making a delivery of digital assets will be treated as two 
sales, one under redesignated proposed Sec.  1.6045-1(a)(9)(i) with 
respect to the profit or loss on the contract, and the other under 
proposed Sec.  1.6045-1(a)(9)(ii)(A)(3) on the delivery of the digital 
assets. The Treasury Department and the IRS invite comments addressing 
the extent to which these rules create logistical concerns for the 
reporting on contracts involving the delivery of digital assets. 
Additionally, the delivery of a digital asset under an executory 
contract will be treated as a sale of the digital asset under these 
rules if the underlying terms of the contract (for example, an exchange 
of one digital asset for a different digital asset) would have given 
rise to a sale under these rules if the contract had been executed when 
made. In contrast, if the underlying terms of the contract would not 
have been treated as a sale under these rules (for example, the direct 
payment of a digital asset by a consumer to a merchant in exchange for 
merchandise without the involvement of a digital asset payment 
processor), then the delivery of the digital asset pursuant to this 
type of executory contract will not be treated as a sale. The Treasury 
Department and the IRS invite comments regarding how frequently forward 
contracts involving digital assets are traded in practice, and whether 
there are any additional issues that should be considered to enable 
brokers to report on these transactions.
    Finally, there are several types of transactions that the 
definition of sale under proposed Sec.  1.6045-1(a)(9)(ii) does not 
include. For example, the definition does not include a transaction in 
which a customer receives new digital assets without disposing of 
something else in exchange. Thus, for example, a sale does not include 
a hard fork transaction, in which a customer receives new digital 
assets as part of a protocol change in previously held digital assets 
without disposing of different digital assets in exchange. Similarly, 
the receipt by a customer of digital assets from an airdrop (or 
simultaneous distribution of units of digital assets to the distributed 
ledger addresses of multiple taxpayers) does not constitute the sale of 
digital assets under proposed Sec.  1.6045-1(a)(9)(ii) even if the 
customer's holdings in existing digital assets are the basis on which 
the new digital assets were received. Additionally, the definition of 
sale under proposed Sec.  1.6045-1(a)(9)(ii) does not include a 
transaction in which a broker's customer receives digital assets in 
return for the performance of services. Thus, for example, a sale does 
not include the receipt by a broker's customer of new digital assets as 
a reward in return for certain marketing-related services such as 
taking a survey.
    The Treasury Department and the IRS are aware that the transactions 
described in this Part I.C of this Explanation of Provisions do not 
address every type of transaction involving digital assets that 
taxpayers engage in through entities defined in these proposed 
regulations as brokers. For example, these proposed regulations do not 
specify whether a loan of digital assets is required to be reported. 
These proposed regulations also do not specifically address whether 
reporting is required for transactions involving the transfer of 
digital assets to and from a liquidity pool by a liquidity pool 
provider, or the wrapping and unwrapping of a digital asset, in light 
of the absence of guidance on those transactions. Comments are 
requested on whether the definition of sale or other parts of the 
regulations should be revised to address transactions not described in 
these proposed regulations.
D. Information To Be Reported for Digital Asset Sales
    Several new subparagraphs have been added to the rules contained in 
existing Sec.  1.6045-1(d)(2)(i) to address the information required to 
be reported with respect to digital asset sales. Much of the 
information required to be reported is similar to the information that 
is currently required to be reported on the Form 1099-B with respect to 
securities. For example, proposed Sec.  1.6045-1(d)(2)(i)(B) requires 
that for each digital asset sale for which a broker is required to file 
an information return, the broker must report on the form prescribed by 
the Secretary the following information:
     The customer's name, address, and taxpayer identification 
number;
     The name or type of the digital asset sold and the number 
of units of the digital asset sold;
     The sale date and time;
     The gross proceeds of the sale; and
     Any other information required by the form or instructions 
in the manner required by the form or instructions.
    Additionally, to aid the IRS in verifying valuations provided for 
reported gross proceeds and in determining whether the basis claimed by 
taxpayers in connection with transactions for which adjusted basis 
information is not reported by the broker, proposed Sec.  1.6045-
1(d)(2)(i)(B) also requires that the broker report:
     The transaction identification (transaction ID or 
transaction hash) associated with the digital asset sale, if any;
     The digital asset address (or digital asset addresses if 
multiple) from which the digital asset was transferred in connection 
with the sale, if any; and
     Whether the consideration received was cash, different 
digital assets, other property, or services.
    In addition to these listed items, if the transaction involves the 
sale of a digital asset that also constitutes a sale of a security, the 
broker must also provide certain information that is relevant to the 
sale of securities as required by the form or instructions. It is 
anticipated that this additional information will be required only for 
digital assets that are digital representations of other assets that 
constitute securities.
    To the extent the sale is of a digital asset that was held by the 
broker in a hosted wallet on behalf of the customer and that digital 
asset was previously transferred into that account (transferred-in 
digital asset), the broker must also report the date and time of such 
transfer-in transaction, the transaction ID of such transfer-in 
transaction, the digital asset address (or digital asset addresses if 
multiple) from which the transferred-in digital asset was transferred, 
and the number of units transferred in by the customer as part of that 
transfer-in transaction. The Treasury Department and the IRS intend to 
except brokers from reporting this additional information with respect 
to the sale of transferred-in digital assets once rules have been 
promulgated under section 6045A with respect to brokers who receive 
transfer statements under section 6045A for digital assets. Until that 
time, this information would be used by the IRS to verify the basis 
claimed by the taxpayer in connection with the sale of the transferred-
in digital asset.
    For purposes of the above reporting requirements, proposed Sec.  
1.6045-1(a)(20) defines a digital asset address as the unique set of 
alphanumeric characters that is generated by the wallet into which the 
digital asset will be transferred. Some digital asset addresses may be 
referred to as wallet addresses. Additionally, proposed Sec.  1.6045-
1(a)(26) defines a transaction identification, or transaction ID, as 
the unique set of alphanumeric identification characters that a digital 
asset distributed ledger associates with

[[Page 59593]]

a transaction involving the transfer of a digital asset from one 
digital asset address to another. A transaction ID is alternatively 
referred to as a ``Txid'' or ``transaction hash.''
    The Treasury Department and the IRS recognize that the requirement 
to report transaction ID information and digital asset addresses with 
respect to digital asset sales and certain digital asset transfer-in 
transactions may be burdensome under certain circumstances. 
Accordingly, the Treasury Department and the IRS request comments 
regarding whether there are other less burdensome alternatives that 
would allow the IRS the ability to investigate or verify basis 
information provided by taxpayers. For example, should the Treasury 
Department and the IRS consider an annual aggregate digital asset sale 
threshold, above which the broker would report transaction ID 
information and digital asset addresses? If so, what should that 
threshold be and why?
    When available, drafts of the form prescribed by the Secretary will 
be posted for comment at www.irs.gov/draftforms. Brokers will only be 
required to file the form following approval of the information 
collection under the Paperwork Reduction Act. The Paperwork Reduction 
Act approval process requires the IRS to publish a 60-day notice and 
request for comments in the Federal Register and subsequently publish a 
30-day notice and request for comments in the Federal Register for the 
Office of Management and Budget's (OMB) review and clearance. Proposed 
Sec.  301.6721-1(g)(3)(iii) (failure to file correct information 
returns) and proposed Sec.  301.6722-1(d)(2)(viii) (failure to furnish 
correct payee statements) have been modified to include the form 
prescribed by the Secretary pursuant to proposed Sec.  1.6045-
1(d)(2)(i)(B) in the list of forms subject to those penalties.
    For sales of digital assets that are effected when recorded on a 
broker's internal accounting ledger, proposed Sec.  1.6045-1(d)(4)(ii) 
provides that the broker must report the sale as of the date and time 
the sale was recorded on that internal ledger regardless of whether 
that sale is later recorded on a distributed ledger. Reporting the time 
of the transaction under a uniform time standard would eliminate any 
confusion that would be caused by reporting transactions by the same 
taxpayer in different local time zones. The Treasury Department and the 
IRS understand that transaction timestamps undertaken on blockchains 
are generally recorded using Coordinated Universal Time (UTC). 
Accordingly, proposed Sec.  1.6045-1(d)(4)(ii) provides that the 
reported date and time should generally be set forth in hours, minutes, 
and seconds using UTC unless otherwise directed in the form prescribed 
by the Secretary pursuant to proposed Sec.  1.6045-1(d)(2)(i)(B) or 
instructions. It is anticipated that the time standard required by this 
form prescribed by the Secretary or instructions will correspond to any 
successor convention for time generally used by the industry. Proposed 
Sec.  1.6045-1(d)(4)(iii) provides examples of a broker reporting time 
using the UTC time convention based on a 12-hour clock (designating 
a.m. and p.m. as appropriate). The Treasury Department and the IRS 
request comments regarding whether it would be less burdensome to 
report the time using a 24-hour clock and the extent to which all 
brokers should be required to use the same 12-hour or 24-hour clock for 
these purposes. The Treasury Department and the IRS also request 
comments regarding whether a uniform time standard is overly burdensome 
and the extent to which there are circumstances under which more 
flexibility should be provided. For example, if a particular customer's 
transactions are carried out only in one time zone, the customer might 
prefer reporting that is based on that time zone, particularly for 
transactions for which the exact date and time of acquisition or 
disposition affect the determination of the customer's tax liability, 
such as transactions that take place just before the end of the 
customer's taxable year or that relate to the customer's holding period 
for the disposed-of digital asset. The Treasury Department and the IRS 
request comments regarding whether there are alternatives to basing the 
transaction date on the UTC for customers who are present in a 
different time zone known to the broker at the time of the transaction.
    These information reporting rules will require digital asset 
brokers to expend resources to develop and implement information 
reporting systems to comply with the required reporting. Balancing on 
the other side of that consideration is the concern that limited 
information reporting by brokers has made it difficult, time-consuming, 
and expensive for taxpayers to calculate their gains or losses on these 
transactions and has contributed to significant underreporting by 
taxpayers of gain generated by digital asset sale and exchange 
transactions. Accordingly, these changes are proposed to apply to sales 
and exchanges of digital assets effected on or after January 1, 2025. 
No inference should be drawn from these proposed rules concerning the 
reporting requirements for digital asset sale transactions entered into 
before the regulations become applicable.
E. Gross Proceeds in Digital Asset Transactions
1. Determining the Gross Proceeds in a Sale Transaction
    The information reporting rules for determining the gross proceeds 
in a sale transaction generally follow the substantive rules for 
computing the amount realized from transactions involving the sale or 
other disposition of digital assets. These substantive rules are 
provided under proposed Sec.  1.1001-7(b) and discussed in Part II of 
this Explanation of Provisions. Accordingly, proposed Sec.  1.6045-
1(d)(5)(ii)(A) defines gross proceeds to be reported by a broker with 
respect to a customer's sale of digital assets as the sum of: (i) the 
total amount in U.S. dollars paid to the customer or credited to the 
customer's account as a result of the sale; (ii) the fair market value 
of any property received or, in the case of a debt instrument issued in 
exchange for the digital asset and subject to Sec.  1.1001-1(g), the 
amount realized attributable to the debt instrument as determined under 
proposed Sec.  1.1001-7(b)(1)(iv) (in general, the issue price of the 
debt instrument); and (iii) the fair market value of any services 
received, including services giving rise to digital asset transaction 
costs; reduced by the amount of the allocable digital asset transaction 
costs as discussed in Part I.E.3 of this Explanation of Provisions. 
Part I.E.2 of this Explanation of Provisions provides the rules 
applicable to determining the fair market value of property or services 
received in an exchange transaction.
    In the case of a sale effected by a digital asset payment processor 
on behalf of one party, proposed Sec.  1.6045-1(d)(5)(iii) provides 
that the amount of gross proceeds to be reported by the digital asset 
payment processor is equal to the sum of the amount paid in cash, or 
the fair market value of the amount paid in digital assets by the 
digital asset payment processor to a second party, plus any digital 
asset transaction costs withheld (whether withheld from the digital 
assets transferred by the first party or withheld from the amount due 
to the second party), reduced by the amount of the allocable digital 
asset transaction costs as discussed in Part I.E.3 of this Explanation 
of Provisions. For purposes of this calculation, the amount paid by a 
digital asset payment processor to a second person includes

[[Page 59594]]

the amount treated as paid to the second person pursuant to a processor 
agreement that temporarily fixes the exchange rate between that second 
person and a digital asset payment processor, which amount is 
determined by reference to the fixed exchange rate.
2. Determining the Fair Market Value of Property or Services Received 
in an Exchange Transaction
    In determining the fair market value of property or services 
received by the customer in an exchange transaction involving digital 
assets, the information reporting rules generally follow the 
substantive rules provided under proposed Sec.  1.1001-7(b) discussed 
in Part II of this Explanation of Provisions. Accordingly, proposed 
Sec.  1.6045-1(d)(5)(ii)(A) provides that in determining gross proceeds 
under these rules, the fair market value should be measured as of the 
date and time the transaction was effected. Additionally, except in the 
case of services giving rise to digital asset transaction costs, to 
determine the fair market value of services or property (including 
different digital assets or real property) paid to the customer in 
exchange for digital assets, proposed Sec.  1.6045-1(d)(5)(ii)(A) 
provides that the broker must use a reasonable valuation method that 
looks to the contemporaneous evidence of value of the services, stored-
value cards, or other property. In contrast, because the value of 
digital assets used to pay for digital asset transaction costs is 
likely to be significantly easier to determine than any other measure 
of the value of services giving rise to those costs, the Treasury 
Department and the IRS have determined for administrability purposes 
that brokers must look to the fair market value of the digital assets 
used to pay for digital asset transaction costs in determining the fair 
market value of services (including the services of any broker or 
validator involved in executing or validating the transfer) giving rise 
to those costs. The Treasury Department and the IRS, however, request 
comments regarding whether there are circumstances under which an 
alternative valuation rule would be more appropriate.
    In the case of one digital asset exchanged for a different digital 
asset, proposed Sec.  1.6045-1(d)(5)(ii)(A) provides that the broker 
may rely on valuations performed by a digital asset data aggregator 
using a reasonable valuation method. For this purpose, a reasonable 
valuation method looks to the exchange rate and the U.S. dollar 
valuations generally applied by the broker effecting the exchange as 
well as other brokers, taking into account the pricing, trading 
volumes, market capitalization, and other relevant factors in 
conducting the valuation. Because taking into account these described 
factors from small volume exchangers could provide skewed valuations of 
a digital asset, proposed Sec.  1.6045-1(d)(5)(ii)(C) provides that a 
valuation method is not a reasonable method if the method over-weighs 
prices from exchangers that have low trading volumes or if the method 
under-weighs exchange prices that lie near the median price value. A 
valuation method also is not a reasonable method if it inappropriately 
weighs factors associated with a price that would make that price an 
unreliable indicator of value. For example, if trading prices on a 
digital asset trading platform are affected by structured trading that 
tends to increase the price of assets beyond the price that an 
unrelated purchaser with knowledge of the facts would pay, using the 
prices from that digital asset trading platform may not be part of a 
reasonable valuation method.
    Consistent with the substantive rules discussed in Part II of this 
Explanation of Provisions, if in a digital asset exchange transaction 
there is a disparity between the value of the services or property 
received and the value of the digital asset transferred, proposed Sec.  
1.6045-1(d)(5)(ii)(B) provides that the broker must look to the fair 
market value of the services or property received. If the broker 
reasonably determines that the value of services or property received 
cannot be valued with reasonable accuracy, proposed Sec.  1.6045-
1(d)(5)(ii)(B) provides that the fair market value of the received 
services or property must be determined by reference to the fair market 
value of the transferred digital asset. If the broker reasonably 
determines that neither the digital asset nor the services or other 
property exchanged for the digital asset can be valued with reasonable 
accuracy, proposed Sec.  1.6045-1(d)(5)(ii)(B) provides that the broker 
must report an undeterminable value for gross proceeds from the 
transferred digital asset.
3. Determining Digital Asset Transaction Costs Allocable to the Sale in 
an Exchange Transaction
    Many digital asset brokers will charge a single transaction fee in 
the case of an exchange of one digital asset for a different digital 
asset. In some cases, these fees may be adjusted depending on the type 
of digital asset acquired or disposed of in the exchange, with 
transactions involving less commonly traded digital assets carrying 
higher transaction fees than transactions involving more commonly 
traded digital assets. The Treasury Department and the IRS considered 
various approaches to allocating transaction fees and other digital 
asset transaction costs that are charged in an exchange of one digital 
asset for a different digital asset. Ultimately, to avoid the 
administrative complexities associated with distinguishing between 
special broker fee allocations that appropriately reflect the economics 
of the transaction and broker fee allocations that reflect tax-
motivated requests, proposed Sec.  1.6045-1(d)(5)(iv) provides that in 
the case of a sale or disposition of digital assets, the total digital 
asset transaction costs paid by the customer are generally allocable to 
the disposition of the digital assets. An exception applies, however, 
in an exchange of one digital asset for another digital asset differing 
materially in kind or in extent. In that case, one-half of any digital 
asset transaction cost paid by the customer in cash or property to 
effect the exchange should be allocable to the disposition of the 
transferred digital asset and the other half should be allocable to the 
acquisition of the received digital asset. These rules are consistent 
with the substantive rules provided under proposed Sec.  1.1001-7(b) 
and proposed Sec.  1.1012-1(h) discussed in Part II of this Explanation 
of Provisions. Finally, proposed Sec.  1.6045-1(d)(5)(iv) defines the 
term digital asset transaction costs to mean the amount paid to effect 
the disposition or acquisition of a digital asset and includes 
transaction fees paid to a digital asset broker, any transfer taxes 
that apply, and any other commissions or other costs paid to effect the 
disposition or acquisition of a digital asset.
F. Adjusted Basis Reporting for Digital Assets and Certain Financial 
Contracts on Digital Assets
1. Mandatory Broker Reporting
    Section 6045(g) requires a broker that is otherwise required to 
make a return under section 6045(a) with respect to covered securities 
to report the adjusted basis with respect to those securities. Under 
section 6045(g)(3)(A), a covered security is any specified security 
acquired on or after the acquisition applicable date if the security 
was either acquired through a transaction in the account in which the 
security is held or was transferred to that account from an account in 
which the security was a covered security, but only if the broker 
received a transfer statement under section 6045A with respect to that 
security. Prior to the amendments made by the Infrastructure Act, the 
term specified security was defined by

[[Page 59595]]

section 6045(g)(3)(B) to mean any share of stock in a corporation; any 
note, bond, debenture, or other evidence of indebtedness; any commodity 
or commodity derivative if the Secretary determines that adjusted basis 
reporting is appropriate; and any other financial instrument with 
respect to which the Secretary determines that adjusted basis reporting 
is appropriate. For stock in a corporation, sections 6045(g)(3)(C)(i) 
and (ii) provide that the acquisition applicable date is either January 
1, 2011, or January 1, 2012, depending on whether the average basis 
method is permissible under section 1012. Prior to the amendments made 
by the Infrastructure Act, section 6045(g)(3)(C)(iii) provided the 
acquisition applicable date for specified securities other than stock, 
including for any other financial instrument with respect to which the 
Secretary determines that adjusted basis reporting is appropriate, was 
January 1, 2013, or such later date as determined by the Secretary. 
Under the existing regulations, reporting of adjusted basis is required 
only for stock, debt instruments, options on stock and debt and related 
financial attributes such as interest rates or dividend yields, and 
securities futures contracts.
    The Treasury Department and the IRS intend to issue a separate 
notice of proposed rulemaking to implement the legislative changes to 
section 6045A which would require applicable persons, including 
brokers, to provide transfer statements under section 6045A when 
digital assets are transferred. These transfer statements are needed 
for digital assets that are acquired by taxpayers in one account and 
transferred to another account to provide the brokers who effect sales 
of digital assets with the information necessary to report the adjusted 
basis of the sold digital assets. Section 6045A addresses this 
information shortfall with respect to transferred securities by 
requiring that the acquiring broker or other applicable person provide 
the purchase date and basis information for a transferred security to 
the receiving broker. The legislative changes to section 6045A made in 
section 80603(b)(2)(A) of the Infrastructure Act not only clarify that 
transfer statement reporting under section 6045A(a) applies to covered 
securities that are digital assets, but also add a new reporting 
provision under section 6045A(d) to provide for broker information 
reporting to the IRS on transfers of digital assets that are covered 
securities, provided the transfer is not a sale and is not to an 
account maintained by a person that the broker knows or has reason to 
know is also a broker.
a. Digital Assets Acquired by Custodial Brokers and Certain Financial 
Contracts on Digital Assets
    Brokers who acquire digital assets for customers, provide custodial 
services for these digital assets, and continue to hold those digital 
assets until sale have the necessary information to determine the 
customers' adjusted basis in these digital assets. By contrast, brokers 
who receive a transfer of a customer's digital assets that were 
acquired for that customer by another broker may not have that 
information. As a result, the Treasury Department and the IRS have 
determined that mandatory basis reporting under these proposed 
regulations should apply only to sales of digital assets that were 
previously acquired, held until sale, and then sold by a custodial 
broker for the benefit of a customer. Accordingly, until rulemaking 
under section 6045A is complete, the definition of a covered security 
for purposes of digital asset basis reporting is limited under proposed 
Sec.  1.6045-1(a)(15)(i)(J) to digital assets that are acquired in a 
customer's account by a broker providing hosted wallet services. 
Therefore, sale transactions effected by custodial brokers of digital 
assets that were not previously acquired in the customer's account and 
sale transactions effected by non-custodial brokers, such as those that 
taxpayers may refer to as decentralized exchanges, are not subject to 
these mandatory basis reporting rules.
    In contrast to digital assets, financial contracts (such as options 
and forward contracts) on digital assets that are not themselves 
digital assets are not held by brokers on behalf of customers in hosted 
wallets. Accordingly, the definition of a covered security subject to 
mandatory basis reporting for these non-digital asset options and 
forward contracts on digital assets is not limited to contracts held by 
brokers providing hosted wallet services. Instead, basis reporting for 
these financial contracts is required under these proposed regulations 
pursuant to the expanded definition of a covered security under 
proposed Sec.  1.6045-1(a)(15)(i)(H) (non-digital asset options) and 
proposed Sec.  1.6045-1(a)(15)(i)(K) (non-digital asset forward 
contracts) as long as they are granted, entered into, or acquired in a 
customer's account at a broker or custodian pursuant to the rules in 
existing Sec.  1.6045-1(a)(15)(ii).
b. Acquisition Applicable Date
    The recordkeeping burden for taxpayers transacting in digital 
assets can be significant. To determine whether a sale or exchange of a 
digital asset gives rise to gain or loss and the holding period for the 
asset, the taxpayer must know both the gross proceeds from the 
transaction as well as the adjusted basis and acquisition date of the 
digital asset. Determining a taxpayer's adjusted basis in a digital 
asset or portion of a digital asset sold or exchanged can be a complex 
endeavor, particularly for taxpayers that carry out frequent 
acquisitions and sales or exchanges of digital assets, as the taxpayer 
may need to track every transaction the taxpayer has carried out with 
respect to that digital asset both in the current taxable year and in 
prior taxable years. This is particularly true for interchangeable 
digital asset units for which minute fractions of previously purchased 
units can be sold on different dates. Complexity is further increased 
when transaction fees paid in digital assets give rise to separate 
digital asset sale transactions of the digital assets used to pay the 
transaction fees. Given these recordkeeping complexities, the Treasury 
Department and the IRS have determined that adjusted basis reporting by 
brokers for digital assets would both improve tax administration and 
assist taxpayers who sell or exchange digital assets to comply with 
their own basis tracking and reporting requirements, as well as 
assisting the IRS to determine whether a taxpayer has properly reported 
its gain or loss. Accordingly, these proposed regulations provide that 
for each sale of a digital asset that is a covered security for which a 
broker is required to make a return of information, the broker must 
also report the adjusted basis of the digital asset sold, the date and 
time the digital asset was purchased, and whether any gain or loss with 
respect to the digital asset sold is long-term or short-term (within 
the meaning of section 1222 of the Code). The remainder of the 
discussion in this Part I.F.1.b of this Explanation of Provisions 
describes when a digital asset is treated as a covered security under 
these proposed regulations.
    Section 80603(b)(1) of the Infrastructure Act adds digital assets 
to the list of specified securities for which basis reporting is 
specifically required, provided that the digital asset is acquired on 
or after January 1, 2023 (the acquisition applicable date for digital 
assets). January 1, 2023, is prior to the date on which these proposed 
regulations may be finalized. Accordingly, the Treasury Department

[[Page 59596]]

and the IRS considered whether the acquisition date on or after which 
brokers should be required to track and report basis for digital assets 
acquired in a customer's account should be January 1, 2023 or should 
instead be a date after the finalization of these proposed regulations. 
In considering that question, the Treasury Department and the IRS have 
taken into account that while few digital assets have been in existence 
for more than a few years, the value of some of those digital assets 
has fluctuated significantly over relatively short periods of time. In 
addition, unlike the securities industry, in which the oldest records 
were first created on paper many decades ago and were then often stored 
physically on paper or microfilm, the oldest records created and stored 
by digital asset brokers were created and continue to be stored 
electronically as a matter of business practice. Thus, a digital asset 
broker has the ability to provide information regarding acquisition 
date, time, and cost (adjusted basis information) to customers with 
respect to digital assets previously acquired by that broker on behalf 
of its customers. The Treasury Department and the IRS understand that 
some digital asset brokers currently voluntarily provide this 
information to customers in response to customer requests for that 
information. Moreover, digital asset platforms have been aware since 
the enactment of the Infrastructure Act that digital assets would be 
treated as covered securities if acquired on or after January 1, 2023, 
and providing basis information for digital assets acquired on or after 
that date will assist taxpayers to properly prepare their tax returns 
for future sales of those assets. See section 6045(g)(3)(C)(iii). 
Accordingly, proposed Sec.  1.6045-1(a)(15)(i)(J) expands the 
definition of a covered security for which adjusted basis reporting 
will be required under proposed Sec.  1.6045-1(d)(2)(i)(C) to include 
digital assets acquired in a customer's account on or after January 1, 
2023, by a broker providing hosted wallet services.
    As discussed in Part I.F.1.a of this Explanation of Provisions, 
these proposed regulations also expand the definition of a covered 
security for which adjusted basis reporting will be required under 
proposed Sec.  1.6045-1(d)(2)(i)(C) to include certain non-digital 
asset options on digital assets and non-digital asset forward contracts 
on digital assets. Proposed Sec.  1.6045-1(a)(15)(i)(H) expands the 
definition of a covered security to include non-digital asset options 
on digital assets to the extent they are granted or acquired in an 
account on or after January 1, 2023, and proposed Sec.  1.6045-
1(a)(15)(i)(K) expands the definition of a covered security to include 
non-digital asset forward contracts on digital assets to the extent 
they are granted or acquired in an account on or after January 1, 2023.
    Notwithstanding the proposed use of January 1, 2023 as the 
acquisition date on or after which brokers should be required to track 
and report basis for digital assets acquired in a customer's account, 
proposed Sec.  1.6045-1(d)(2)(i)(C) would require adjusted basis 
reporting for sales of digital assets treated as covered securities and 
for non-digital asset options and forward contracts on digital assets 
only to the extent the sales are effected on or after January 1, 2026, 
in order to allow brokers additional time to build appropriate 
reporting and basis retrieval systems. That is, under these proposed 
regulations a broker providing custodial services for digital asset 
would be required to provide adjusted basis reporting for sales of 
digital assets effected on or after January 1, 2026, if the digital 
asset is acquired and continuously held by that broker in the 
customer's account on or after January 1, 2023. Additionally, any type 
of broker effecting sales of non-digital asset options on digital 
assets and non-digital asset forward contracts on digital assets would 
be required to provide adjusted basis reporting for sales of these 
assets if they were granted, entered into, or acquired on or after 
January 1, 2023.
2. Voluntary Broker Reporting
    Some brokers may be capable of providing the information required 
in these regulations with respect to digital asset sales prior to the 
applicability dates, and some brokers may be capable of providing the 
information required in these regulations for digital assets that are 
not covered securities. To encourage reporting by digital asset brokers 
that are not subject to mandatory basis reporting, these proposed 
regulations apply the same penalty waiver rule to digital asset brokers 
that voluntarily report adjusted basis information on noncovered 
securities as currently applies to securities brokers. Accordingly, 
under proposed Sec.  1.6045-1(d)(2)(iii)(A), brokers that voluntarily 
report adjusted basis information with respect to sales of digital 
asset-related noncovered securities (that is, digital assets acquired 
prior to January 1, 2023, options on digital assets granted or acquired 
in an account prior to January 1, 2023, and forward contracts on 
digital assets entered into or acquired in an account on or prior to 
January 1, 2023, which assets are not covered securities under proposed 
Sec.  1.6045-1(a)(15)(i)(H), (J) or, (K)), are not subject to penalties 
under section 6721 or 6722 for failure to report or furnish the 
adjusted basis information correctly. Additionally, proposed Sec.  
1.6045-1(d)(2)(iii)(B) provides that brokers that choose to report 
sales of digital assets before the applicability date of these 
regulations (that is, gross proceeds from the sale of digital assets 
effected prior to January 1, 2025, or adjusted basis information with 
respect to sales effected prior to January 1, 2026), will not be 
subject to penalties under section 6721 or 6722 for failure to report 
or furnish that information correctly. Brokers that choose to report on 
sales of digital assets before the applicability date of these 
regulations can make that report on either the Form 1099-B, Proceeds 
From Broker and Barter Exchange Transactions, or, if available in time 
for this reporting, the form prescribed by the Secretary pursuant to 
proposed Sec.  1.6045-1(d)(2)(i)(B).
3. Determining the Adjusted Basis
    To ensure that the rules governing the calculation of adjusted 
basis apply to digital asset transactions, these proposed regulations 
modify existing Sec.  1.6045-1(d)(6)(i) and (d)(6)(ii)(A), which 
provide the general rules for determining the adjusted basis of a 
security and detail how to calculate the initial basis of a security. 
First, proposed Sec.  1.6045-1(d)(6)(i) and (d)(6)(ii)(A) clarify that 
the rules therein apply for determining the adjusted basis of a 
specified security that is subject to the broker basis reporting rules, 
whether or not the asset is within the definition of security under 
existing Sec.  1.6045-1(a)(3). Additionally, proposed Sec.  1.6045-
1(d)(6)(ii)(A) is modified to add, in the case of a digital asset sale, 
digital asset transaction costs to the list of costs that are included 
in calculating the initial basis of a specified security. Accordingly, 
under proposed Sec.  1.6045-1(d)(6)(ii)(A), the initial basis of a 
specified security that is a digital asset and that is acquired for 
cash is the total amount paid by the customer (or credited against the 
customer's account) for the specified security, increased by any 
commissions, transfer taxes, and digital asset transaction costs 
related to its acquisition.
    The existing regulations do not permit brokers to adjust the basis 
of securities acquired to reflect income recognized upon the exercise 
of a compensatory option or the vesting or exercise of other equity-
based compensation arrangements, to the extent the securities were 
granted or acquired on or after January 1, 2014. This decision was made 
because compensation

[[Page 59597]]

information is not generally accessible to most brokers, and, in many 
situations, a broker would have to accept customer-provided information 
to track the compensation-related status of these arrangements. 
Additionally, requiring basis reporting for securities acquired as part 
of equity-based compensation arrangements would have required extensive 
reprogramming of brokers' underlying databases and reporting systems. 
TD 9616, 78 FR 23116, 23122 (Apr. 18, 2013). For the same reasons, 
proposed Sec.  1.6045-1(d)(6)(ii)(A) adds digital asset-based 
compensation arrangements to the types of services arrangements for 
which brokers are prohibited from adjusting to reflect income 
recognized.
    These proposed regulations provide special rules for determining 
the initial basis of digital assets acquired in exchange for property, 
including different digital assets or real property. These rules are 
provided to avoid discrepancies associated with transactions in which 
the fair market value of property, including different digital assets, 
transferred is not equal to the fair market value of the digital assets 
received. See Proposed Sec. Sec.  1.1001-7, 1.1012-1(h), and 1.1012-
1(j) in Part II of this Explanation of Provisions in connection with 
exchanges of digital assets for different digital assets. In accordance 
with the principles described there, proposed Sec.  1.6045-
1(d)(6)(ii)(C)(1) provides that the initial basis of a digital asset 
received in an exchange for property that is not a debt instrument 
described in proposed Sec.  1.1012-1(h)(1)(v) is the fair market value 
of the digital asset received at the time of the exchange, increased by 
any digital asset transaction costs allocable to the acquisition of 
that digital asset. Proposed Sec.  1.6045-1(d)(6)(ii)(C)(2) provides 
that the total digital asset transaction costs paid by the customer in 
an acquisition of digital assets are allocable to the digital assets 
received. An exception is provided, however, in the case of an exchange 
of one digital asset for a different digital asset differing materially 
in kind or in extent. Rather, in the case of an exchange of one digital 
asset for a different digital asset differing materially in kind or in 
extent, one-half of any digital asset transaction costs paid in cash or 
property to effect the exchange is allocable to the disposition of the 
transferred digital asset and one-half is allocable to the acquisition 
of the received digital asset for the purpose of determining basis 
under proposed Sec.  1.6045-1(d)(6)(ii)(C)(1). These allocation rules 
are consistent with the rules provided in proposed Sec.  1.1012-1(h) 
discussed in Part II of this Explanation of Provisions. Finally, 
proposed Sec.  1.6045-1(d)(6)(ii)(C)(1) provides that for digital 
assets acquired in exchange for a debt instrument described in proposed 
Sec.  1.1012-1(h)(1)(v), the initial basis of the digital asset 
attributable to the debt instrument is equal to the amount determined 
under the rules provided in Sec.  1.1012-1(g) (generally equal to the 
issue price of the debt instrument) plus any allocable digital asset 
transaction costs.
    In determining the initial basis of a digital asset acquired in an 
exchange, if the broker or digital asset data aggregator reasonably 
determines that the value of the digital asset received cannot be 
determined with reasonable accuracy, proposed Sec.  1.6045-
1(d)(6)(ii)(C)(1) provides that the fair market value of the digital 
asset received must be determined by reference to the property 
transferred at the time of the exchange. If the broker or digital asset 
data aggregator reasonably determines that neither the value of the 
digital asset received, nor the value of the property transferred can 
be determined with reasonable accuracy, proposed Sec.  1.6045-
1(d)(6)(ii)(C)(1) provides that the broker must report zero for the 
initial basis of the received digital asset.
    Finally, these proposed regulations reserve two paragraphs at 
proposed Sec.  1.6045-1(d)(6)(vii) and (ix) to accommodate final 
regulations implementing safe harbor exceptions for de minimis errors 
on information returns and payee statements, which are expected to be 
finalized before these proposed regulations are finalized.
G. Ordering Rules
    Proposed Sec.  1.6045-1(d)(2)(ii)(B) provides ordering rules that 
are consistent with the ordering rules under proposed Sec.  1.1012-
1(j)(3) for a broker to determine which units of the same digital asset 
should be treated as sold when the customer previously acquired, or had 
transferred in, multiple units of that same digital asset on different 
dates or at different prices. Under these rules, a broker must report a 
sale of less than the customer's entire position in an account in 
accordance with a customer's identification of the digital assets to be 
sold. These proposed regulations provide, similar to the rules for 
identifying lots of stock that are sold when a taxpayer sells less than 
all of its shares in a particular company, that an adequate 
identification is made if a customer notifies the broker no later than 
the date and time of sale which units of a type of digital asset it is 
selling. See Proposed Sec. Sec.  1.1001-7, 1.1012-1(h), and 1.1012-1(j) 
in Part II of this Explanation of Provisions.
    In cases where a customer does not provide an adequate 
identification by the date and time of sale, proposed Sec.  1.6045-
1(d)(2)(ii)(B) provides that the units of the digital asset sold are 
the earliest units of that type of digital asset either purchased 
within or transferred into the customer's account with the broker. For 
purposes of this ordering rule, units of a digital asset are treated as 
transferred into the customer's account as of the date and time of the 
transfer. Once rules have been promulgated under section 6045A, it is 
anticipated that brokers who receive transfer statements under section 
6045A with respect to transferred-in digital assets would be permitted 
to use the actual purchase date of these digital assets for purposes of 
determining which units are the earliest units of that type of digital 
asset held in the customer's account with the broker.
H. Exceptions To Reporting
    These proposed regulations leave unchanged for digital asset 
brokers the exceptions to reporting provided under existing Sec.  
1.6045-1(c) for exempt recipients and excepted sales. Thus, for 
example, no reporting is required for sales of digital assets effected 
on behalf of certain customers, such as certain corporations, financial 
institutions, tax exempt organizations, or governments or political 
subdivisions thereof. The Treasury Department and the IRS considered 
adding registered money services businesses (MSBs), as defined in 31 
CFR 1010.100(ff), to the list of recipients a broker may treat as 
exempt from reporting under existing Sec.  1.6045-1(c)(3)(i)(B) but did 
not do so because the Treasury Department and the IRS are not aware of 
any public method for determining whether a registered MSB is compliant 
with its obligations under the Bank Secrecy Act. See Part I.I.4 of this 
Explanation of Provisions for a discussion of some of the obligations 
of registered MSBs under the Bank Secrecy Act. A registered MSB that is 
not compliant with its obligations under the Bank Secrecy Act may also 
fail to comply with its obligations to report information to the IRS.
    The special multiple broker rule under existing Sec.  1.6045-
1(c)(3)(iii) provides that a broker is not required to file a return of 
information if it is instructed to initiate a sale on behalf of a 
customer by a person that is an exempt recipient under existing Sec.  
1.6045-1(c)(3)(i)(B)(6) (registered dealer in securities or 
commodities), existing Sec.  1.6045-1(c)(3)(i)(B)(7)

[[Page 59598]]

(registered futures commission merchant), or existing Sec.  1.6045-
1(c)(3)(i)(B)(11) (financial institution). This rule is intended to 
avoid duplicative reporting. Although the avoidance of duplicative 
reporting is also a desirable goal for digital asset reporting, there 
are some practical considerations that impede the extension of the 
multiple broker rule to digital asset brokers that are not exempt 
recipients under the existing regulations. First, in some cases it may 
be difficult for a broker to determine whether a particular digital 
asset platform also qualifies as a broker for purposes of these 
proposed regulations. Second, even if a digital asset broker can 
determine that the person that instructed the broker to initiate a sale 
on behalf of a customer is also a digital asset broker, there is a 
higher level of risk that the multiple broker rule would result in no 
reporting of the sale than is the case with traditional financial 
institutions. Unlike the three types of listed exempt recipients, 
digital asset brokers are not necessarily subject to the type of 
prudential or supervisory regulation that would tend to provide 
assurance to the IRS that the broker will comply with its tax reporting 
obligations. Accordingly, while the Treasury Department and the IRS 
considered whether to add digital asset brokers to the list of exempt 
recipients for which the multiple broker rule would apply, it was 
decided that it was not appropriate at this time to expand the rule in 
this way. The Treasury Department and the IRS, however, welcome 
suggestions that could work to avoid duplicative broker reporting 
without sacrificing the certainty that at least one of the multiple 
brokers will report. Specifically, to what extent will a broker know 
with certainty that another party involved in a transaction is also a 
broker with a reporting obligation under these rules.
I. Sales Effected at an Office Outside the United States or on Behalf 
of Exempt Foreign Persons
    This Part I.I describes the provisions in these proposed 
regulations relating to when U.S. brokers and, in some cases, non-U.S. 
brokers may treat a customer as an exempt foreign person and therefore 
not be required to report on digital asset sales effected for the 
customer. These rules are based on the rules in the existing 
regulations that provide that reporting is not required with respect to 
customers that may be treated as exempt foreign persons.
    The Organisation for Economic Development and Co-operation has 
developed and approved the Crypto-Asset Reporting Framework (CARF), 
which is a framework for the reporting and automatic exchange of 
information on crypto-assets. The Treasury Department and the IRS are 
currently considering how the United States could implement the CARF, 
so that the IRS could receive information on sales effected for U.S. 
taxpayers by non-U.S. brokers through an automatic exchange of 
information with other countries that have implemented the CARF. It is 
anticipated that implementation of CARF by the United States would 
require the modification of the proposed regulations described in this 
Part I.I to ensure that U.S. brokers collect the information required 
to be exchanged under the framework, to the extent that the collection 
of that information is permitted under U.S. law, and to exempt some 
non-U.S. brokers from collecting certain information required under the 
proposed regulations. For example, the modifications may require 
reporting by U.S. brokers of certain information on transactions 
effected for customers that are treated under these proposed 
regulations as exempt foreign persons and relieve certain non-U.S. 
brokers of reporting under section 6045 on sales effected for U.S. 
customers if the IRS is entitled to receive information on such 
transactions from a foreign tax administration pursuant to an automatic 
exchange of information mechanism. Any modified rules would be reissued 
for notice and comment.
    Under existing Sec.  1.6045-1(a)(1), a U.S. payor or middleman is 
considered a broker (and therefore subject to the reporting rules under 
section 6045) with respect to sales effected at an office inside the 
United States and sales effected at an office outside the United 
States, while a non-U.S. payor or middleman is considered a broker (and 
therefore subject to the reporting rules under section 6045) only with 
respect to sales it effects at an office inside the United States. A 
U.S. payor or middleman includes a U.S. person (including a foreign 
branch of a U.S. person), a controlled foreign corporation (as defined 
in Sec.  1.6049-5(c)(5)(i)(C)), certain U.S. branches, a foreign 
partnership with controlling U.S. partners and a U.S. trade or 
business, and a foreign person for which 50 percent or more of its 
gross income is effectively connected with a U.S. trade or business. A 
non-U.S. payor or middleman is a payor or middleman other than a U.S. 
payor or middleman.
    A sale is treated as effected at an office located outside the 
United States under existing Sec.  1.6045-1(g)(3)(iii)(A) if the broker 
completes the acts necessary to effect the sale outside the United 
States pursuant to instructions directly transmitted to that office 
from outside the United States by the broker's customer. If, however, 
specified indicia of U.S.-based activity are associated with a 
customer's sale (such as if the customer has transmitted instructions 
to the foreign office of the broker from within the United States, or 
gross proceeds are transferred into an account maintained by the 
customer in the United States), the sale (which would otherwise be 
treated as effected at an office outside the United States) will be 
treated as effected at an office inside the United States. See existing 
Sec.  1.6045-1(g)(3)(iii)(B). Even when a sale is treated as effected 
at an office inside the United States by a broker that is a non-U.S. 
payor or middleman, existing Sec.  1.6045-1(c)(3)(ii)(B) excepts the 
sale from reporting if the broker is a foreign financial institution 
that reports with respect to the account of the customer for which the 
sale was effected under the broker's requirements under chapter 4 of 
the Code or an applicable intergovernmental agreement to implement the 
provisions commonly known as the Foreign Account Tax Compliance Act 
(FATCA) of the Hiring Incentives to Restore Employment Act of 2010, 
Public Law 111-147, 124 Stat. 71 (March 18, 2010).
    Regardless of the location of the sale and whether a broker is a 
U.S. or non-U.S. payor, reporting under section 6045 also does not 
apply to sales effected for a customer that a broker may treat as an 
exempt recipient or as an exempt foreign person. See existing Sec.  
1.6045-1(c)(3) and (g)(1). Under existing Sec.  1.6045-1(c)(3)(i)(C), a 
broker may treat a customer as an exempt recipient based on a Form W-9, 
Request for Taxpayer Identification Number and Certification, the 
broker's actual knowledge that the customer is an exempt recipient, or 
applicable indicators, depending on the type of exempt recipient 
status. Except in circumstances under which a broker is permitted to 
presume a customer is a foreign person, to treat the customer as an 
exempt foreign person a broker must obtain for a customer a beneficial 
owner withholding certificate, such as a Form W-8BEN, Certificate of 
Foreign Status of Beneficial Owner for United States Tax Withholding 
and Reporting (Individuals). Alternatively, for a sale effected at an 
office outside the United States, brokers may use documentary evidence 
to establish that a customer is an exempt foreign person. Documentary 
evidence can include a driver's license, other government issued 
identification, or certain other information supporting the customer's 
foreign status. See

[[Page 59599]]

existing Sec. Sec.  1.6045-1(g)(1)(i) (referencing the documentation 
requirements of Sec.  1.6049-5(c)) and 1.6049-5(d)(2) and (3) 
(presumption rules applicable in absence of reliable documentation). 
Finally, payments that are reportable under section 6045 may also be 
subject to backup withholding under section 3406, generally when a 
broker has failed to obtain a valid Form W-9 for a customer, subject to 
certain exceptions.
    The existing regulations under section 6045 rules were written 
based on a business model for securities that assumed that brokers 
would have offices at physical locations where customer transactions 
may be booked, and that brokers would generally have direct, in-person 
contact with their customers. In comparison to the business model of 
securities brokers that existed at the time the existing regulations 
were promulgated, digital asset brokers typically interact with, and 
effect sales on behalf of, customers entirely online, without any in-
person interactions with the customer. This business model means that 
brokers can transact with customers across jurisdictional borders, 
without necessarily having a branch or place of business in the 
jurisdiction where the customers are located. These proposed 
regulations therefore provide rules to adapt the concept of effecting a 
sale at an office outside the United States and the rules relating to 
exempt foreign persons to the digital asset broker business model.
    Under these proposed regulations, the determination of whether a 
sale is effected at an office inside or outside the United States is 
generally not based on the physical location where the acts necessary 
to effect a sale of digital assets are undertaken. Instead, proposed 
Sec.  1.6045-1(g)(4) classifies a broker as a U.S. digital asset 
broker, a CFC digital asset broker, or a non-U.S. digital asset broker, 
and provides rules for determining the location of a digital asset sale 
for each type of broker. That is, the determination of whether a sale 
is treated as effected at an office outside the United States begins 
with reference to the classification of the broker under these proposed 
regulations, rather than being an independent determination based on 
the location of the brokers' activities. In general, sales by U.S. 
digital asset brokers are treated as effected at an office inside the 
United States, and sales by CFC digital asset brokers and non-U.S. 
digital asset brokers are treated as effected at an office outside the 
United States, although there are circumstances under which sales 
effected by such brokers are treated as effected at an office inside 
the United States. These proposed regulations also incorporate certain 
modifications to the requirements for how each of these three types of 
brokers determine the foreign status of a customer for purposes of 
determining when the customer may be treated as an exempt foreign 
person. For CFC digital asset brokers and non-U.S. digital asset 
brokers, sales generally are not subject to backup withholding tax 
under proposed regulations under section 3406, although notable 
exceptions apply when the broker is considered to be conducting 
substantial business within the United States or when the broker has 
actual knowledge that the customer is a U.S. person.
1. Rules for U.S. Digital Asset Brokers
    Under proposed Sec.  1.6045-1(g)(4)(i)(A), a U.S. digital asset 
broker is a U.S. payor or middleman (as defined in Sec.  1.6049-
5(c)(5)), other than a controlled foreign corporation within the 
meaning of Sec.  1.6049-5(c)(5)(i)(C), that effects sales of digital 
assets for customers. A U.S. payor or middleman that is considered a 
U.S. digital asset broker for this purpose includes a U.S. person 
(including a foreign branch of a U.S. person), a U.S. branch of a 
foreign entity described in Sec.  1.1441-1(b)(2)(iv) that is treated as 
a U.S. person for purposes of withholding and reporting on specified 
payments under chapters 3, 4, and 61 of the Code, a foreign partnership 
with controlling U.S. partners and a U.S. trade or business, and a 
foreign person for which 50 percent or more of its gross income is 
effectively connected with a U.S. trade or business. As U.S. payors, 
U.S. digital asset brokers are treated as brokers under proposed Sec.  
1.6045-1(a)(1) with respect to all sales of digital assets they effect 
for their customers.
    Proposed Sec.  1.6045-1(g)(4)(ii) provides rules for a U.S. digital 
asset broker to determine the location of digital asset sales and the 
foreign status of its customers. Under these rules, all sales of 
digital assets effected by a U.S. digital asset broker are considered 
effected at an office inside the United States. Under these proposed 
regulations, a U.S. digital asset broker is required to report 
information with respect to sales effected for its customers unless the 
broker can treat the customer as an exempt recipient under existing 
Sec.  1.6045-1(c)(3) or as an exempt foreign person. Finally, a payment 
by a U.S. digital asset broker that is reportable under section 6045 
may also be subject to backup withholding under section 3406 when the 
broker has failed to obtain a valid Form W-9 for a customer, subject to 
certain exceptions.
    To treat a customer as an exempt foreign person, unless there is an 
applicable presumption rule that allows that treatment under proposed 
Sec.  1.6045-1(g)(4)(vi)(A)(2), a U.S. digital asset broker must obtain 
from the customer a valid beneficial owner withholding certificate 
described in Sec.  1.1441-1(e)(2)(i) and (ii), such as a Form W-8BEN 
for a customer who is an individual, and must apply the reliance rules 
under proposed Sec.  1.6045-1(g)(4)(vi) with respect to the beneficial 
owner withholding certificate. Similar to the existing rules for 
securities brokers, proposed Sec.  1.6045-1(g)(4)(ii)(B) provides that 
a broker that obtains a beneficial owner withholding certificate from 
an individual may rely on the beneficial owner withholding certificate 
only if it includes a certification that the beneficial owner has not 
been, and at the time the beneficial owner withholding certificate is 
furnished reasonably expects not to be, present in the United States 
for a period aggregating 183 days or more during each calendar year to 
which the beneficial owner withholding certificate pertains. This 
certification is incorporated onto Form W-8BEN through the 
representation on that form that the person signing the form is an 
exempt foreign person in accordance with the instructions to the form, 
which instructions reference this requirement. U.S. digital asset 
brokers may not rely on documentary evidence such as a foreign driver's 
license or a government identification card to determine whether a 
customer may be treated as an exempt foreign person.
    The rules described in the preceding paragraph are generally 
similar to those that apply under existing law for securities brokers 
that are U.S. payors or middlemen, except with respect to sales 
effected at an office outside the United States. The proposed rules for 
U.S. digital asset brokers differ from the rules for securities brokers 
in this case because securities brokers that are U.S. payors may rely 
on documentary evidence for sales effected at an office outside the 
United States. This approach was not adopted in these proposed 
regulations because of the difficulty of determining whether a sale of 
a digital asset is effected at an office inside or outside the United 
States. The Treasury Department and the IRS request comments on the 
approach adopted by these proposed regulations. If a commenter offers 
suggestions for an alternative approach that could be used to 
differentiate between a U.S. digital asset broker's U.S. business and 
non-U.S. business for purposes of allowing

[[Page 59600]]

different documentation to be used for the broker's non-U.S. business, 
the Treasury Department and the IRS request that the commenter explain 
how the alternative approach could be objectively applied and why the 
alternative would not be readily subject to manipulation.
    See Part I.I.5 of this Explanation of Provisions for further 
discussion of the documentation, reliance, and presumption rules that 
U.S. digital asset brokers must apply to treat their customers as 
exempt foreign persons.
2. Rules for CFC Digital Asset Brokers Not Conducting Activities as 
Money Services Businesses
    Under proposed Sec.  1.6045-1(g)(4)(i)(B), a CFC digital asset 
broker is a controlled foreign corporation (as defined in Sec.  1.6049-
5(c)(5)(i)(C)) that effects sales of digital assets for customers. 
Under these proposed regulations, a CFC digital asset broker must use 
different rules to determine the place of a digital asset sale and the 
foreign status of its customers based on whether the CFC digital asset 
broker is considered under these proposed regulations to be conducting 
activities as an MSB (conducting activities as an MSB), with respect to 
sales of digital assets. See Part I.I.4 of this Explanation of 
Provisions for discussion of the rules for CFC digital asset brokers 
conducting activities as MSBs with respect to sales of digital assets 
as well as the rationale behind those rules.
    Under these proposed regulations, a sale effected by a CFC digital 
asset broker not conducting activities as an MSB is considered a sale 
effected at an office outside the United States. These CFC digital 
asset brokers, like U.S. digital asset brokers, report on all sales 
other than sales effected for an exempt recipient (as defined in 
existing Sec.  1.6045-1(c)(3)(i)(B)) or an exempt foreign person. See 
proposed Sec.  1.6045-1(a)(1) (providing that for a sale effected at an 
office outside the United States, a broker includes only a U.S. payor 
or U.S. middleman). Requiring CFC digital asset brokers generally to 
report all sales, like U.S. digital asset brokers, is consistent with 
the existing regulations for securities brokers, which treat controlled 
foreign corporations as U.S. payors or middlemen, and which require 
U.S. payors or middlemen to report both on sales effected at an office 
inside the United States and on sales effected an office outside the 
United States (unless an exception applies).
    Under these proposed regulations, a CFC digital asset broker not 
conducting activities as an MSB is permitted to rely on documentary 
evidence, rather than a withholding certificate, to determine whether a 
customer is an exempt foreign person. This rule is also consistent with 
the existing regulations for securities brokers, under which a broker 
may rely on documentary evidence to determine that a customer is an 
exempt foreign person if the broker effects the sale at an office 
outside the United States. The existing regulations for traditional 
brokers determine where a sale is effected by looking to, among other 
things, the location of the office that completes the acts necessary to 
effect the sale. A securities broker that is a controlled foreign 
corporation is likely to effect sales at an office outside the United 
States and thus may rely on documentary evidence to treat a customer as 
an exempt foreign person. Therefore, although these proposed 
regulations have a different framework than the existing regulations, 
unless the CFC digital asset broker is conducting activities as an MSB 
(as discussed in Part I.I.4 of this Explanation of Provisions), the 
same basic principles generally apply to controlled foreign 
corporations under both the proposed and existing regulations. Finally, 
also unlike a U.S. digital asset broker, a CFC digital asset broker not 
conducting activities as an MSB is not subject to backup withholding 
with respect to reportable sales unless it has actual knowledge that 
the customer is a U.S. person. Thus, if a CFC digital asset broker not 
conducting activities as an MSB has actual knowledge that a customer is 
a U.S. person, and the customer does not provide a valid Form W-9 to 
the broker, the broker must both report a sale or exchange of a digital 
asset by that customer to the IRS and backup withhold on the gross 
proceeds of the transaction.
3. Rules for Non-U.S. Digital Asset Brokers That Are Not Conducting 
Activities as Money Services Businesses
    A non-U.S. payor or non-U.S. middleman under Sec.  1.6049-5(c)(5) 
that effects sales of digital assets on behalf of customers is a non-
U.S. digital asset broker under proposed Sec.  1.6045-1(g)(4)(i)(C). A 
non-U.S. digital asset broker must use different rules to determine the 
location of its digital asset sales and, for sales that are effected 
within the United States, the foreign status of its customers is based 
on whether the broker is considered conducting activities as an MSB. 
See Part I.I.4 of this Explanation of Provisions for discussion of the 
rules for non-U.S. digital asset brokers conducting activities as MSBs 
as well as the rationale behind those rules.
    Under these proposed regulations, a sale effected by a non-U.S. 
digital asset broker not conducting activities as an MSB is generally 
treated as effected at an office outside the United States unless the 
broker collects documentation or information that indicates that the 
customer has connections to the United States or may be a U.S. person. 
For a sale effected at an office outside the United States, a non-U.S. 
digital asset broker not conducting activities as an MSB would not be 
considered a broker under proposed Sec.  1.6045-1(a)(1) and would not 
be required to report the sale under proposed Sec.  1.6045-1(c).
    These proposed regulations do not require non-U.S. digital asset 
brokers that are not conducting activities as MSBs to obtain 
documentation from customers prior to making a payment to the customer. 
However, these non-U.S. digital asset brokers may be obligated to 
collect documentation or information from customers under applicable 
anti-money laundering laws or other applicable laws (referred to as an 
AML program), or may otherwise collect information on customers under 
the broker's policies and procedures, and that documentation or 
information may include information that indicates that a customer has 
connections to the United States or may be a U.S. person (as described 
in the following paragraph). In such a case, these proposed regulations 
treat the sale as effected at an office inside the United States and 
require the non-U.S. digital asset broker to report a sale effected on 
behalf of this customer after the broker obtains that documentation or 
information, unless the broker determines that the customer is an 
exempt foreign person or an exempt recipient (as defined in existing 
Sec.  1.6045-1(c)(3)(i)(B)) or the broker closes the account before 
effecting the sale for the customer. However, these proposed 
regulations limit the indicators of a connection to the United States 
to those that are contained in the documentation or information that is 
part of the broker's account information for the customer. This is 
intended to limit the efforts that a broker must make to determine if 
there are U.S. indicia for the customer and to allow brokers to 
automate their searches for U.S. indicia. Additionally, a non-U.S. 
digital asset broker not conducting activities as an MSB is not subject 
to backup withholding with respect to reportable sales unless it has 
actual knowledge that the customer is a U.S. person. Thus, if a non-
U.S. digital asset broker not conducting activities as an MSB has 
actual knowledge that a customer is a

[[Page 59601]]

U.S. person, and the customer does not provide a valid Form W-9 to the 
broker, the broker must both report a sale or exchange of a digital 
asset by that customer to the IRS and backup withhold on the gross 
proceeds of the transaction.
    Under proposed Sec.  1.6045-1(g)(4)(iv), a digital asset sale 
effected by a non-U.S. digital asset broker that is not conducting 
activities as an MSB will be considered effected at an office inside 
the United States (and thus potentially subject to reporting and backup 
withholding as described in the prior paragraph) if, before the payment 
is made, the broker collects documentation or other information that is 
part of the broker's account information for the customer and the 
documentation or information that shows any of the following U.S. 
indicia: (i) a customer's communication with the broker using a device 
(such as a computer, smart phone, router, server or similar device) 
that the broker has associated with an internet Protocol (IP) address 
or other electronic address indicating a location within the United 
States; (ii) a U.S. permanent residence or mailing address for the 
customer, current U.S. telephone number and no non-U.S. telephone 
number for the customer, or the broker's classification of the customer 
as a U.S. person in its records; (iii) cash paid to the customer by a 
transfer of funds into an account maintained by the customer at a bank 
or financial institution in the United States, cash deposited with the 
broker by a transfer of funds from such an account, or if the 
customer's account is linked to a bank or financial account maintained 
within the United States; (iv) one or more digital asset deposits into 
the customer's account at the broker were transferred from, or digital 
asset withdrawals from the customer's account were transferred to, a 
digital asset broker that the broker knows or has reason to know to be 
organized within the United States, or the customer's account is linked 
to a digital asset broker that the broker knows or has reason to know 
to be organized within the United States; or (v) an unambiguous 
indication of a U.S. place of birth for the customer.
    The U.S. indicia listed in the preceding paragraph differ from the 
U.S. indicia that apply to traditional brokers under existing 
regulations under section 6045 because of the digital nature of digital 
asset brokers and the technological developments that have been made 
since the issuance of the existing regulations. Unlike traditional 
brokers, digital asset brokers typically interact with customers 
primarily through digital means, and do not usually communicate through 
the mail with customers. Digital asset brokers also typically do not 
have a physical office from which business is conducted with the 
customer. Instead, IP addresses are commonly reviewed by tax and other 
investigators as possible indicators of a person's physical presence 
and may be taken into account as part of an AML program. Transfers of 
cash or digital assets to or from a U.S. bank or digital asset broker 
also are considered potential indicators of U.S. presence or 
connections. The Treasury Department and the IRS welcome comments on 
the appropriateness and sufficiency of the U.S. indicia listed in 
proposed Sec.  1.6045-1(g)(4)(iv)(B)(1) through (5). The Treasury 
Department and the IRS also welcome comments on whether the regulations 
should define when a broker has reason to know that a digital asset 
broker is organized within the United States, and suggestions for 
objective indicators that a broker can use to determine if a digital 
asset broker is organized in the United States.
    For a sale considered effected at an office inside the United 
States (that is, a sale effected for a customer for which the broker 
has documentation or information prior to the payments indicating U.S. 
indicia), a non-U.S. digital asset broker not conducting activities as 
an MSB will nonetheless not be required to report the sale under 
existing Sec.  1.6045-1(c) if the broker determines that it can treat 
the customer as an exempt recipient under existing Sec.  1.6045-
1(c)(3). Additionally, a non-U.S. digital asset broker not conducting 
activities as an MSB is not required to report the sale if it obtains 
certain documentation to treat the customer as an exempt foreign person 
or if it may presume that the customer is a foreign person, pursuant to 
the requirements described in Part I.I.5 of this Explanation of 
Provisions (discussing the presumption rules, documentation 
requirements, and reliance rules that brokers must apply to treat their 
customers as exempt foreign persons).
    The types of documentation on which a broker may rely to treat a 
customer as an exempt foreign person despite U.S. indicia depends on 
the particular U.S. indicator contained in the customer's account 
information. If any of the U.S. indicia described in proposed Sec.  
1.6045-1(g)(4)(iv)(B)(1) through (4) (U.S. indicia other than an 
unambiguous indication of a U.S. place of birth) is present, the broker 
may treat the customer as an exempt foreign person if the broker, prior 
to the payment of any proceeds to the customer, obtains either: (i) a 
beneficial owner withholding certificate, or (ii) documentary evidence 
for the customer described in Sec.  1.1471-3(c)(5)(i) (for example, an 
identification document issued by a foreign government), and also a 
signed statement from the customer stating that the customer is not a 
U.S. person, that the customer understands that a false statement or 
misrepresentation of tax status by a U.S. person could lead to 
penalties under U.S. law, and that the customer agrees to notify the 
broker within 30 days of a change in the customer's status. If the 
broker's account information for the customer includes a U.S. indicator 
described in proposed Sec.  1.6045-1(g)(4)(iv)(B)(5) (an unambiguous 
indication of a U.S. place of birth), proposed Sec.  1.6045-
1(g)(4)(iv)(D)(2) provides that the broker may nevertheless treat the 
customer as an exempt foreign person if, prior to the payment of any 
proceeds to the customer, the broker obtains documentary evidence 
described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a 
country other than the United States (for example, a foreign passport) 
and either (i) a copy of the customer's Certificate of Loss of 
Nationality of the United States, or (ii) a valid beneficial ownership 
withholding certificate and either a reasonable written explanation of 
the customer's renunciation of U.S. citizenship or the reason the 
customer did not obtain U.S. citizenship at birth. The rules in 
proposed Sec.  1.6045-1(g)(4)(vi) (described in Part I.I.5 of this 
Explanation of Provisions) also apply to documentation obtained by a 
non-U.S. digital asset broker not conducting activities as an MSB; 
however, such a broker is not required to treat documentation as 
incorrect or unreliable solely as a result of the U.S. indicator that 
required the broker to obtain this documentation with respect to a 
customer. Additionally, these brokers are not required to collect 
additional documentation or to report a sale if they obtain U.S. 
indicia after a sale has taken place, although the rules described 
earlier apply with respect to any future sales by that customer.
4. Rules for CFC Digital Asset Brokers and Non-U.S. Digital Asset 
Brokers Conducting Activities as Money Services Businesses
    CFC digital asset brokers and non-U.S. digital asset brokers may be 
MSBs under the Bank Secrecy Act (31 U.S.C. 5311 et seq.). An MSB is 
defined in regulations issued by the Financial Crimes Enforcement 
Network (FinCEN) of the Treasury Department as a person, wherever 
located, that is doing business wholly or in substantial part within 
the

[[Page 59602]]

United States in the capacity of a dealer in foreign exchange; a check 
casher; an issuer or seller of traveler's checks or money orders; an 
issuer, seller, or redeemer of stored value; or a money transmitter. 31 
CFR 1010.100(ff). This includes, but is not limited to, maintenance of 
any agent, agency, branch, or office within the United States. 
Accordingly, a foreign person with no physical operations in the United 
States may nevertheless be an MSB under FinCEN regulations. An MSB is 
required under FinCEN regulations 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. 31 CFR 1022.210(a). AML programs generally include, 
among other things, obtaining customer-related information necessary to 
determine the risk profile of a customer. MSBs are also required to 
make certain reports to FinCEN, register with the Treasury Department, 
and maintain certain records about transmittals of funds. See 31 CFR 
part 1022.
    Because CFC digital asset brokers and non-U.S. digital asset 
brokers conducting activities as MSBs may conduct business with 
customers located in the United States, even when the brokers have no 
branch or other fixed place of business in the United States, proposed 
Sec.  1.6045-1(g)(4)(v) generally subjects these brokers to the same 
rules as U.S. digital asset brokers with respect to their sales of 
digital assets. Accordingly, a CFC digital asset broker conducting 
activities as an MSB and a non-U.S. digital asset broker conducting 
activities as an MSB must apply the rules for U.S. digital asset 
brokers to determine the place of sale of digital assets and the 
foreign status of its customers. With the exception of sales effected 
at certain kiosks located outside the United States (described in the 
next paragraph), the sales of digital assets are treated as effected at 
an office inside the United States. Therefore, these brokers are 
treated as brokers under proposed Sec.  1.6045-1(a)(1) with respect to 
all sales of digital assets and are required to report information with 
respect to sales effected for their customers unless the broker can 
treat the customer as an exempt recipient under existing Sec.  1.6045-
1(c)(3) or as an exempt foreign person under proposed Sec.  1.6045-
1(g)(4)(ii). Unless there is an applicable presumption rule, these 
brokers conducting activities as MSBs must obtain a beneficial owner 
withholding certificate to treat a customer as an exempt foreign person 
and are subject to the same backup withholding rules with respect to 
reportable sales as those applicable to U.S. digital asset brokers.
    Under proposed Sec.  1.6045-1(g)(4)(i)(D), a CFC digital asset 
broker or a non-U.S. digital asset broker is conducting activities as 
an MSB with respect to a sale of digital assets if it is registered 
with the Treasury Department under 31 CFR 1022.380 as an MSB.\4\ An 
exception applies, however, in the case of a sale that is effected at a 
digital asset kiosk that is physically located outside the United 
States and owned or operated by the broker conducting activities as an 
MSB, unless that broker is required under the Bank Secrecy Act to 
implement an AML program, file reports, or otherwise comply with the 
requirements for MSBs under the Bank Secrecy Act with respect to sales 
effected at that kiosk. See proposed Sec.  1.6045-1(g)(4)(i)(E). With 
respect to sales effected at a foreign kiosk as described in the 
preceding sentence, CFC digital asset brokers and non-U.S. digital 
asset brokers are not treated as conducting activities as MSBs with 
respect to those sales for purposes of proposed Sec.  1.6045-1(g)(4). 
This foreign kiosk exception allows CFC digital asset brokers and non-
U.S. digital asset brokers that effect sales at foreign kiosks to apply 
the diligence and documentation rules that are generally applicable to 
CFC digital asset brokers and non-U.S. digital asset brokers, 
respectively, to those sales because these sales are less likely to 
have a connection to the United States.
---------------------------------------------------------------------------

    \4\ No inference is intended as to whether a CFC digital asset 
broker or a non-U.S. digital asset broker that is not registered 
with FinCEN as an MSB (and therefore is not conducting activities as 
an MSB within the meaning of the proposed regulations) may be 
required to register as an MSB under the Bank Secrecy Act and 
FinCEN's implementing regulations, which are outside the scope of 
these regulations.
---------------------------------------------------------------------------

    These proposed regulations adopt this approach for CFC digital 
asset brokers and non-U.S. digital asset brokers that conduct 
activities as MSBs because the Treasury Department and the IRS have 
determined that a broker that is doing business wholly or in 
substantial part within the United States and is consequently subject 
to regulation by FinCEN should be subject to the same rules as U.S.-
based digital asset brokers with respect to the part of its business 
that is subject to FinCEN regulation. The Treasury Department and the 
IRS are not aware of a reliable method for distinguishing the U.S. and 
non-U.S. parts of such a broker's business for purposes of determining 
whether the broker should be subject to reporting under section 6045 in 
light of the fact that almost all or all of a digital asset broker's 
activities take place electronically. The special rule for sales at 
foreign kiosks recognizes that in those limited circumstances it is 
possible to determine that a sale is effected at an office outside the 
United States because the kiosk and the customer are physically present 
outside the United States. The overall approach in these proposed 
regulations is consistent with the principles underlying the existing 
regulations, which treat a broker as a U.S. payor when it has a 
substantial nexus with the United States. The Treasury Department and 
the IRS request comments on administrable rules that would allow CFC 
digital asset brokers and non-U.S. digital asset brokers that conduct 
activities as MSBs to apply different rules to their U.S. and non-U.S. 
business activities while still ensuring that they are reporting on 
transactions of their U.S. customers.
    The Treasury Department and the IRS are considering applying 
similar rules to CFC digital asset brokers and non-U.S. digital asset 
brokers that are regulated by other U.S. regulators, such as the 
Securities and Exchange Commission, the Commodity Futures Trading 
Commission, and banking regulators such as the Board of Governors of 
the Federal Reserve System, the Office of the Comptroller of the 
Currency and the Federal Deposit Insurance Corporation. As is the case 
with CFC digital asset brokers and non-U.S. digital asset brokers that 
are registered as MSBs, such digital asset brokers may have sufficient 
contacts with the United States and a U.S. customer base that warrants 
the application of the same diligence and reporting rules as for U.S. 
digital asset brokers with respect to the U.S. part of their business. 
The Treasury Department and the IRS request comments on what CFC 
digital asset brokers and non-U.S. digital asset brokers should be 
subject to these rules.
    Separate from the decision to require that CFC digital asset 
brokers and non-U.S. digital asset brokers conducting activities as 
MSBs with respect to sales of digital assets apply the rules applicable 
to U.S. digital asset brokers, the Treasury Department and the IRS also 
considered whether to adopt different diligence and documentation rules 
for these brokers. On the one hand, CFC digital asset brokers and non-
U.S. digital asset brokers are foreign persons and may conduct a 
substantial part of their business with non-U.S. customers. On the 
other hand, a different rule for these brokers, particularly those with 
substantial U.S. customer business, might incentivize U.S. customers to 
move their digital asset transactions to

[[Page 59603]]

non-U.S.-based brokers, which might make it more difficult for the IRS 
to verify that taxpayers are properly reporting those transactions. 
Accordingly, the Treasury Department and the IRS determined that the 
same rules should apply to these brokers as apply for U.S. digital 
asset brokers, to impose similar obligations on CFC digital asset 
brokers and non-U.S. digital asset brokers with active U.S. operations 
regardless of where they are organized and in light of the difficulty 
referred to earlier in distinguishing between U.S. and non-U.S. 
business operations. The Treasury Department and the IRS request 
comments on whether different diligence and documentation rules should 
apply to CFC digital asset brokers and non-U.S. digital asset brokers 
conducting activities as MSBs with respect to the non-U.S. part of 
their business, and if so, on what basis should a determination be made 
as to when these different diligence and documentation rules would 
apply.
5. Documentation, Reliance, and Presumption Rules Applicable to Digital 
Asset Brokers
    As described in Parts I.I.1 through I.I.4 of this Explanation of 
Provisions, U.S. digital asset brokers and CFC digital asset brokers 
generally must report a sale of digital assets unless the broker can 
treat the customer as an exempt foreign person or another exception 
applies (for example, the exception for exempt recipients in existing 
Sec.  1.6045-1(c)(3)). For sales treated as effected at an office 
inside the United States, a non-U.S. digital asset broker is required 
to report a sale of digital assets unless the broker can treat the 
customer as an exempt foreign person (or another exception applies). In 
all cases, the broker may generally treat a customer as an exempt 
foreign person based on documentation obtained from the customer or, in 
some cases, based on a presumption that the customer is a foreign 
person. For example, if a broker does not have documentation from a 
customer, the broker is required to presume that the customer is 
classified in a specified manner (such as an individual or an entity), 
and then is required to presume that the customer is a U.S. or foreign 
person under rules that depend on how the customer has been classified. 
If the customer is presumed to be a foreign person, a broker generally 
is not required to report information on sales by that customer. In 
contrast, if the customer is presumed to be a U.S. person that is not 
an exempt recipient under existing Sec.  1.6045-1(c)(3), the broker 
must report information on sales by that customer under these proposed 
regulations, unless the broker obtains documentation on which it may 
rely to treat the customer as an exempt foreign person.
    As described in Parts I.I.1 through I.I.4 of this Explanation of 
Provisions, the types of documentation on which a broker may rely 
depends on whether the broker is a U.S. digital asset broker, a CFC 
digital asset broker, or a non-U.S. digital asset broker, and for a CFC 
digital asset broker and a non-U.S. digital asset broker, whether the 
broker is conducting activities as an MSB with respect to sales of 
digital assets. In general, U.S. digital asset brokers, as well as CFC 
digital asset brokers and non-U.S. digital asset brokers conducting 
activities as MSBs, may rely on withholding certificates to treat a 
customer as an exempt foreign person, while CFC digital asset brokers 
and non-U.S. digital asset brokers not conducting activities as MSBs 
(for sales effected at offices inside the United States) may rely on 
either a withholding certificate or documentary evidence, such as 
identification document from a foreign government, to establish a 
customer's foreign status. While the type of documentation on which 
these brokers may rely differs, all these brokers are subject to 
similar requirements to ensure that the documentation is reliable.
    The existing regulations for securities brokers generally cross-
reference to general provisions of regulations under sections 1441 and 
6049 for rules on what documentation a broker may obtain to treat a 
customer as an exempt foreign person and for rules relating to reliance 
and validity of documentation. As described in Parts I.I.1 through 
I.I.4 of this Explanation of Provisions, these proposed regulations 
provide explicit rules on the type of documentation on which a broker 
may rely, rather than referring to regulations under sections 1441 and 
6049 as in the existing regulations for securities brokers. However, 
for rules on reliance, validity, and other matters, these proposed 
regulations cross-reference in some cases to certain existing 
regulations under sections 1441 and 6049, with some modifications to 
take into account the differences between the rules for digital asset 
brokers in proposed Sec.  1.6045-1(g)(4) and the rules for securities 
brokers in existing Sec.  1.6045-1(g)(1) through (3). The benefit of 
referring to rules under section 1441 is that these rules have well-
established and understood standards for reliance, validity, and other 
matters that will already be familiar to many brokers and U.S. tax 
advisors.
a. Valid Documentation of Foreign Status
    In general, a broker may rely on documentation if (i) the 
documentation is valid, (ii) the broker can reliably associate the 
documentation with a payment, and (iii) the broker does not know or 
have reason to know that the documentation is incorrect or unreliable. 
Proposed Sec.  1.6045-1(g)(4)(vi)(A)(1) refers to Sec. Sec.  1.1441-
1(e)(4)(i) through (ix) and 1.6049-5(c)(1)(ii) for documentation 
requirements that generally apply to digital asset brokers, with 
certain modifications (as described in this Part I.I.5). Additionally, 
Sec.  1.1441-1(e)(4)(ii) provides rules regarding the period of time 
during which a broker may rely on a withholding certificate or 
documentary evidence. Section 1.1441-1(e)(4) also contains other rules 
specific to withholding certificates, such as rules on who may sign a 
withholding certificate (and when the certificate may be electronically 
signed), when a substitute withholding certificate (rather than an IRS 
form) may be obtained, when a taxpayer identification number must be 
included on a withholding certificate, and when a prior version of a 
withholding certificate may be used.
    Section 1.1441-1(e)(4) also contains permissive rules for 
documentation, such as when documentation may be obtained through 
electronic transmission or from a third party repository. Some of the 
rules in Sec.  1.1441-1(e)(4) provide more favorable treatment to a 
financial institution than to other persons obtaining documentation for 
a payment because of the high volume of accounts held at withholding 
agents that are financial institutions. In light of the fact that 
digital asset brokers, like financial institutions, may have a high 
volume of customer accounts to document, these proposed regulations 
allow digital asset brokers to apply Sec.  1.1441-1(e)(4)(viii) 
(reliance rules for documentation) and (ix) (certificates to be 
furnished to a withholding agent for each obligation unless exception 
applies) regardless of whether the digital asset broker is a financial 
institution. Sections 1.1441-1(e)(4)(iii) and 1.6049-5(c)(1)(ii) are 
incorporated by cross-reference for the rules regarding the length of 
time that a broker must retain a withholding certificate and for 
procedures to obtain, review, and maintain documentary evidence. 
Finally, Sec.  1.1441-1(e)(4)(viii) provides that documentation may be 
relied upon without having to inquire into the veracity of the 
information contained on the documentation unless the person obtaining 
the documentation

[[Page 59604]]

knows or has reason to know that the information is incorrect. These 
proposed regulations incorporate this rule but provide specific rules 
for when a broker has reason to know that documentation is incorrect or 
unreliable.
    Proposed Sec.  1.6045-1(g)(4)(vi)(A)(1) cross-references to Sec.  
1.1441-1(b)(2)(vii)(A) for when a broker may reliably associate a 
payment of gross proceeds with documentation. In general, this rule 
provides that a broker can reliably associate a payment with valid 
documentation if, prior to the payment, it holds valid documentation 
(either directly or through an agent), it can reliably determine how 
much of the payment relates to the valid documentation, and it has no 
actual knowledge or reason to know that any of the information, 
certifications, or statements in, or associated with, the documentation 
are incorrect.
b. Presumption Rules
    If a broker does not have documentation from a customer, or the 
documentation it has obtained is not valid or cannot be reliably 
associated with a payment of gross proceeds, these proposed regulations 
provide presumption rules. The presumption rules also apply when 
documentation that the broker possesses has expired or the broker may 
no longer rely on the documentation because the broker knows or has 
reason to know that the documentation is incorrect or unreliable.
    Proposed Sec.  1.6045-1(g)(4)(vi)(A)(2) provides that a broker may 
determine the classification of a customer (as an individual, entity, 
etc.) by applying the presumption rules of Sec.  1.1441-1(b)(3)(ii), 
with certain modifications. Section 1.1441-1(b)(3)(ii)(B) provides that 
if there is no reliable indication that a person is an individual, 
trust, or an estate, the person may be presumed to be an exempt 
recipient if it can be so treated without the need to furnish 
documentation. However, Sec.  1.1441-1(b)(3)(ii)(B) cross references to 
regulations under section 6049 for the definition of an exempt 
recipient. Because the categories of exempt recipients under section 
6045 are different from the categories that apply for purposes of 
section 6049, these proposed regulations provide that Sec.  1.1441-
1(b)(3)(ii)(B) is applied by replacing the references to exempt 
recipients under section 6049 with the exempt recipient categories in 
existing Sec.  1.6045-1(c)(3).
    Proposed Sec.  1.6045-1(g)(4)(vi)(A)(2) also provides presumption 
rules to determine whether a customer is presumed to be a U.S. or 
foreign person in the absence of documentation. Existing regulations 
under section 6045 for securities brokers cross-reference to Sec.  
1.6049-5(d)(2), which generally requires a broker to presume a person 
classified as an individual to be a U.S. person (by cross-referencing 
to Sec.  1.1441-1(b)(3)(iii), which presumes a payee to be a U.S. 
person unless another rule applies). However, for certain amounts paid 
outside the United States with respect to an offshore obligation, Sec.  
1.6049-5(d)(2)(i) provides that an individual payee shall be presumed a 
U.S. person only when there are certain U.S. indicia for the 
individual. These proposed regulations do not incorporate the concept 
of a payment outside the United States or an offshore obligation 
because digital asset activities overwhelmingly are conducted online 
and therefore are not located in an identifiable location. Instead, 
these proposed regulations apply this presumption rule depending on the 
status of the broker (including whether a broker other than a U.S. 
digital asset broker is conducting activities as an MSB) rather than 
the location of the customer's obligation or where the broker makes the 
payment. Proposed Sec.  1.6045-1(g)(4)(vi)(A)(2) provides that with 
respect to a customer that the broker has classified as an individual 
in the absence of documentation, a broker that is a U.S. digital asset 
broker, or a CFC digital asset broker or a non-U.S. digital asset 
broker conducting activities as an MSB, must treat the customer as a 
U.S. person; however, a broker that is a CFC digital asset broker or a 
non-U.S. digital asset broker not conducting activities as an MSB with 
respect to a sale of a digital asset is required to presume that a 
customer that it has classified as an individual is a U.S. person only 
when the broker has certain U.S. indicia for the customer.
    With respect to a customer that may be presumed to be an entity, 
these proposed regulations provide that a broker may generally 
determine the status of the customer as U.S. or foreign by applying the 
presumption rules in Sec. Sec.  1.1441-1(b)(3)(iii)(A) and 1.1441-5(d) 
and (e)(6), except that the presumption rule in Sec.  1.1441-
1(b)(3)(iii)(A)(1)(iv) (which presumes that a payee is a foreign person 
if the payment is made with respect to an offshore obligation) does not 
apply. Under existing regulations, presumption rules for offshore 
obligations are generally not applicable to payments of gross proceeds 
by securities brokers. See Sec.  1.6049-5(d)(2)(i) (providing that the 
presumption rules in Sec.  1.1441-1(b)(3)(iii)(D) and (b)(3)(vii)(B) 
for payments with respect to offshore obligations do not apply to a 
payment of an amount not subject to withholding under chapter 3 of the 
Code, unless it is a withholdable payment made to an entity payee). 
These proposed regulations thereby apply a generally similar 
presumption rule for digital asset brokers as the rule that applies to 
securities brokers without applying the concept of a payment made with 
respect to an offshore obligation because digital asset activities 
overwhelmingly are conducted online and therefore are not located in an 
identifiable location.
c. Grace Period for Obtaining Documentation
    These proposed regulations include a grace period to allow a broker 
time to obtain documentation (or additional documentation when the 
original documentation relied upon is incorrect or unreliable). 
Proposed Sec.  1.6045-1(g)(4)(vi)(A)(3) provides that a broker may 
apply the grace period described in Sec.  1.6049-5(d)(2)(ii), which 
allows a payor to treat an account as owned by a foreign person until 
the earlier of (i) 90 days from the date the payor first credits an 
account (for a new account) or the date the payor first credits the 
account after the existing documentation can no longer be relied upon 
(for an existing account), or (ii) the date when the remaining balance 
in the account is equal to or less than the applicable statutory backup 
withholding rate (currently 24 percent) of the total amounts credited 
during the grace period. Also under Sec.  1.6049-5(d)(2)(ii), a payor 
may use the grace period only if at the beginning of the grace period: 
(i) the address that the payor has in its records for the account 
holder is in a foreign country, (ii) the payor has been furnished the 
information contained in a withholding certificate described in Sec.  
1.1441-1(e)(2), or (iii) the payor holds a withholding certificate that 
is no longer reliable other than because the validity period has 
expired. By cross-referencing Sec.  1.6049-5(d)(2)(ii), these proposed 
regulations apply the same grace period to digital asset brokers as the 
grace period that applies to payors under section 6049 that hold 
securities in customers' accounts and securities brokers effecting 
sales of securities under section 6045.
d. Standards of Knowledge for Reliance on Withholding Certificates
    These proposed regulations provide that a broker may rely on 
documentation only if it does not know or have reason to know that the 
documentation is incorrect or

[[Page 59605]]

unreliable. Proposed Sec.  1.6045-1(g)(4)(vi)(A)(1)(iii) provides that 
in applying the reliance rules in Sec.  1.1441-1(e)(4)(viii) for 
documentation, references to Sec.  1.1441-7(b)(4) through (6) are 
replaced by the provisions of proposed Sec.  1.6045-1(g)(4)(vi)(B) 
(relating to beneficial owner withholding certificates) and (C) 
(relating to documentary evidence), as applicable.
    Proposed Sec.  1.6045-1(g)(4)(vi)(B) specifies that a digital asset 
broker may rely on a beneficial owner withholding certificate to treat 
a customer as an exempt foreign person, unless the broker has actual 
knowledge or has reason to know that the beneficial owner withholding 
certificate is unreliable or incorrect. For this purpose, these 
proposed regulations limit when a digital asset broker has reason to 
know that information on a withholding certificate is unreliable or 
incorrect to when there are specific indicia of U.S. status in the 
broker's account files. The existing regulations limit when a 
securities broker has reason to know that information on a withholding 
certificate is unreliable or incorrect based on specific indicia set 
forth in Sec.  1.1441-7(b)(3), which contain limitations on reason to 
know for financial institutions. However, a digital asset broker's 
reason to know standard is based on the same U.S. indicia set forth in 
proposed Sec.  1.6045-1(g)(4)(iv)(B)(1) through (5) for determining 
when a non-U.S. digital asset broker is required to treat a sale as 
effected at an office inside the United States, rather than the U.S. 
indicia applicable to traditional brokers (which are in Sec.  1.1441-
7(b)(5) and (8)) to take into account the differences between 
traditional brokers and digital asset brokers.
    These proposed regulations also prescribe the additional 
documentation that a broker may collect to continue to rely on the 
withholding certificate if there are U.S. indicia. That documentation 
is similar to the documentation specified for that purpose for 
securities brokers in Sec.  1.1441-7(b)(5), but with certain 
modifications to eliminate distinctions in the additional documentation 
permitted to be collected that are based on whether a payment is made 
outside the United States with respect to an offshore obligation under 
Sec.  1.1441-7(b)(5). Proposed Sec.  1.6045-1(g)(4)(vi)(B) provides 
that if the broker collects documentation or information associated 
with the customer or the customer's account at the broker that shows 
U.S. indicia described in proposed Sec.  1.6045-1(g)(4)(iv)(B)(1) 
through (4), then the broker may not rely on the beneficial owner 
withholding certificate unless the broker can obtain documentary 
evidence establishing foreign status (as described in Sec.  1.1471-
3(c)(5)(i) (for example, identification from a foreign government)) 
that does not contain a U.S. address and the individual customer 
provides the broker with a reasonable explanation, in writing, 
supporting the claim of foreign status. However, if the broker 
previously classified an individual customer as a U.S. person in its 
account information, the broker may treat the customer as an exempt 
foreign person only if it has in its possession documentation described 
in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a country other 
than the United States. If the customer is an entity, the broker may 
treat the customer as an exempt foreign person if it has in its 
possession documentation that substantiates that the entity is 
organized or created under the laws of a foreign country. Additionally, 
and regardless of whether a customer is an individual or entity, a 
broker that is a non-U.S. person may treat a customer as an exempt 
foreign person if the broker reports the payment to the customer to the 
jurisdiction in which the customer is resident under that 
jurisdiction's tax reporting requirements, provided that the 
jurisdiction has a tax information exchange agreement or income tax 
treaty in effect with the United States. If the broker collects 
information with respect to the customer showing an unambiguous 
indication of a U.S. place of birth, proposed Sec.  1.6045-
1(g)(4)(vi)(B)(2) provides, however, that the broker may treat the 
customer as an exempt foreign person only if the broker has in its 
possession documentary evidence described in Sec.  1.1471-3(c)(5)(i)(B) 
evidencing citizenship (for example, a passport) in a foreign country 
and either a copy of the customer's Certificate of Loss of Nationality 
of the United States or a reasonable written explanation of the 
customer's renunciation of U.S. citizenship or the reason the customer 
did not obtain U.S. citizenship at birth.
e. Standards of Knowledge for Reliance on Documentary Evidence
    Proposed Sec.  1.6045-1(g)(4)(vi)(C) provides the rules for when a 
broker has reason to know that documentary evidence is unreliable or 
incorrect. As with the rules applicable to when a broker has reason to 
know that a beneficial owner withholding certificate is unreliable or 
incorrect, reason to know that documentary evidence is unreliable or 
incorrect is limited to when the U.S. indicia in proposed Sec.  1.6045-
1(g)(4)(iv)(B)(1) through (5) are present in the broker's account files 
for a customer. Proposed Sec.  1.6045-1(g)(4)(vi)(C)(1) and (2) specify 
the additional documentation a broker is required to collect to 
continue to rely on the documentary evidence notwithstanding the 
presence of the U.S. indicia (similar to the documentation specified 
for that purpose in Sec.  1.1441-7(b)(8), but with modifications 
similar to those that apply to reliance on a withholding certificate 
under these proposed regulations, except that a broker is permitted to 
obtain a withholding certificate in certain cases in lieu of obtaining 
additional documentary evidence).
f. Joint Owners
    These proposed regulations provide that in the case of amounts paid 
to customers that are joint account holders for which a certificate or 
documentation is required as a condition for being exempt from 
reporting under proposed Sec.  1.6045-1(g)(4)(ii)(B) or (g)(4)(iv)(D), 
the amounts are presumed paid to U.S. payees who are not exempt 
recipients when the conditions of existing Sec.  1.6045-1(g)(3)(i) are 
met. The effect of this rule is to apply to digital asset brokers the 
same rule that applies to securities brokers for amounts paid to their 
customers that are joint account holders.
g. Foreign Intermediaries, Foreign Flow-Through Entities, and Certain 
U.S. Branches
    Proposed Sec.  1.6045-1(g)(4)(vi)(E) provides rules for a broker to 
determine whether a customer is a foreign intermediary, foreign flow-
through entity, or U.S. branch (other than a U.S. branch that is the 
beneficial owner of a payment of gross proceeds), and, if so, whether 
the customer may be treated as an exempt foreign person. The rules in 
these proposed regulations reach a similar result as those that apply 
to securities brokers under existing regulations but provide more 
detail on the procedures for brokers to determine that a customer is a 
foreign intermediary, foreign flow-through entity, or U.S. branch.
    Under proposed Sec.  1.6045-1(g)(4)(vi)(E)(1), a broker may rely on 
a valid foreign intermediary withholding certificate described in Sec.  
1.1441-1(e)(3)(ii) or (iii), with one modification, to determine the 
classification of a customer as a foreign intermediary. Section 1.1441-
1(e)(3)(iii) provides that a foreign intermediary withholding 
certificate from a nonqualified intermediary is not valid unless the

[[Page 59606]]

intermediary has attached the withholding certificates and other 
appropriate documentation for all persons to whom the certificate 
relates. Proposed Sec.  1.6045-1(g)(4)(vi)(E)(1) provides that a broker 
does not need to obtain from the foreign intermediary the withholding 
certificates or other documentation for the intermediary's account 
holders. The Treasury Department and the IRS are considering requiring 
brokers to obtain documentation on account holders of customers that 
are foreign intermediaries in order to avoid circumvention of these 
proposed regulations by U.S. persons selling digital assets through a 
foreign intermediary. The Treasury Department and the IRS request 
comments on whether the transparency gained by adding this rule would 
justify the increased burden on brokers, and whether that trade-off 
would be different for digital asset-only brokers, securities-only 
brokers, or brokers that effect sales or exchanges in both categories. 
The Treasury Department and the IRS also request comments on how 
frequently and in what circumstances securities brokers rely on the 
existing section 6045 regulations to not document account holders of 
customers that are foreign intermediaries.
    If a broker does not obtain a valid foreign intermediary 
withholding certificate or valid beneficial owner withholding 
certificate from the customer, it must determine under presumption 
rules whether the customer is treated as a beneficial owner or an 
intermediary, and whether the customer has the status of U.S. or 
foreign. The applicable presumption rules depend on whether the broker 
is a U.S. or foreign broker to provide rules similar to those 
applicable to securities brokers. Under proposed Sec.  1.6045-
1(g)(4)(vi)(E)(1), if a broker is a U.S. digital asset broker or a non-
U.S. digital asset broker or CFC digital asset broker that in each case 
is conducting activities as an MSB, then the broker must apply the 
presumption rules in Sec.  1.1441-1(b)(3)(ii)(B), which would result in 
a presumption that the entity is not an intermediary. If a broker is a 
non-U.S. digital asset broker or a CFC digital asset broker that in 
each case is not conducting activities as an MSB, then the broker may 
determine the status of a customer as an intermediary by presuming that 
the entity is an intermediary to the extent permitted by Sec.  1.1441-
1(b)(3)(ii)(C) (providing rules treating certain payees as not 
beneficial owners), with certain modifications. These modifications (i) 
allow a broker to apply Sec.  1.1441-1(b)(3)(ii)(C) without regard to 
the requirement in that section that limits its application to payments 
on offshore obligations, and (ii) substitute the references in Sec.  
1.1441-1(b)(3)(ii)(C) to exempt recipient categories under section 6049 
with the exempt recipient categories in existing Sec.  1.6045-
1(c)(3)(i). The first modification is made to conform the rule for 
digital asset brokers to the rule for securities brokers. See Sec.  
1.6049-5(d)(2)(i) for the rule applicable to securities brokers. The 
second modification is needed because Sec.  1.1441-1(b)(3)(ii)(C) cites 
to regulations under section 6049 for exempt recipients, but the 
categories of exempt recipients under section 6045 are different from 
the categories that apply for purposes of section 6049.
    If a customer is presumed to be an intermediary, these proposed 
regulations provide that a broker must determine the intermediary's 
status as U.S. or foreign by applying the presumption rules in Sec.  
1.1441-1(b)(3)(iii). If a broker is required to treat a customer as a 
foreign intermediary under proposed Sec.  1.6045-1(g)(4)(vi)(E)(1), the 
broker must treat the foreign intermediary as an exempt foreign person 
except to the extent required by existing Sec.  1.6045-1(g)(3)(iv) 
(providing that a broker may not treat a foreign intermediary as an 
exempt foreign person if the broker has actual knowledge that the 
person for whom the intermediary acts is a U.S. person who is not an 
exempt recipient, and providing for reporting that may be required by 
the foreign intermediary).
    Proposed Sec.  1.6045-1(g)(4)(vi)(E)(2) provides the documentation 
and presumption rules for brokers paying gross proceeds to foreign 
flow-through entities. Under these proposed regulations, a broker may 
rely on a valid foreign flow-through withholding certificate described 
in Sec.  1.1441-5(c)(3)(iii) (relating to nonwithholding foreign 
partnerships) or (e)(5)(iii) (relating to foreign simple trusts and 
foreign grantor trusts that are nonwithholding foreign trusts) to 
determine the status of a customer as a foreign flow-through entity. 
Proposed Sec.  1.6045-1(g)(4)(vi)(E)(2) provides that a broker does not 
need to obtain from the foreign flow-through entity the withholding 
certificates or other documentation for the entity's partners to treat 
the withholding certificate as valid. The Treasury Department and the 
IRS are considering requiring brokers to obtain documentation on 
partners, beneficiaries, or owners (as applicable) of customers that 
are foreign flow-through entities in order to avoid circumvention of 
these proposed regulations by U.S. persons holding interests in foreign 
flow-through entities selling digital assets. The Treasury Department 
and the IRS request comments on whether the transparency gained by 
adding this rule would justify the increased burden on brokers, and 
whether that trade-off would be different for digital asset-only 
brokers, securities-only brokers, or brokers that effect sales or 
exchanges in both categories. The Treasury Department and the IRS also 
request comments on how frequently and in what circumstances securities 
brokers rely on the existing section 6045 regulations to not document 
partners, beneficiaries, or owners (as applicable) of customers that 
are foreign flow-through entities.
    If a broker does not obtain a valid foreign flow-through 
withholding certificate, the broker may determine the status of a 
customer as a foreign flow-through entity based on the presumption 
rules in Sec.  1.1441-1(b)(3)(ii)(B) (relating to entity 
classification) and Sec.  1.1441-5(d) (relating to partnership status 
as U.S. or foreign) and (e)(6) (relating to the status of trusts and 
estates as U.S. or foreign). If a broker is permitted to treat a 
customer as a foreign flow-through entity, the broker must treat the 
payment as made to an exempt foreign person except to the extent 
required by Sec.  1.6049-5(d)(3)(ii) (providing that a broker may not 
treat a foreign flow-through entity as an exempt foreign person if the 
broker has actual knowledge that the partner to which the payment is 
allocated is a U.S. person who is not an exempt recipient and the 
broker has actual knowledge of the amount allocable to such person).
    Proposed Sec.  1.6045-1(g)(4)(vi) provides the documentation, 
presumptions, and reliance rules applicable to payments to a customer 
that is a U.S. branch (as described in Sec.  1.1441-1(b)(2)(iv)). When 
a U.S. branch is the beneficial owner of the payment, the rules in 
proposed Sec.  1.6045-1(g)(4)(vi) other than paragraph (g)(4)(vi)(E) 
apply. When a U.S. branch is not the beneficial owner of a payment, 
proposed Sec.  1.6045-1(g)(4)(vi)(E)(3) provides that a broker may rely 
on a valid U.S. branch withholding certificate described in Sec.  
1.1441-1(e)(3)(v) to determine the status of a customer as a U.S. 
branch that is not a beneficial owner of a payment, without regard to 
whether the withholding certificate contains a withholding statement 
and withholding certificates or other documentation for each person for 
whom the branch receives the payment. If a U.S. branch

[[Page 59607]]

certifies on a valid U.S. branch withholding certificate that it agrees 
to be treated as a U.S. person under Sec.  1.1441-1(b)(2)(iv)(A), the 
broker may treat the U.S. branch as an exempt foreign person. If a U.S. 
branch does not certify on a valid U.S. branch withholding certificate, 
the broker may treat the U.S. branch as an exempt foreign person except 
to the extent required by existing Sec.  1.6045-1(g)(3)(iv) (providing 
that a broker may not treat a U.S. branch as an exempt foreign person 
if the broker has actual knowledge that the person for whom the U.S. 
branch receives the payment is a U.S. person who is not an exempt 
recipient, and providing for reporting that may be required by the U.S. 
branch).
6. Coordination With Rules Applicable to Sales of Securities
    In determining whether a sale is effected at an office inside or 
outside the United States or whether a broker may treat a customer as 
an exempt foreign person, brokers that effect sales of both securities 
and digital assets for customers may find it difficult to apply both 
the rules in existing Sec.  1.6045-1(g)(1) through (3) for sales of 
securities and those in proposed Sec.  1.6045-1(g)(4) for sales of 
digital assets. This fact pattern could arise if a traditional 
securities broker also effected sales of digital assets for customers. 
The difficulty of complying both with the reporting and documentation 
rules for securities and with the reporting and documentation rules for 
digital assets might be particularly acute when a customer uses the 
same broker to effect both types of transactions.
    The Treasury Department and the IRS considered including a 
coordination rule that would allow brokers that effect transactions 
involving both securities and digital assets, as those terms are 
defined under section 6045, to apply the rules of proposed Sec.  
1.6045-1(g)(4) to determine whether sales of both securities and 
digital assets are effected at an office inside or outside the United 
States and whether brokers may treat the customers as exempt foreign 
persons. These proposed regulations do not propose this coordination 
rule because it was determined that more extensive coordination between 
the rules for sales of securities and sales of digital assets would be 
required and because the rules proposed for sales of digital assets 
have been drafted based on the characteristics of digital asset 
transactions and may not apply seamlessly to a securities broker. For 
example, the U.S. indicia applicable to digital asset brokers differ 
from the U.S. indicia applicable to security brokers. The Treasury 
Department and the IRS request comments on whether a coordination 
provision would be helpful to brokers that effect sales of both 
securities and digital assets for customers, and if so, which proposed 
rules applicable to digital asset brokers should apply to securities 
brokers.
7. Transition Period
    To provide digital asset brokers with sufficient time to obtain 
necessary documentation from existing customers to establish exempt 
foreign status under these proposed regulations, proposed Sec.  1.6045-
1(g)(4)(vi)(F) provides that for sales of digital assets effected 
before January 1, 2026, that were held in an account established at a 
broker before January 1, 2025, digital asset brokers may treat a 
customer as an exempt foreign person provided that the customer has not 
previously been classified as a U.S. person by the broker, and the 
information that the broker has for the customer in the account opening 
files or other files pertaining to the account, including documentation 
collected for purposes of an AML program, includes a residence address 
that is not a U.S. address.
J. Special Rules for Barter Exchanges That Effect Certain Digital Asset 
Exchanges
    Any person with members or clients that contract with each other or 
with the organization to trade or barter property or services either 
directly (member to member) or through the organization is a barter 
exchange under existing Sec.  1.6045-1(a)(4). A merchant that provides 
goods or services in exchange for a customer's digital asset is not 
acting as a barter exchange for purposes of this definition.
    Property or services are considered exchanged through a barter 
exchange if payment is made by means of a credit on the books of the 
barter exchange or a scrip issued by the barter exchange, or if the 
barter exchange arranges a direct exchange of property or services 
between members. Existing regulations provide limited guidance on the 
application of these rules and do not explicitly address whether the 
barter exchange rules apply to digital asset exchange transactions 
under which digital assets are exchanged for property (including 
different digital assets) or services. Consequently, it is possible 
that a particular exchange transaction might qualify both as a sale 
under proposed Sec.  1.6045-1(a)(9)(ii) effected by a broker under 
these regulations and also as an exchange transaction effected by a 
barter exchange. Alternatively, a particular exchange transaction could 
be considered both a reportable payment transaction facilitated by a 
TPSO under section 6050W as well as an exchange transaction effected by 
a barter exchange.
    To avoid duplicative reporting, proposed Sec.  1.6045-1(e)(2)(iii) 
provides coordination rules applicable to a barter exchange that is 
also a broker subject to reporting under proposed Sec.  1.6045-1(c). 
Under these rules, exchange transactions involving the exchange of one 
digital asset held by one customer of a broker for a different digital 
asset held by a second customer of the same broker are treated as sales 
under proposed Sec.  1.6045-1(a)(9)(ii) subject to reporting under 
proposed Sec.  1.6045-1(c) and (d) (reporting by brokers) with respect 
to both customers and not as an exchange of personal property through a 
barter exchange subject to reporting under proposed Sec.  1.6045-1(e) 
and (f) (reporting by barter exchanges).
    Additionally, in circumstances involving exchanges of digital 
assets for personal property or services where the digital asset 
payment is also a reportable payment transaction subject to reporting 
by the barter exchange under Sec.  1.6050W-1(a)(1), these proposed 
regulations provide rules for reporting each member's or client's 
disposition under rules other than under the barter exchange rules 
under proposed Sec.  1.6045-1(e) and (f) depending on whether the 
member is disposing of digital assets on the one hand or personal 
property or services on the other. For the member or client disposing 
of personal property or services, proposed Sec.  1.6045-1(e)(2)(iii) 
provides that the exchange must be treated as a reportable payment 
transaction that must be reported under proposed Sec.  1.6050W-1(a)(1) 
and not as an exchange through a barter exchange subject to reporting 
under proposed Sec.  1.6045-1(e). With respect to the member or client 
disposing of digital assets in this exchange, proposed Sec.  1.6045-
1(e)(2)(iii) provides that the exchange must be treated as a sale under 
proposed Sec.  1.6045-1(a)(9)(ii)(D) subject to reporting under 
proposed Sec.  1.6045-1(c) and not as an exchange through a barter 
exchange subject to reporting under proposed Sec.  1.6045-1(e).
    The purpose of these rules is to have brokers report all digital 
asset exchange transactions that are also subject to reporting under 
the barter exchange provisions reported under proposed Sec.  1.6045-
1(c) and (d). No inference is intended as to whether exchanges 
involving digital assets do or do not constitute exchanges subject to 
the reporting under the barter exchange rules under existing Sec.  
1.6045-1(e). The

[[Page 59608]]

Treasury Department and the IRS request comments on the extent to which 
there are additional broker-facilitated transactions involving digital 
assets that would still be subject to reporting under the barter 
exchange rules after the applicability date of these proposed 
regulations. For example, are there any broker-mediated transactions 
that are not reportable payment transactions under Sec.  1.6050W-
1(a)(1) with respect to the client that receives the digital assets as 
payment?
K. Additional Definitions and Definitional Changes
    As noted in Part I of the Background, references in these proposed 
regulations to an owner holding digital assets generally or holding 
digital assets in a wallet or account are meant to refer to holding or 
controlling, whether directly or indirectly through a custodian, the 
keys to the digital assets. Proposed Sec.  1.6045-1(a)(23) adds this 
clarification to the regulation by providing a definition for held in a 
wallet or account. Under this provision, a digital asset is considered 
held in a wallet or account if the wallet, whether hosted or unhosted, 
or account stores the private keys necessary to transfer access to, or 
control of, the digital asset. A digital asset associated with a 
digital asset address that is generated by a wallet, and a digital 
asset associated with a sub-ledger account of a wallet, are similarly 
considered held in a wallet. References to variations of held in a 
wallet or account, such as held at a broker, held with a broker, held 
by the user of a wallet, held on behalf of another, acquired in a 
wallet or account, acquired in a customer's wallet or account, or 
transferred into a wallet or account, each have a similar meaning. 
Proposed Sec.  1.6045-1(a)(24) provides that a hosted wallet is a 
custodial service provided to a user that electronically stores the 
private keys to digital assets held on behalf of others. Hosted wallets 
are sometimes referred to as custodial wallets. Proposed Sec.  1.6045-
1(a)(27) provides that an unhosted wallet is a non-custodial means of 
storing, electronically or otherwise, a user's private keys to digital 
assets held by or for the user. Unhosted wallets can be provided 
through software that is connected to the internet (a hot wallet) or 
through hardware or physical media that is disconnected from the 
internet (a cold wallet).
    Proposed Sec.  1.6045-1(a)(12) revises the definition of cash to 
include U.S. dollars and any convertible foreign currency that is 
issued by a government or a central bank, whether in physical or 
digital form. Pursuant to that definition, a central bank digital 
currency may be treated as cash for purposes of these proposed 
regulations and not as digital assets. The revised definition is also 
intended to exclude privately-issued digital assets from the definition 
of cash for purposes of the reporting requirements under existing Sec.  
1.6045-1. No inference is intended, however, as to the treatment of a 
central bank digital currency or other digital asset for other purposes 
of the Code.
    For purposes of these regulations, the definition of cash 
(including the U.S. dollar and foreign currency) does not include so-
called stablecoins, which are a form of digital assets in which the 
underlying value of the coins generally are linked to another asset or 
assets. Stablecoins are treated as digital assets for purposes of these 
proposed regulations because stablecoins 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, are held and transferred in the same 
manner as other digital assets and, therefore, raise similar tax 
compliance concerns.
    The Treasury Department and the IRS considered whether to exclude 
transactions involving the disposition of stablecoins that are linked 
to the U.S. dollar or to other foreign currencies from the definition 
of a sale for which reporting is required, which would parallel the 
manner in which dispositions of U.S. dollars or other foreign 
currencies are treated for purposes of section 6045, that is, as 
dispositions that are generally not subject to reporting. These 
proposed regulations do not exclude stablecoin transactions from the 
definition of sale because a broker may not be able to identify which 
stablecoins will perfectly and consistently reflect the value of the 
currencies to which they are linked, if any. The Treasury Department 
and the IRS are aware that legislative or regulatory rules are being 
considered in a number of jurisdictions that might more closely tie the 
value of a stablecoin to a fiat currency, and request comments on 
whether stablecoins, or a subset of stablecoins, should not be treated 
as digital assets for purposes of these rules. Additionally, comments 
are requested on whether the regulations should exclude from reporting 
transactions involving the disposition of U.S. dollar related 
stablecoins that give rise to no gain or loss, and if so, how should 
those stablecoin transactions be identified. Finally, comments are 
requested regarding whether any other changes would need to be made to 
the regulations or other rules to ensure adequate reporting of 
transactions involving the receipt or disposition of stablecoins.
    The Treasury Department and the IRS also request comments on the 
structure and use of tokenized deposits or other tokenized assets that 
are closely linked to cash held in an account.
    Additionally, the list of governmental exempt recipients in 
existing Sec.  1.6045-1(c)(3)(i)(B) is clarified by listing the 
specific territorial jurisdictions to which the existing exemption for 
``a possession of the United States'' applies, and the definitions for 
security, barter exchange, regulated futures contract, closing 
transaction, person, debt instrument, and securities futures contract, 
are republished in proposed Sec.  1.6045-1(a)(3), (4), (6), (8), (13), 
(17), and (18), respectively, to add headings and, where necessary, to 
reformat paragraph numbering and make other non-substantive changes.
    Finally, where the existing regulations provide rules that do not 
apply to digital assets, such as existing Sec.  1.6045-1(d)(2)(iv) 
governing the use by brokers of information furnished on a transfer 
statement described in Sec.  1.6045A-1, these proposed regulations 
clarify that those existing rules do not apply to digital assets by 
limiting the existing rules to securities only or specifically 
excluding digital assets from the existing rules. These changes are not 
intended to change the way the proposed regulations apply to assets 
currently covered by the existing regulations.

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

    In general, existing regulations and other guidance under sections 
1001 and 1012 provide the tax rules for determining a taxpayer's amount 
realized on the disposition of digital assets and basis in purchased 
digital assets. For example, a taxpayer's transfer of digital assets 
from one of the taxpayer's wallets into a different wallet owned by the 
same taxpayer is not a sale or other disposition pursuant to section 
1001, whereas the payment of a transfer fee with digital assets to 
effectuate that transfer is a sale or other disposition of the digital 
assets used to pay the fee resulting in gain or loss pursuant to 
section 1001. In some fact patterns, however, taxpayers may benefit 
from additional clarifying guidance. Those fact patterns include 
exchanges of digital assets for services or other property, including 
different

[[Page 59609]]

digital assets, and dispositions of less than all of a taxpayer's 
holdings of a particular digital asset if the taxpayer purchased those 
holdings at different times or for different prices.
A. Amount Realized
    Proposed Sec.  1.1001-7(b)(1)(i) provides the general rule for 
determining the amount realized on a sale or disposition of digital 
assets for cash, other property differing materially either in kind or 
in extent, or services. Under these rules, the amount realized is the 
sum of: (i) the cash received; (ii) the fair market value of any 
property received (including digital assets) or, in the case of a debt 
instrument issued in exchange for the digital assets and subject to 
Sec.  1.1001-1(g), the issue price of the debt instrument, as provided 
under the rules of Sec.  1.1001-1(g); and (iii) the fair market value 
of any services received; reduced by the allocable digital asset 
transaction costs. Digital assets are defined in this proposed 
regulation by cross-reference to the digital assets definition 
contained in proposed Sec.  1.6045-1(a)(19).
    Proposed Sec.  1.1001-7(b)(1)(ii) provides that the disposition of 
digital assets (including digital assets withheld) to pay digital asset 
transaction costs is a disposition of digital assets for services. 
Proposed Sec.  1.1001-7(b)(1)(iii) applies the general rule included in 
proposed Sec.  1.1001-7(b)(1)(i) to different fact patterns depending 
on whether cash, services, digital assets, or other property is 
received as consideration for the sale or disposition of the digital 
assets. Proposed Sec.  1.1001-7(b)(1)(iv) provides the rule for 
calculating the amount attributable to a debt instrument issued in 
exchange for digital assets. Under this rule, the amount attributable 
to a debt instrument issued in exchange for digital assets is 
determined by cross-reference to the rules in Sec.  1.1001-1(g) (in 
general the issue price of the debt instrument).
    As provided in the general rule set forth in proposed Sec.  1.1001-
7(b)(1)(i), in computing the amount realized from the sale or exchange 
of digital assets, the amount determined to have been received in 
exchange for the digital assets must be reduced by any digital asset 
transaction costs allocable to the disposed-of digital asset. Proposed 
Sec.  1.1001-7(b)(2)(i) defines digital asset transaction costs as the 
amount paid, in cash, or property (including digital assets), to effect 
the disposition or acquisition of a digital asset and includes 
transaction fees, transfer taxes, and any other commissions. Proposed 
Sec.  1.1001-7(b)(2)(ii) provides rules for allocating digital asset 
transaction costs to the disposition or acquisition of a digital asset. 
These allocation rules apply to any digital asset transaction costs 
paid on the sale or disposition of a digital asset used or withheld to 
pay other digital asset transaction costs. Proposed Sec.  1.1001-
7(b)(2)(ii)(A) provides the general rule for allocating digital asset 
transaction costs on dispositions of digital assets in exchange for 
cash, services, debt instruments issued in exchange for the digital 
assets, or other property (other than digital assets). In these 
instances, the total digital asset transaction costs paid by the 
taxpayer are allocated to the disposition of the digital assets. The 
reference to total digital asset transaction costs in this rule is 
intended to avoid the further allocation of cascading digital asset 
transaction costs (that is, a digital asset transaction cost paid with 
respect to the use of a digital asset to pay for a digital asset 
transaction cost). The Treasury Department and the IRS request comments 
regarding whether it is appropriate to treat all such costs as digital 
asset transaction costs associated with the original transaction.
    The Treasury Department and the IRS understand that brokers that 
effect exchanges of one digital asset for a different digital asset may 
charge a single digital asset transaction cost for the exchange. In 
this case, the digital asset transaction cost is associated both with 
the disposition of one digital asset and the acquisition of a different 
digital asset. The Treasury Department and the IRS considered whether 
these regulations should permit taxpayers or brokers to designate how 
to allocate digital asset transaction costs but determined that a 
single uniform rule would be easier to administer and less susceptible 
to manipulation. Consideration was also given to allocating the costs 
either entirely to reduce the amount realized or entirely to increase 
basis; however, this allocation would not reflect the economic reality 
that the costs are allocable to a particular transaction that includes 
both the purchase of one digital asset and the disposition of a 
different digital asset. Accordingly, proposed Sec.  1.1001-
7(b)(2)(ii)(B) provides that if digital asset transaction costs are 
paid to effect the exchange of one digital asset for a digital asset 
differing materially in kind or in extent, any allocation or assignment 
made by the parties or the entity effecting the exchange is 
disregarded. Instead, one-half of the total digital asset transaction 
costs paid by the taxpayer is allocable to the disposition of the 
transferred digital asset for purposes of determining the amount 
realized and one-half is allocable to the acquisition of the received 
digital asset for purposes of determining the basis of that received 
digital asset under Sec.  1.1012-1(h). The Treasury Department and the 
IRS request comments on whether this allocation of digital asset 
transaction costs to exchanges of one digital asset for a different 
digital asset is administrable and whether alternative allocations, 
such as a 100 percent allocation of digital asset transaction costs to 
the disposed-of digital assets, would be less burdensome.
    In some circumstances, taxpayers may incur a transfer fee 
associated with a transfer of digital assets that does not involve a 
sale or an exchange. For example, a transfer of digital assets from an 
unhosted wallet owned by a taxpayer to a hosted wallet in an account 
that is also owned by the taxpayer may incur a distributed ledger 
transaction fee that must be paid in digital assets, notwithstanding 
that the underlying transfer is not a taxable event under section 1001. 
To the extent that a digital asset is used to pay this fee in exchange 
for the recordation of the transfer on the distributed ledger, the 
exchange of the digital asset to pay this fee is a taxable event under 
section 1001 resulting in gain or loss.
    Finally, proposed Sec.  1.1001-7(b)(3) and (4) provide rules for 
determining the fair market value of digital assets and for determining 
the fair market value of services or property received in consideration 
for digital assets. Specifically, under proposed Sec.  1.1001-7(b)(3), 
the fair market value of a digital asset is determined as of the date 
and time of the exchange or disposition of the digital asset. Under 
proposed Sec.  1.1001-7(b)(4), when the fair market value of the 
property (including digital assets but excluding debt instruments 
subject to Sec.  1.1001-1(g)) or services received in exchange for 
digital assets cannot be determined with reasonable accuracy, the fair 
market value of such property or services must be determined by 
reference to the fair market value of the digital assets transferred as 
of the date and time of the exchange.
B. Basis
    The starting point for determining basis of property is its cost, 
that is, what is transferred in consideration for what is received, 
under section 1012. Proposed Sec.  1.1012-1(h) provides the general 
rules for determining the cost basis of digital assets that are 
acquired in a purchase for cash, a transfer in connection with the 
performance of services, an exchange for digital assets or other 
property differing materially in

[[Page 59610]]

kind or extent, an exchange for a debt instrument, or in a part sale 
and part gift transfer.
    Ordinarily, the value of property in exchange for other property 
received should be equal in value. Under Federal income tax law 
principles, in an exchange of property, both the amount realized on the 
property transferred and the basis of the property received in an 
exchange ordinarily are determined by reference to the fair market 
value of the property received. See United States v. Davis, 370 U.S. 65 
(1962); Philadelphia Park Amusement Co. v. United States, 126 F. Supp. 
184 (Ct. Cl. 1954); Rev. Rul. 55-757, 1955-2 C.B. 557. This rule 
ensures that the sum of any gain or loss realized by the taxpayer in an 
exchange transaction in which property is received plus the gain or 
loss realized by the taxpayer in a subsequent transaction in which the 
property received in the first transaction is later sold will be 
equivalent to the customer's economic gain on the combined 
transactions. Accordingly, proposed Sec.  1.1012-1(h)(1) provides that 
the basis of digital assets acquired in an exchange is generally equal 
to the cost of the digital assets received at the date and time of the 
exchange. Basis also takes into account allocable digital asset 
transaction costs. Proposed Sec.  1.1012-1(h)(3) provides that if a 
taxpayer receives digital assets in exchange for property differing 
materially in kind or in extent (including digital assets and non-
digital asset property), the cost of the digital assets received is the 
same as the fair market value used in determining the amount realized 
on a sale or disposition of the transferred digital assets for the 
purposes of section 1001.
    Proposed Sec.  1.1012-1(h)(1)(i), (iii), and (iv) apply the general 
rule included in proposed Sec.  1.1012-1(h)(1) to different fact 
patterns depending on whether cash or certain other property is used to 
acquire the digital assets. Specifically, under proposed Sec.  1.1012-
1(h)(1)(i), when digital assets are purchased for cash, the basis of 
the digital assets purchased is the amount of cash paid plus any 
allocable digital asset transaction costs. Under proposed Sec.  1.1012-
1(h)(1)(iii), the basis of digital assets acquired in exchange for 
property other than digital assets is the cost of the acquired digital 
assets plus any allocable digital asset transaction costs. Under 
proposed Sec.  1.1012-1(h)(1)(iv), the basis of digital assets received 
in exchange for other digital assets differing materially in kind or in 
extent is the cost of the acquired digital assets, plus one-half of the 
total allocable digital asset transaction costs pursuant to the rules 
provided in proposed Sec.  1.1012-1(h)(2)(ii)(B), discussed later in 
this section. Proposed Sec.  1.1012-1(h)(3), discussed below, explains 
how to determine the cost of digital assets received in an exchange 
described in either proposed Sec.  1.1012-1(h)(1)(iii) or (iv).
    Proposed Sec.  1.1012-1(h)(1)(ii), (v), and (vi) apply special 
rules for determining the basis of digital assets received in other 
select fact patterns. Proposed Sec.  1.1012-1(h)(1)(ii) provides that 
when digital assets are received in exchange for the performance of 
services, taxpayers should follow the rules set forth in Sec. Sec.  
1.61-2(d)(2) and 1.83-4(b) for purposes of determining basis. Proposed 
Sec.  1.1012-1(h)(1)(v) provides the rule for determining the basis of 
digital assets acquired in exchange for the issuance of a debt 
instrument. Under these rules, the cost of the digital asset 
attributable to the debt instrument is the amount determined under 
Sec.  1.1012-1(g) (which generally looks to the issue price of the debt 
instrument as determined under the rules under either section 1273 or 
section 1274, whichever is applicable) plus any allocable digital asset 
transaction costs pursuant to the rules in proposed Sec.  1.1012-
1(h)(2) described in the next paragraph. Lastly, if digital assets are 
received in a transfer, which is in part a sale and in part a gift, 
proposed Sec.  1.1012-1(h)(1)(vi) provides that taxpayers should look 
to the rules for transfers that are in part a sale and in part a gift 
under Sec.  1.1012-2.
    Proposed Sec.  1.1012-1(h)(2)(ii) provides rules for allocating 
digital asset transaction costs to acquisitions of digital assets. 
Except in the case of an exchange of digital assets for other digital 
assets differing materially in kind or in extent, proposed Sec.  
1.1012-1(h)(2)(ii)(A) provides that digital asset transaction costs 
paid by the taxpayer are entirely allocable to the digital assets 
received. In contrast, as a corollary to the split digital asset 
transaction cost rule provided under proposed Sec.  1.1001-
7(b)(2)(ii)(B), when digital assets are received in exchange for other 
digital assets that differ materially in kind or extent, one-half of 
the total digital asset transaction costs paid by the taxpayer is 
allocable to the acquisition of the received digital assets for 
purposes of determining the basis of those received digital assets. 
Accordingly, if a taxpayer exchanges digital asset DE for digital asset 
ST and pays digital asset transaction costs, the basis of the digital 
asset ST is computed using the fair market value of the digital asset 
ST received, plus one-half of the total digital asset transaction 
costs.
    Finally, proposed Sec.  1.1012-1(h)(3) provides the rules for 
determining the cost of digital assets received in an exchange 
described in either proposed Sec.  1.1012-1(h)(1)(iii) or (iv). Under 
these rules, the cost of the digital assets received equals the fair 
market value of those digital assets as of the date and time of the 
exchange. Additionally, when the fair market value of a digital asset 
received cannot be determined with reasonable accuracy, proposed Sec.  
1.1012-1(h)(3) provides that the fair market value of the digital asset 
received must be determined with reference to the property transferred. 
This rule is analogous to the rule provided in proposed Sec.  1.1001-
7(b)(4) with respect to the determination of the fair market value of 
property received.
C. Identification Rules
    These proposed regulations provide rules for identifying which 
units of a particular digital asset held in a single wallet or account 
as defined in proposed Sec.  1.6045-1(a)(23) are sold, disposed of, or 
transferred when less than all units of that digital asset are sold, 
disposed of, or transferred. Proposed Sec.  1.1012-1(j)(1) and (2) 
provide rules for units of a digital asset that are left in an unhosted 
wallet and proposed Sec.  1.1012-1(j)(3) provides rules for units of a 
digital asset left in the custody of a broker.
    For units held in unhosted wallets and therefore not left in the 
custody of a broker, proposed Sec.  1.1012-1(j)(1) provides that if a 
taxpayer sells, disposes of, or transfers less than all the units of 
the same digital asset held within a single wallet, the units disposed 
of for purposes of determining basis and holding period are determined 
by a specific identification of the units of the particular digital 
asset in the wallet or account that the taxpayer intends to sell, 
dispose of, or transfer. For a taxpayer that does not specifically 
identify the units to be sold, disposed of, or transferred, the units 
in the wallet or account disposed of are determined in order of time 
from the earliest purchase date of the units of that same digital 
asset. For purposes of making this determination, the dates the units 
were transferred into the taxpayer's wallet or account are disregarded.
    Proposed Sec.  1.1012-1(j)(2) provides that a specific 
identification of the units of a digital asset sold, disposed of, or 
transferred is made if, no later than the date and time of sale, 
disposition, or transfer, the taxpayer identifies on its books and 
records the particular units to be sold, disposed of, or transferred by 
reference to any identifier, such as purchase date and time or the 
purchase

[[Page 59611]]

price for the unit, that is sufficient to identify the basis and 
holding period of the units sold, disposed of, or transferred. A 
specific identification can be made only if adequate records are 
maintained for all units of a specific digital asset held in a single 
wallet or account to establish that a unit is removed from the wallet 
or account for purposes of subsequent transactions.
    The Treasury Department and the IRS request comments on methods by 
which taxpayers using unhosted wallets can more easily track purchase 
dates, times, and/or basis of specific units of a digital asset upon 
the transfer of some or all of the units between custodial brokers and 
unhosted wallets. The Treasury Department and the IRS also request 
comments on whether the above ordering rules for unhosted wallets 
should be applied on a wallet-by-wallet basis as proposed, or whether 
these rules should instead be applied on a digital asset address-by-
digital asset address basis or some other basis. Additionally, the 
Treasury Department and the IRS request comments on alternative 
proposals for these ordering rules if unhosted wallets have systems 
that can otherwise account for their customers' transactions.
    For multiple units of a type of digital asset that are left in the 
custody of a broker, proposed Sec.  1.1012-1(j)(3)(ii) provides that 
the taxpayer can make an adequate identification of the units sold, 
disposed of, or transferred by specifying to the broker, no later than 
the date and time of sale, disposition, or transfer, the particular 
units of the digital asset to be sold, disposed of, or transferred by 
reference to any identifier (such as purchase date and time or purchase 
price paid for the units) that the broker designates as sufficiently 
specific to allow it to determine the basis and holding period of those 
units. The units so identified are treated as the units of the digital 
asset sold, disposed of, or transferred to determine the basis and 
holding period of such units. This identification must also be taken 
into consideration in identifying the taxpayer's remaining units of the 
digital asset for purposes of subsequent sales, dispositions, or 
transfers. Identifying the units sold, disposed of, or transferred 
solely on the taxpayer's books or records is not an adequate 
identification of the digital assets if the assets are held in the 
custody of a broker. The Treasury Department and the IRS request 
comments on whether this ordering rule for digital assets left in the 
custody of a broker should apply on an account-by-account basis or 
whether brokers have systems that can otherwise account for their 
customers' transactions. Additionally, comments are also requested 
regarding whether exceptions should be made to the ordering rule for 
digital assets left in the custody of a broker to allow brokers to take 
into account reasonably reliable purchase date information received 
from outside sources, and if so, what types of purchase date 
information should be considered reasonably reliable.
    For customers that do not provide the broker with an adequate 
identification of the units sold, disposed of, or transferred, proposed 
Sec.  1.1012-1(j)(3)(i) provides that the units disposed of for 
purposes of determining the basis and holding period of such units is 
determined in order of time from the earliest units of that same 
digital asset purchased within or transferred into the taxpayer's 
account with the broker. For this purpose, units of a particular 
digital asset are treated as transferred into the taxpayer's account as 
of the date and time of the transfer. Once transfer statement reporting 
under section 6045A is required, however, the Treasury Department and 
the IRS anticipate that these rules would be revised to take into 
account the basis and holding period information provided to the broker 
on the transfer statement. A rule of that kind would conform the 
substantive rules applicable to taxpayers to the reporting required 
from brokers.
    Lastly, proposed Sec.  1.1012-1(j)(4) clarifies that the taxpayer's 
method of specifically identifying the units of a particular digital 
asset sold, disposed of, or transferred is not a method of accounting. 
This means that each time a taxpayer sells, disposes of, or transfers 
units of a particular digital asset, the taxpayer can decide how to 
specifically identify those units, for example, by the earliest 
acquired, the latest acquired, or the highest basis. Therefore, a 
change in the method of specifically identifying the digital asset 
sold, disposed of, or transferred is not a change in method of 
accounting to which sections 446 and 481 of the Code apply.

III. Proposed Sec.  1.6045-4

    In addition to reporting on dispositions by real estate buyers of 
digital assets in exchange for real estate under the proposed Sec.  
1.6045-1 rules described earlier, real estate reporting persons should 
also report on the fair market value of digital assets received by 
transferors (sellers) of real estate in real estate transactions. 
Accordingly, these proposed regulations expand the information real 
estate reporting persons are required to report on information returns 
filed, and payee statements furnished, with respect to real estate 
transactions. Proposed Sec.  1.6045-4(h)(1)(vii) provides that for 
payments made to a transferor using digital assets, a real estate 
reporting person should report the name and number of units of the 
digital asset used to make the payment, the date and time the payment 
was made, the transaction identification of the digital asset transfer 
as defined in proposed Sec.  1.6045-1(a)(26), and the digital asset 
address (or addresses) as defined in proposed Sec.  1.6045-1(a)(20) 
into which the digital assets are transferred. Additionally, proposed 
Sec.  1.6045-4(i) expands the definition of gross proceeds to be 
reported to include payments using digital assets received by the real 
estate transferor. For purposes of proposed Sec.  1.6045-4, a digital 
asset has the same meaning set forth in proposed Sec.  1.6045-1(a)(19).
    Under existing Sec.  1.6045-4(i)(1), the term gross proceeds means 
the total cash received and to be received by or on behalf of the 
transferor in connection with the real estate transaction. These 
proposed regulations make three main changes to this definition to 
ensure all payments using digital assets will be included in the amount 
reported. First, proposed Sec.  1.6045-4(i)(1) clarifies that the total 
cash received by, or on behalf of, the transferor in connection with a 
real estate transaction includes cash received from a digital asset 
payment processor (as defined in proposed Sec.  1.6045-1(a)(22)(i)) in 
exchange for the digital assets paid to that processor by the real 
estate buyer. Thus, if a buyer purchases real estate using a digital 
asset payment processor that accepts digital assets in return for the 
payment of cash to the real estate transferor, the cash received by 
that transferor includes the cash amount received from the digital 
asset payment processor.
    Second, although existing Sec.  1.6045-4(i)(1) uses the phrase 
``cash . . . to be received,'' the remainder of the regulation uses the 
phrase ``consideration treated as cash'' to refer to what is meant by 
``cash . . . to be received.'' To maintain consistency throughout the 
regulation, proposed Sec.  1.6045-4(i)(1) replaces the ``cash . . . to 
be received'' phrase with ``consideration treated as cash'' in the two 
places where the former phrase appears in the regulation. The Treasury 
Department and the IRS intend this change as a clarification and not as 
a substantive change to any information that is currently required to 
be reported under the existing regulation.
    Finally, proposed Sec.  1.6045-4(i)(1) provides that gross proceeds 
also include the value of digital assets received by, or on behalf of, 
the transferor in connection with the real

[[Page 59612]]

estate transaction. Proposed Sec.  1.6045-4(i)(1)(ii) provides that the 
value of digital assets received includes the fair market value of 
digital assets actually received. In addition, when a transferor 
receives an obligation to pay digital assets to, or for the benefit of, 
the transferor in the future, the value of digital assets received 
includes the fair market value, as of the date and time the obligation 
is entered into, of the digital assets to be paid as stated principal 
under the obligation. Digital assets actually received by, or on behalf 
of, the transferor from or at the direction of a digital asset payment 
processor are included in digital assets received for purposes of this 
rule. The fair market value of digital assets received by, or on behalf 
of, the transferor must be determined by the broker based on the 
valuation techniques provided in proposed Sec.  1.6045-1(d)(5)(ii). See 
Parts I.E.2 and II of this Explanation of Provisions.
    In a change unrelated to transactions involving digital assets, 
proposed Sec.  1.6045-4 is also updated to reflect the section 
6045(e)(5) exception from reporting for gross income up to $250,000 of 
gain on the sale or exchange of a principal residence if certain 
conditions are met. Section 6045(e)(5) was added to the Code by section 
312 of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 
788 (August 5, 1997), as amended by the Internal Revenue Service 
Restructuring and Reform Act of 1998, Public Law 105-206, 112 Stat. 805 
(July 22, 1998). Proposed Sec.  1.6045-4(c)(2)(iv) provides that no 
information return is required with respect to a sale or exchange of an 
interest in a principal residence provided the real estate reporting 
person obtains from the seller a written certification consistent with 
guidance designated by the Secretary. This guidance is currently 
provided in Rev. Proc. 2007-12, 2007-1 C.B. 357. In addition, proposed 
Sec.  1.6045-4(c)(2)(iv) also provides that if a residence has more 
than one owner, the real estate reporting person must either obtain a 
certification from each owner (whether married or not) or file an 
information return and furnish a payee statement for any owner that 
does not make the certification. The certification must be retained by 
the reporting person for four years after the year of the sale or 
exchange of the residence to which the certification applies. Finally, 
proposed Sec.  1.6045-4(c)(2)(iv) provides that a reporting person who 
relies on a certification made in compliance with paragraph (c)(2)(iv) 
will not be liable for penalties under section 6721 for failure to file 
an information return, or under section 6722 for failure to furnish a 
payee statement to the seller, unless the reporting person has actual 
knowledge, or reason to know, that any assurance is incorrect.
    Additionally, proposed Sec.  1.6045-4 is updated to reflect the 
statutory changes made to section 6045(e)(3), which provides that it is 
unlawful for any real estate reporting person to separately charge any 
customer for complying with the reporting under section 6045. Section 
6045(e)(3) was modified by section 1704(o)(1) of the Small Business Job 
Protection Act of 1996, Public Law 104-188, 110 Stat. 1755 (August 20, 
1996), to provide that notwithstanding the prohibition against real 
estate reporting persons separately changing customers for complying 
with section 6045 reporting obligations, real estate reporting persons 
may take their costs of complying with the requirements of section 6045 
into account in establishing their charge for performing services in 
connection with real estate transactions. Proposed Sec.  1.6045-4(o) 
has been revised to reflect this statutory change.
    Finally, in another change unrelated to transactions involving 
digital assets, the list of governmental exempt transferors in existing 
Sec.  1.6045-4(d)(2)(ii)(A) is clarified by listing the specific 
territorial jurisdictions to which the existing exemption for ``a 
possession of the United States'' applies.

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

    As discussed in the introductory paragraph to this Explanation of 
Provisions, these proposed regulations do not provide guidance or 
otherwise implement the changes made by the Infrastructure Act that 
require transfer statement reporting in the case of digital asset 
transfers under section 6045A(a) or broker information reporting under 
section 6045A(d) for digital asset transfers that are not sales or are 
not transfers to accounts maintained by persons that the transferring 
broker knows or has reason to know are also brokers.
    Additionally, as discussed in Part I.A.2. of this Explanation of 
Provisions, because it is unclear whether sections 6045A and 6045B are 
currently being applied to assets that qualify both as digital assets 
and specified securities under the existing rules, the Treasury 
Department and the IRS have decided to delay transfer statement 
reporting under section 6045A(a) and issuer reporting under section 
6045B for these dual classification assets until regulations or other 
guidance is issued. Accordingly, proposed Sec.  1.6045A-1(a)(1)(vi) has 
been added to specifically exempt from transfer statement reporting any 
specified security that is also a digital asset. Transferors that 
nonetheless choose to provide a transfer statement reporting some or 
all of the information described in section 6045A are not subject to 
penalties under section 6722 for failure to report this information 
correctly. In addition, proposed Sec.  1.6045B-1(a)(6) similarly 
exempts issuers from reporting on any specified security that is also a 
digital asset. Accordingly, under these rules, the transfer of a 
specified security within the meaning of proposed Sec.  1.6045-
1(a)(14)(i) through (iv) or an issuer of a specified security within 
the meaning of proposed Sec.  1.6045-1(a)(14)(i) through (iv) will not 
be subject to the section 6045A and section 6045B reporting rules if 
the specified security also falls within the definition of a digital 
asset under proposed Sec.  1.6045-1(a)(19). Issuers that nonetheless 
choose to provide this reporting are not subject to penalties under 
either section 6721 or section 6722 for failure to report or furnish 
this information correctly.
    The Treasury Department and the IRS will consider guidance for 
these dual classification assets as part of the implementation of more 
general transfer statement reporting under section 6045A(a), broker 
information reporting under section 6045A(d), and digital asset issuer 
reporting under section 6045B as part of a later phase of information 
reporting guidance. Comments are requested as to whether sections 6045A 
and 6045B should be made applicable for securities that are also 
digital assets prior to the implementation of this later phase of the 
information reporting guidance. Comments are requested regarding who 
would be the responsible party required to provide the reporting if 
section 6045B is made applicable to securities that are also digital 
assets prior to the implementation of this later phase of information 
reporting guidance.

V. Proposed Sec.  1.6050W-1

    Some digital asset brokers currently treat payments of cash for 
digital assets, or exchanges of one digital asset for a different 
digital asset, as reportable payments under section 6050W. These 
proposed regulations do not take a position regarding the 
appropriateness under existing regulations of treating payments of cash 
for digital assets, or payments of one digital asset in exchange for a 
different digital asset, as reportable payments under section 6050W. To 
the extent these transactions are reportable under proposed Sec.  
1.6045-

[[Page 59613]]

1 after the applicability date of these proposed regulations, however, 
these transactions must be reported under section 6045. Therefore, to 
avoid duplicative reporting, proposed Sec.  1.6050W-1(c)(5)(i)(A) 
provides that in the case of a payor that makes a payment using digital 
assets as part of a third party network transaction involving the 
exchange of the payor's digital assets for goods or services, if that 
payment constitutes a sale of digital assets by the payor under the 
broker reporting rules under section 6045, the amount paid to that 
payor in settlement of that exchange will be subject to the broker 
reporting rules (including any exemptions from these rules) and not 
section 6050W. Additionally, for goods or services provided by a payee 
that are digital assets, proposed Sec.  1.6050W-1(c)(5)(i)(B) provides 
that if the exchange is a sale of digital assets by the payee under the 
broker reporting rules under section 6045, the payment to the payee in 
settlement of that exchange will be reportable under the broker 
reporting rules (including any exemptions from these rules) and not 
section 6050W. Accordingly, the broker reporting rules (and not the 
section 6050W rules) will apply to both the payor and the payee in an 
exchange of digital assets for different digital assets.
    Rules avoiding duplication are also provided for certain exchanges 
involving digital assets for goods or services that could potentially 
be treated as barter exchanges. As noted, if the purchaser of the goods 
or services in this type of exchange is subject to reporting under 
proposed Sec.  1.6045-1 due to the use of digital assets to make 
payment, proposed Sec.  1.6050W-1(c)(5)(i)(A) provides that reporting 
is not required under section 6050W. To avoid duplicative reporting 
under proposed Sec. Sec.  1.6045-1(e) and 1.6050W-1(a) with respect to 
the payee who sells goods and services in this type of exchange (that 
is, in return for digital assets), proposed Sec.  1.6050W-1(c)(5)(i)(B) 
also provides that any digital asset that is paid to a person (payee) 
in a third party network transaction that is reportable under proposed 
Sec.  1.6045-1(e) (without regard to whether the payee is an exempt 
recipient under proposed Sec.  1.6045-1(f)(2)(ii) or an exempt foreign 
person under proposed Sec.  1.6045-1(g)) must be reported under section 
6050W and not the barter exchange rules under proposed Sec.  1.6045-
1(e). As a result, reporting will be required under section 6050W with 
respect to a payee who sells goods or services (other than digital 
assets) in exchange for digital assets in third party network 
transactions to the extent the fair market value of the aggregate 
payments made to that payee exceed the de minimis exception as provided 
in section 6050W(e) for reportable payments made on or after January 1, 
2023. See Notice 2023-10, 2023-3 I.R.B. 403 (January 17, 2023) 
(delaying the effective date of the modified de minimis exception under 
section 6050W(e) for payments made during calendar year 2022). The de 
minimis exception under section 6050W is not applicable to the 
reporting of information required with respect to digital asset sales 
or exchanges under section 6045.
    In certain circumstances, such as when a TPSO functions as a 
digital asset payment processor as described in proposed Sec.  1.6045-
1(a)(22)(i)(B), a payment made with digital assets by a customer 
directly to a TPSO's participating payee may be a third party network 
transaction subject to reporting. For example, if a customer makes a 
payment pursuant to instructions provided by a TPSO that has an 
agreement with a participating payee to receive digital assets as 
payment, the payment to that payee should be treated as a payment made 
in settlement of a reportable payment transaction despite the fact that 
the payment was not first made to the TPSO. To clarify that reporting 
under section 6050W is required in this example with respect to the 
participating payee, proposed Sec.  1.6050W-1(a)(2) provides that in 
the case of a TPSO that has the contractual obligation to make payments 
to participating payees, a payment in settlement of a reportable 
payment transaction includes the submission of an instruction to a 
purchaser to transfer funds directly to the account of the 
participating payee for purposes of settling the reportable payment 
transaction.

VI. Proposed Sec. Sec.  31.3406(b)(3)-2, 31.3406(g)-2, and 31.3406(g)-1

    Section 3406 of the Code requires certain payors of reportable 
payments, including payments required to be reported by a broker or a 
barter exchange under section 6045, to deduct and withhold a tax on the 
payment at the statutory backup withholding rate (currently 24 percent) 
if the payee fails to provide a TIN or provides an incorrect TIN. The 
existing rules under Sec.  31.3406(b)(3)-2(a) provide generally that 
any payment made by a broker or barter exchange that is required to be 
reported under section 6045 is a reportable payment that is subject to 
backup withholding, and that the amount subject to backup withholding 
is the amount of gross proceeds as determined under existing Sec.  
1.6045-1(d)(5). Except for the addition of digital assets to the title 
to proposed Sec.  31.3406(b)(3)-2, these proposed regulations do not 
make any substantive changes to these general rules under Sec.  
31.3406(b)(3)-2 because they are broad enough to cover digital asset 
transactions that are reportable under section 6045. The remainder of 
Sec.  31.3406(b)(3)-2 provides the backup withholding rules for 
specific types of transactions reportable under section 6045. 
Specifically, Sec.  31.3406(b)(3)-2(b)(2) provides backup withholding 
rules for brokers reporting on foreign currency contracts and regulated 
futures contracts subject to section 1256. The text of these existing 
rules is broad enough to also apply to forward contracts calling for 
the delivery of digital assets as well as forward contracts that are 
cryptographically recorded on a distributed ledger. Additionally, Sec.  
31.3406(b)(3)-2(b)(3) and (4) provide backup withholding rules for 
brokers reporting on securities sales made through a margin account and 
security short sales. Because these rules are limited to securities, 
they do not apply to most digital assets.\5\ Comments are requested as 
to whether any changes should be made to these rules, either to address 
digital assets that may also be treated as securities for Federal 
income tax purposes or to address short sales of digital assets. The 
Treasury Department and the IRS also request comments regarding whether 
any additional rules are needed to address how backup withholding 
should apply to transactions involving digital assets.
---------------------------------------------------------------------------

    \5\ No inference is intended as to whether a digital asset is 
treated as a security for any other legal regime, including the 
Federal securities laws and the Commodity Exchange Act, or to 
otherwise impact the interpretation or applicability of those laws, 
which are outside the scope of these regulations.
---------------------------------------------------------------------------

    Existing Sec.  31.3406(g)-2(e) provides that real estate reporting 
persons are not required to backup withhold on a payment made with 
respect to a real estate transaction that is subject to reporting under 
section 6045(a) and (e) and existing Sec.  1.6045-4. This rule was 
intended to apply to the reportable payment made to the transferors, or 
sellers, of real estate. Proposed Sec.  31.3406(g)-2(e) has been 
revised to clarify that this rule does not apply to reportable payments 
made with respect to the disposition of digital assets by a real estate 
buyer to purchase real estate. Rather, sales of digital assets in 
return for real estate that are effected by brokers should be subject 
to backup

[[Page 59614]]

withholding under proposed Sec.  31.3406(b)(3)-2 to ensure that all 
customers who exchange digital assets for services or property in 
transactions effected by a broker are treated consistently without 
regard to the type of property acquired. Accordingly, proposed Sec.  
31.3406(g)-2(e) provides that real estate reporting persons must backup 
withhold under section 3406 and in accordance with the rules in 
proposed Sec.  31.3406(b)(3)-2 on reportable payments made with respect 
to real estate buyers who exchange digital assets for real estate.
    Under existing Sec.  31.3406(g)-1(e), an exception provides that a 
payor is not required to backup withhold on gross proceeds if the sale 
is effected at an office outside the United States (as defined in 
existing Sec.  1.6045-1(g)(3)(iii)) unless the payor has actual 
knowledge that the payee is a U.S. person. These proposed regulations 
amend Sec.  31.3406(g)-1(e) to apply this exception to a sale of 
digital assets effected at an office outside the United States by a CFC 
digital asset broker that is not conducting activities as an MSB with 
respect to that sale and to a sale of digital assets effected by a non-
U.S. digital asset broker that is not conducting activities as an MSB 
with respect to that sale. These proposed regulations also clarify 
that, with respect to sales other than sales of digital assets, the 
reference to existing Sec.  1.6045-1(g)(3)(iii) is intended to 
encompass sales described in that section without regard to whether the 
sale is considered effected at an office inside the United States under 
existing Sec.  1.6045-1(g)(3)(iii)(B).

VII. Request for Comments

    Comments are requested on all aspects of these proposed 
regulations, including the following:
A. Questions From the Explanation of Provisions
    The comments specially requested throughout the discussion in the 
Explanation of Provisions are consolidated here in this Part VII 
Request for Comments. Comments are requested on the following 
questions:
    1. Does the proposed definition of digital asset accurately and 
appropriately define the type of assets to which these regulations 
should apply? See Part I.A.1 of this Explanation of Provisions.
    2. Does the definition of digital asset or the reporting 
requirements with respect to digital assets inadvertently capture 
transactions involving non-digital asset securities that may use 
distributed ledger technology, shared ledger, or similar technology to 
process orders without effecting sales? Should any definitions or 
reporting rules be modified to address other transactions involving 
tokenized or digitized financial instruments that are used to 
facilitate back-office processing of the transaction? See Part I.A.2. 
of this Explanation of Provisions.
    3. If an exception is necessary for transactions involving non-
digital asset securities that may use distributed ledger technology or 
similar technology to process orders without effecting sales, how 
should it be drafted so that it does not sweep in other transactions 
(such as tokenized securities, or other digital assets that are 
securities) that should not be exempted from the reporting 
requirements? For example, should, and if so how should, reporting 
requirements distinguish between, and thus avoid double-counting of, 
sales of digital assets from use of distributed ledger technology or 
similar technology for mere recordkeeping, clearing, or settlement of 
tokenized securities or other assets? See Part I.A.2. of this 
Explanation of Provisions.
    4. How common are digital asset options that are also section 1256 
contracts? Are there less burdensome alternatives for reporting these 
digital asset option transactions? For example, would it be less 
burdensome to allow brokers to report transactions involving section 
1256 contracts that are also digital assets or the delivery of non-
digital assets that underlie a digital asset option as a sale under 
proposed Sec.  1.6045-1(a)(9)(ii)? See Part I.A.3 of this Explanation 
of Provisions.
    5. Is there is anything factually unique in the way short sales of 
digital assets, options on digital assets, and other financial product 
transactions involving digital assets are undertaken compared to 
similar transactions involving non-digital assets, and do these 
transactions raise any additional reporting issues that have not been 
addressed in these proposed regulations? See Part I.A.3 of this 
Explanation of Provisions.
    6. Are there alternative information reporting approaches that 
could be used by digital asset trading platforms that collect and 
retain no information or collect and retain limited information about 
the identity of their customers that would satisfy tax compliance 
objectives while reducing privacy concerns? See Part I.B of this 
Explanation of Provisions.
    7. Are there any technological or other technical issues that might 
affect the ability of a non-custodial digital asset trading platform 
that is a person who qualifies as a broker to obtain and transmit the 
information required under these proposed regulations, and how might 
these issues be overcome? See Part I.B of this Explanation of 
Provisions.
    8. In light of the fact that digital asset trading platforms 
operate with varying degrees of centralization and effective control by 
founders or others, does the application of reporting rules only to 
``persons'' (as described in Part I.B of this Explanation of 
Provisions) adequately limit the scope of reporting obligations to 
platforms that have one or more individuals or entities that can 
update, amend, or otherwise cause the platform to carry out the 
diligence and reporting rules of these proposed regulations? See Part 
I.B of this Explanation of Provisions.
    9. Should the provision of connection software by a wallet provider 
to a trading platform (that customers of the trading platform can then 
use to access their wallets from the trading platform) be considered a 
facilitative service resulting in the wallet provider being treated as 
a broker? See Part I.B of this Explanation of Provisions.
    10. What additional functions potentially provided by wallet 
software should be considered sufficient to treat the wallet provider 
as providing facilitative services? See Part I.B of this Explanation of 
Provisions.
    11. What other factors should be considered relevant to determining 
whether a person maintains sufficient control or influence over 
provided facilitative services to be considered being in a position to 
know either the identity of the party that makes a sale or the nature 
of the transaction potentially giving rise to gross proceeds from a 
sale? See Part I.B of this Explanation of Provisions.
    12. Under what circumstances should an operator of a digital asset 
trading platform be considered to maintain or not to maintain 
sufficient control or influence over the facilitative services offered 
by that platform? Should, and if so how should, the ability of users of 
the platform, shareholders or holders of governance tokens to vote on 
aspects of the platform's operation be considered? How are these 
decentralized organizational and governance structures similar to or 
different from other existing organizational or governance structures 
(e.g., shareholder votes, mutual organizations)? Should this conclusion 
be impacted by the existence of full or even partial-access 
administration keys or the ability of the operator to replace the 
existing protocol with a new or modified protocol if that replacement 
does not require holding a vote of governance token holders or 
complying with these voting

[[Page 59615]]

restrictions? See Part I.B of this Explanation of Provisions.
    13. To what extent should holders of governance tokens be treated 
as operating a digital asset trading platform business as an 
unincorporated group or organization? Please provide examples of fact 
patterns involving governance tokens and explain any differences in 
those fact patterns relevant to assessing the degree of control or 
influence exercisable by holders of those tokens. See Part I.B.1 of 
this Explanation of Provisions.
    14. Are there alternative information reporting approaches that 
could be used by digital asset payment processors effecting payments to 
merchants on behalf of customers in transactions where the payment 
processor is an agent of a merchant that would satisfy tax compliance 
objectives while reducing privacy concerns? See Part I.B.3 of this 
Explanation of Provisions.
    15. What is the frequency with which creators or issuers of digital 
assets redeem digital assets? See Part I.B.4 of this Explanation of 
Provisions.
    16. Should the broker reporting regulations apply to initial coin 
offerings, simple agreements for future tokens, and similar contracts? 
See Part I.B.4 of this Explanation of Provisions.
    17. Are the types of consideration for which digital assets may be 
exchanged in a sale transaction sufficiently broad to capture current 
and anticipated transactions in which taxpayers regularly dispose of 
digital assets for consideration? See Part I.C of this Explanation of 
Provisions.
    18. Are there any logistical concerns about the reporting on 
contracts involving the delivery of digital assets created by these 
proposed regulations? See Part I.C of this Explanation of Provisions.
    19. What is the frequency with which forward contracts involving 
digital assets are traded in practice? Are there any additional issues 
that should be considered to enable brokers to report on these 
transactions? See Part I.C of this Explanation of Provisions.
    20. Should the definition of sale or other parts of these proposed 
regulations be revised to address transactions not addressed in these 
proposed regulations, such as the transfer of digital assets to and 
from a liquidity pool by a liquidity pool provider, or the wrapping and 
unwrapping of digital assets? See Part I.C of this Explanation of 
Provisions.
    21. Are there other less burdensome alternatives to reporting 
transaction ID information and digital asset addresses with respect to 
digital asset sales and certain digital asset transfer-in transactions 
that would still ensure the IRS receives the information necessary to 
determine taxpayers' gains and losses? See Part I.D of this Explanation 
of Provisions.
    22. Should an annual digital asset sale threshold, above which the 
broker would report transaction ID information and digital asset 
addresses, be used? If so, what should that threshold be? See Part I.D 
of this Explanation of Provisions.
    23. Should the time reported using UTC time be reported using a 12-
hour clock (designating a.m. or p.m. as appropriate) or a 24-hour 
clock? To what extent should all brokers be required to use the same 
12-hour or 24-hour clock for these purposes? See Part I.D of this 
Explanation of Provisions.
    24. Is a uniform time standard overly burdensome, and are there 
circumstances under which more flexibility should be provided? See Part 
I.D of this Explanation of Provisions.
    25. Are there alternatives to basing the transaction date on the 
UTC for customers who are present in different time zones known to the 
broker at the time of the transaction? See Part I.D of this Explanation 
of Provisions.
    26. Should the fair market value of services giving rise to digital 
asset transaction costs (including the services of any broker or 
validator involved in executing or validating the transfer) be 
determined by looking to the fair market value of the digital assets 
used to pay for the transaction costs? Are there circumstances under 
which an alternative valuation rule would be more appropriate? See Part 
I.E.2 of this Explanation of Provisions.
    27. Are there any suggestions that could work to avoid duplicative 
multiple broker reporting for sale transactions involving digital asset 
brokers without sacrificing the certainty that at least one of the 
multiple brokers will report? See Part I.H of this Explanation of 
Provisions.
    28. Is there an alternative approach that could be objectively 
applied to differentiate between a U.S. digital asset broker's U.S. 
business and non-U.S. business for purposes of allowing different 
documentation to be used for the broker's non-U.S. business, and how 
could this alternative approach avoid being readily subject to 
manipulation? See Part I.I.1 of this Explanation of Provisions.
    29. Are the U.S. indicia listed in proposed Sec.  1.6045-
1(g)(4)(iv)(B)(1) through (5) appropriate and sufficient? See Part 
I.I.3 of this Explanation of Provisions.
    30. Should the regulations define when a broker has reason to know 
that a digital asset broker is organized within the United States, and 
are there suggestions for objective indicators that a digital asset 
broker is organized in the United States? See Part I.I.3 of this 
Explanation of Provisions.
    31. Are there administrable rules that would allow CFC and non-U.S. 
digital asset brokers conducting activities as MSBs to apply different 
rules to their U.S. and non-U.S. business activities while still 
ensuring that they are reporting on transactions of their U.S. 
customers? See Part I.I.4 of this Explanation of Provisions.
    32. Should different diligence and documentation rules apply to CFC 
and non-U.S. digital asset brokers conducting activities as MSBs with 
respect to the non-U.S. part of their business, and if so, on what 
basis should a determination be made as to when these different 
diligence and documentation rules would apply? See Part I.I.4 of this 
Explanation of Provisions.
    33. What U.S. regulatory schemes applicable to a CFC digital asset 
broker or a non-U.S. digital asset broker other than registration with 
FinCEN should be sufficient to cause such a digital asset broker to be 
subject to the same diligence, documentation and reporting rules as a 
digital asset broker conducting activities as an MSB? How can such 
digital asset brokers be identified by the IRS? Please also address 
questions 31 and 32 relating to digital asset brokers conducting 
activities as an MSB.
    34. Would a rule requiring brokers to obtain documentation on 
account holders or partners, beneficiaries, or owners (as applicable) 
of customers that are foreign intermediaries or foreign flow-through 
entities increase transparency sufficiently to justify the increased 
burden on brokers? Is that trade-off different for digital asset-only 
brokers, securities-only brokers, or brokers that effect sales or 
exchanges in both categories? How frequently and in what circumstances 
do securities brokers rely on the existing section 6045 regulations to 
not document account holders or partners, beneficiaries, or owners (as 
applicable) of customers that are foreign intermediaries or foreign 
flow-through entities? See Part I.I.5.g of this Explanation of 
Provisions.
    35. Would a coordination provision for brokers that effect 
transactions involving both non-digital asset securities and digital 
assets be helpful to brokers, and if so, which proposed rules 
applicable to digital asset brokers should apply to non-digital asset 
securities brokers? See Part I.I.6 of this Explanation of Provisions.

[[Page 59616]]

    36. Are there additional broker-facilitated transactions involving 
digital assets that would still be subject to reporting under the 
barter exchange rules after the applicability date of these proposed 
regulations? For example, are there broker-mediated transactions that 
are not reportable payment transactions under Sec.  1.6050W-1(a)(1) 
with respect to the client that receives the digital assets as payment? 
See Part I.J of this Explanation of Provisions.
    37. Is it appropriate to treat stablecoins, or a subset of 
stablecoins, as digital assets for purposes of these regulations? What 
characteristics should be considered when assessing whether 
stablecoins, or a subset of stablecoins, should be treated as digital 
assets under these regulations? See Part I.K of this Explanation of 
Provisions.
    38. Should the regulations exclude reporting on transactions 
involving the disposition of U.S. dollar related stablecoins that give 
rise to no gain or loss, and if so, how should those stablecoin 
transactions be identified? See Part I.K of this Explanation of 
Provisions.
    39. Should any other changes be made to the regulations or other 
rules to ensure adequate reporting of transactions involving the 
receipt or disposition of stablecoins? See Part I.K of this Explanation 
of Provisions.
    40. In the case of cascading digital asset transaction costs (that 
is, a digital asset transaction cost paid with respect to the use of a 
digital asset to pay for a digital asset transaction cost), should all 
such costs be treated as digital asset transaction costs associated 
with the original transaction? See Part II.A of this Explanation of 
Provisions.
    41. Is the allocation of one-half of total digital asset 
transaction costs paid to the disposition of digital assets for 
purposes of determining the amount realized and the allocation of the 
other half to the acquisition of the received digital assets for 
purposes of determining basis administrable? See Part II.A of this 
Explanation of Provisions.
    42. Would a 100 percent allocation of digital asset transaction 
costs to the disposed-of digital asset in an exchange of one digital 
asset for a different digital asset be less burdensome? See Part II.A 
of this Explanation of Provisions.
    43. Are there methods or functionalities that unhosted wallets can 
provide to assist taxpayers with the tracking of purchase dates, times, 
and/or basis of specific units of a digital asset upon the transfer of 
some or all of those units between custodial brokers and unhosted 
wallets? See Part II.C of this Explanation of Provisions.
    44. Should the ordering rules for unhosted wallets be applied on a 
wallet-by-wallet basis as proposed, or should these rules be applied on 
a digital asset address-by-digital asset address basis or some other 
basis? See Part II.C of this Explanation of Provisions.
    45. Are there any alternatives to requiring that the ordering rules 
for digital assets left in the custody of a broker be followed on an 
account-by-account basis; for example, if brokers have systems that can 
otherwise account for their customers' transactions? See Part II.C of 
this Explanation of Provisions.
    46. Should exceptions be made to the ordering rule for digital 
assets left in the custody of a broker to allow brokers to take into 
account reasonably reliable purchase date information received from 
outside sources? If so, what types of purchase date information should 
be considered reasonably reliable? See Part II.C of this Explanation of 
Provisions.
    47. Should the current rules under section 6045A applicable to 
transfers of securities from one broker to another remain applicable 
for securities that are also digital assets prior to the implementation 
of a later phase of the information reporting guidance? See Part IV of 
this Explanation of Provisions.
    48. Who would be the responsible party required to provide the 
reporting if section 6045B is made applicable to securities that are 
also digital assets prior to the implementation of this later phase of 
information reporting guidance? See Part IV of this Explanation of 
Provisions.
    49. Should any changes be made to the backup withholding rules 
under existing Sec.  31.3406(b)(3)-2(b)(3) or (4) to address digital 
assets that may also be treated as securities for Federal income tax 
purposes or to address short sales of digital assets? Are any 
additional rules needed to address how backup withholding should apply 
to transactions involving digital assets? See Part VI of this 
Explanation of Provisions.

B. Additional Questions

    Comments are also requested on any other aspect of these proposed 
regulations not specifically discussed in these proposed regulations, 
including on the following questions:
    1. Are there any suggestions for what the IRS should consider in 
planning for the receipt, storage, retrieval, and usage of the 
information required to be reported under these proposed regulations?
    2. These proposed regulations anticipate that reporting brokers may 
voluntarily engage with acquiring brokers to obtain basis information 
with respect to transactions in which the reporting broker does not 
already have adjusted basis information. What would encourage reporting 
brokers to voluntarily obtain and provide this information?

Applicability Dates

    The regulations regarding computation of gain or loss and the basis 
of digital assets under sections 1001 and 1012 are proposed to apply to 
taxable years for all sales and acquisitions of digital assets on or 
after January 1 of the calendar year immediately following the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. Taxpayers, however, may rely on 
these proposed regulations under sections 1001 and 1012 for 
dispositions in taxable years ending on or after August 29, 2023, 
provided the taxpayer consistently follows the proposed regulations 
under sections 1001 and 1012 in their entirety and in a consistent 
manner for all taxable years through the applicability date of the 
final regulations. The proposed Sec.  1.6045-1 regulations require 
brokers to report the gross proceeds from the sale of digital assets if 
the sale is effected on or after January 1, 2025. According to the 
terms of proposed Sec.  1.6045-1(d)(2)(i)(C), brokers are required to 
report the adjusted basis and the character of any gain or loss with 
respect to a sale if the sale or exchange is effected on or after 
January 1, 2026. For assets that are commodities pursuant to the 
Commodity Futures Trading Commission's certification procedures 
described in 17 CFR 40.2, these regulations are proposed to apply to 
sales of such commodities on or after January 1, 2025, without regard 
to the date such certification procedures were undertaken. The changes 
made by the proposed Sec.  1.6045-4 regulations, applicable to 
reporting on real estate transactions, are proposed to apply to real 
estate transactions with dates of closing occurring on or after January 
1, 2025. The changes made by these proposed regulations applicable to 
transfer statements (proposed Sec.  1.6045A-1) and organizational 
actions (proposed Sec.  1.6045B-1), applicable to specified securities 
described in proposed Sec.  1.6045-1(a)(14)(i) through (iv) that are 
also digital assets as defined in proposed Sec.  1.6045-1(a)(19), are 
proposed to apply on or following the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. The regulations applicable to payments

[[Page 59617]]

made in settlement of payment card and third party network transactions 
(proposed Sec.  1.6050W-1) are proposed to apply to payments made using 
digital assets on or after January 1, 2025. The regulations applicable 
to the penalties for failing to file or furnish an information return 
(proposed Sec. Sec.  1.6721-1 and 1.6722-2) are proposed to apply to 
information returns required to be filed with respect to sales effected 
on or after January 1, 2025. Finally, the regulations applicable to 
backup withholding (proposed Sec. Sec.  31.3406(b)(3)-2, 31.3406(g)-
1(e), and 31.3406(g)-2(e)) are proposed to apply to sales of digital 
assets on or after January 1, 2025.

Special Analyses

    These proposed regulations were subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations.

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility.
    These proposed regulations were designated by the Office of 
Information and Regulatory Affairs (OIRA) as subject to review under 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) (MOA) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding review of tax regulations. OIRA 
designated these regulations as significant under section 1(c) of the 
MOA. Accordingly, OMB reviewed these regulations.

A. Background

    A digital asset is a representation of value that uses cryptography 
to verify transactions and maintain records using a distributed ledger 
as opposed to a centralized authority. Digital assets have gained 
popularity in recent years as both a method of payment and as an 
investment vehicle. Their popularity has grown due to the potential for 
low transaction fees, decentralization (that is, a lack of association 
with a central government and lack of intermediation by financial 
institutions), and because the distributed ledger record of 
transactions does not include the identities of the parties involved in 
the transaction. A ``distributed ledger technology'' is a decentralized 
infrastructure used to store and maintain data as opposed to using one 
centralized server.
    One example of distributed ledger technology is a blockchain. A 
blockchain refers to a cryptographically secured digital ledger that 
maintains a record of transactions that occur on the network. 
Transactions are recorded in ``blocks'' and added to a ``chain'' that 
represents the entire history of transactions. This history is then 
shared and synchronized across many nodes, which then each keep a copy 
of the blockchain. When transactions are added to the blockchain, they 
include unique codes called ``public keys'' that identify the digital 
asset addresses involved. While a public key is unique to a digital 
asset owner, it does not reveal personal information such as a name or 
physical address. In this way, the blockchain preserves a layer of 
confidentiality that allows digital asset owners to feel their privacy 
is better protected on the distributed ledger.
    The confidentiality which helped digital assets gain popularity 
presents challenges for tax compliance. Because the distributed ledger 
does not identify digital asset owners past a public key, compliance 
currently relies primarily on self-reported information.

B. Need for These Proposed Regulations

    Information reporting is essential to the integrity of the tax 
system. The Internal Revenue Service (IRS) estimated in its 2019 tax 
gap analysis that net misreporting as a percent of income for income 
with little to no third-party information reporting is 55 percent. In 
comparison, misreporting for income with some information reporting, 
such as capital gains, is 17 percent, and for income with substantial 
information reporting, such as dividend and interest income, is just 
five percent.
    Prior to these proposed regulations, many transactions involving 
digital assets were outside the scope of information reporting rules. 
Digital assets are treated as property for Federal income tax purposes. 
The regulations under section 6045 of the Internal Revenue Code (Code) 
require brokers to file information returns for customers that sell 
certain types of property noting gross proceeds and, in some cases, 
adjusted basis. However, the existing regulations do not specify 
digital assets as a type of property for which information reporting is 
required. Section 6045 also requires information returns for real 
estate transactions, but the existing regulations do not require 
reporting of amounts received in digital assets. Section 6050W of the 
Code requires information reporting by payment settlement entities on 
certain payments made with respect to payment card and third-party 
network transactions. However, the existing regulations are silent as 
to whether certain exchanges involving digital assets are reportable 
payments under section 6050W.

C. Overview

    These proposed regulations add digital assets to the list of 
property for which brokers must file information returns under section 
6045. In effect, these proposed regulations would require brokers to 
report sales of digital assets if, in return, customers receive cash, 
stored-value cards, different digital assets, services, or other 
property that is subject to reporting under section 6045. Real estate 
persons would also be required to file information returns reporting 
digital assets received in real estate transactions. Finally, to avoid 
duplicative reporting, a broker who is also a payment settlement entity 
would be required to report the sale of digital assets used to make a 
payment associated with a payment card or third party network 
transaction under section 6050W, to the extent the payment is not 
subject to reporting under section 6045.
    Furthermore, these proposed regulations provide the tax rules for 
determining a taxpayer's amount realized on the disposition of digital 
assets and basis in purchased digital assets. Specifically, the 
proposed regulations address exchanges of digital assets for services 
or other property, including different digital assets, and dispositions 
of less than all of a taxpayer's holdings of a particular digital asset 
if the taxpayer purchased those holdings at different times or for 
different prices. The proposed regulations also provide rules for 
allocating transaction costs when one digital asset is exchanged for 
another digital asset.
    These provisions are analyzed in Part D of these Special Analyses.

D. Economic Analysis

1. Baseline
    In this analysis, the Treasury Department and the IRS assess the 
benefits and costs of these proposed regulations compared to a no-
action

[[Page 59618]]

baseline that reflects anticipated Federal income tax-related behavior 
in the absence of these regulations.
a. Economic Effects of These Proposed Regulations
    The worldwide digital asset market is estimated to be valued at 
around $1 trillion as of January 2023.\6\ It is currently unknown how 
much of the global market cap or what share of monthly transactions is 
held by U.S. taxpayers.
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    \6\ See CryptoSlate.com and CoinMarketCap.com.
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b. Alternatives Considered for the Definition of Digital Assets
    A digital asset is defined in the Infrastructure Investment and 
Jobs Act, Public Law 117-58, 135 Stat. 429 (2021) (IIJA) to be any 
digital representation of value which is recorded on a 
cryptographically secured distributed ledger or any similar technology 
as specified by the Secretary of the Treasury. The definition of 
digital assets in these proposed regulations does not include other 
types of virtual assets, such as those that exist only in a closed 
system (such as a video game). The proposed definition is not intended 
to include uses of distributed ledger technology for ordinary 
commercial purposes that do not create new transferable assets, such as 
tracking inventory, which may be unlikely to give rise to sales as 
defined for purposes of the regulations.
    These proposed regulations extend the information reporting rules 
under section 6045 to brokers who, in the ordinary course of a trade or 
business, act as agents, principals, or digital asset middlemen for 
others to effect sales or exchanges of digital assets for cash, broker 
services, or property of a type that is subject to reporting by the 
brokers (including different digital assets, securities, and real 
estate) under section 6045 or to effect on behalf of customers payments 
of digital assets associated with payment card and third party network 
transactions subject to reporting under section 6050W. These proposed 
regulations also clarify that the definition of broker for purposes of 
section 6045 includes certain digital asset trading platforms, digital 
asset payment processors, certain digital asset hosted wallet 
providers, and persons who regularly offer to redeem digital assets 
that were created or issued by that person. In addition, these proposed 
regulations would require real estate reporting persons to report on 
real estate purchasers who use digital assets to acquire real estate in 
a reportable real estate transaction and extend the information that 
must be reported with respect to sellers of real estate to include the 
fair market value of digital assets received by sellers in exchange for 
real estate. Finally, in the case of a transaction involving the 
exchange of digital assets for goods (other than digital assets) or 
services, these proposed regulations treat the provision of the goods 
or services as reportable under section 6050W and the disposition of 
the digital assets as reportable under section 6045.
    The Treasury Department and the IRS considered whether newer forms 
of digital assets, such as those referred to as stablecoins, should be 
subject to the section 6045 broker reporting rules. A stablecoin is a 
form of digital asset that is generally designed to track the value of 
another asset and is intended to have a stable value. It was determined 
that broker reporting should be required for stablecoins. However, the 
principal reporting on stablecoins is likely to come from platforms 
that facilitate the purchase and sale of other digital assets along 
with stablecoins. Stablecoin issuers that redeem stablecoins are 
included in the definition of broker because, notwithstanding their 
nomenclature, the value of a stablecoin is not always stable and 
therefore may give rise to gain or loss. Stablecoin issuers effect 
these redemptions on behalf of their customers and know the gross 
proceeds paid to their customers. The Treasury Department and the IRS 
considered whether to carve out transactions involving stablecoins that 
are linked to the U.S. dollar or to other foreign currencies from the 
definition of a sale for which reporting is required. These proposed 
regulations do not carve out stablecoin transactions from the 
definition of sale because a broker may not be able to identify which 
stablecoins will perfectly and consistently reflect the value of the 
currencies to which they are linked.
    The Treasury Department and the IRS also considered whether 
transactions featuring non-fungible tokens (NFTs) should be subject to 
the proposed regulations. NFTs differ from some other digital assets, 
including cryptocurrency, due to their non-fungible nature--that is, 
they are unique and, thus, not directly interchangeable with other 
NFTs. For purposes of these proposed regulations, NFTs also are digital 
assets that may represent artwork; antiques; written compositions, 
articles, or commentaries; music; videos; films; fashion designs; or 
sports or other entertainment memorabilia, the sale of which is not 
currently subject to reporting under section 6045. However, there is no 
indication in the IIJA or its legislative history that Congress 
intended to exclude certain digital assets from section 6045 reporting. 
NFTs are digital assets that are bought, sold, and traded on digital 
asset trading platforms similar to other digital assets. The 
disposition of NFTs may give rise to gain or loss, and the reporting of 
gross proceeds and basis information is equally useful to taxpayers and 
the IRS as reporting on other digital assets. Ultimately, the Treasury 
Department and the IRS decided that transactions involving NFTs should 
be included under the proposed regulations.
b. Alternatives Considered for Allocating Transaction Costs
    While the majority of the proposed regulations deal with 
information reporting rules for brokers, the proposed regulations also 
deal with operative rules of substantive tax law for customers 
conducting the underlying transactions being reported, including rules 
with respect to the allocation of digital asset transaction costs. The 
term digital asset transaction costs (including transaction fees, 
transfer taxes, and commissions) means the amount paid in cash or 
property (including digital assets) to effect the disposition or 
acquisition of a digital asset. Some digital asset brokers will charge 
a single transaction fee in the case of an exchange of one digital 
asset for a different digital asset. In some cases, these transaction 
fees may be adjusted depending on the type of digital asset acquired or 
disposed of in the exchange, with transactions involving less commonly 
traded digital assets carrying higher transaction fees than 
transactions involving more commonly traded digital assets. The 
Treasury Department and the IRS considered various approaches to 
allocating digital asset transaction costs that are charged in an 
exchange of one digital asset for another. Consideration was given to 
whether these proposed regulations should permit taxpayers or brokers 
to designate how to allocate digital asset transaction costs by, for 
example, entirely reducing the amount realized or entirely increasing 
basis; however, this allocation would not reflect the economic reality 
that the costs are allocable to a particular transaction that includes 
both the purchase of one digital asset and the disposition of a 
different digital asset. Furthermore, a single uniform rule is easier 
to administer and less susceptible to manipulation.
    Ultimately, to avoid the administrative complexities associated 
with distinguishing between special broker fee allocations that 
appropriately

[[Page 59619]]

reflect the economics of the transaction and broker fee allocations 
that reflect tax-motivated requests, these proposed regulations provide 
that in an exchange of one digital asset for a different digital asset, 
one-half of any digital asset transaction cost paid in cash or property 
to effect the exchange is allocable to the disposition of the 
transferred digital asset for purposes of determining the amount 
realized and one-half is allocable to the acquisition of the received 
digital asset for purposes of determining the basis of that received 
digital asset. To clarify, these proposed regulations provide that in 
an exchange of two different digital assets where transaction costs are 
paid or withheld, the amount realized from the exchange is the cash 
received plus the fair market value of other property (including 
digital assets), or services received, reduced by one half of the total 
digital asset transaction costs. Economically, this decision likely has 
little effect on the market since prices will adjust to reflect the 
relative elasticities of supply and demand.
c. Economic Effects on Brokers
    The Treasury Department and the IRS estimate that approximately 600 
to 9,500 brokers will be impacted by these proposed regulations. The 
lower bound of this estimate is derived using Form 1099 issuer data 
through 2021 and statistics from CoinMarketCap.com. The upper bound of 
this estimate is based on IRS data for brokers with nonzero revenue who 
may deal in digital assets. These proposed regulations increase costs 
for brokers who do not already maintain records of customers' digital 
asset transactions. These proposed regulations will require brokers to 
collect and store customers' information, including names, addresses, 
and tax identification numbers. Brokers will also be required to 
collect and store information about customers' digital asset 
transactions. While the ongoing costs of reporting information to the 
IRS may be small, there will be larger costs associated with the 
initial setup for brokers. To the extent that they do not have such a 
system in place, brokers will need to build a system of collecting and 
storing this information, as well as reporting this information to the 
IRS and taxpayers, or will need to find a service provider to do so. 
They will also need to develop and maintain the ability to backup 
withhold and deposit withheld tax with the IRS for applicable 
taxpayers. Some of these costs may be curtailed by working with 
existing third parties that currently assist some brokers with 
voluntary reporting. These regulations may also increase costs for 
those brokers who do voluntarily report under the current rules, since 
these brokers will need to ensure that their current reporting systems 
are compliant with the proposed reporting rules.
    A reasonable burden estimate for the average time to complete these 
forms for each customer is between 7.5 minutes and 10.5 minutes, with a 
mid-point of 9 minutes (or 0.15 hours). The Treasury Department and the 
IRS estimate that 13 to 16 million customers will be impacted by these 
proposed regulations. Taking the mid-points of the ranges for the 
number of taxpayers that are expected to report gain (or loss) from 
digital asset transactions (i.e., form recipients) and number of 
brokers expected to be impacted by these regulations (14.5 million 
recipients and 5,050 brokers, respectively), we expect the average 
broker to incur 425 hours of time burden and $27,000 of monetized 
burden for the ongoing costs per year based on calculations using wage 
and compensation data from the Bureau of Labor Statistics that capture 
the wage, benefit, and overhead costs of a typical tax preparer.\7\ The 
total estimated aggregate annual burden is 2,146,250 hours. The total 
estimated monetized annual burden is $136,350,000. These estimates are 
based on survey data collected from filers of similar information 
returns, such as Form 1099-B, Proceeds From Broker and Barter Exchange 
Transactions, and Form 1099-K, Payment Card and Third Party Network 
Transactions. Although these estimates are likely to change once these 
proposed regulations are effective, the Treasury Department and the IRS 
do not have data that would allow for an accurate estimate of these 
changes.
---------------------------------------------------------------------------

    \7\ See https://www.bls.gov/oes/tables.htm and https://www.bls.gov/news.release/ecec.toc.htm.
---------------------------------------------------------------------------

    Additionally, start-up costs are estimated to be between three and 
eight times annual costs. Given that we expect per firm annual 
estimated burden hours to be 425 hours and $27,000 of estimated 
monetized burden, we estimate per firm start-up aggregate burden hours 
to range from 1,275 to 3,400 hours and $81,000 to $216,000 of aggregate 
monetized burden. Using the mid-points, start-up total estimated 
aggregate burden hours is 11,804,375 and total estimated monetized 
burden is $749,925,000.
    However, these proposed regulations also work to mitigate some 
potential compliance costs for brokers. First, the clarity provided by 
these proposed regulations on which types of transactions (namely those 
involving digital assets) are subject to reporting will allow brokers 
to create a consistent reporting plan and not collect additional 
information for other types of transactions that do not otherwise 
require information reporting. Second, the application of one fixed 
rule for allocating transaction costs gives brokers a clear rule to 
follow and resolves any uncertainty with how to treat those transaction 
costs for reporting purposes.
    Prior to these proposed regulations, brokers who chose to report on 
digital asset transactions took different approaches to collecting 
information and reporting due to a lack of clear policy guidelines. Any 
economic inefficiencies created by this uncertainty (such as 
competition between brokers regarding collecting personal information) 
would now be resolved.
d. Economic Effects on Digital Asset Owners
    The Treasury Department and the IRS estimate that 13 to 16 million 
digital asset owners will be impacted by these proposed regulations. 
This estimated range may be low, since it relies on information 
reported on Forms 8949, Sales and Other Dispositions of Capital Assets, 
by individuals, Forms 1099-B, Forms 1099-K, Forms 1099-MISC, 
Miscellaneous Income, and Forms 1099-NEC, Nonemployee Compensation, 
provided by brokers and/or payment settlement entities prior to the 
passage of IIJA and individuals that checked yes on the Form 1040, U.S. 
Individual Income Tax Return, question regarding virtual currency 
transactions. Because the existing regulations were previously silent 
as to the information reporting obligations of brokers for many digital 
asset transactions prior to IIJA, these data are likely not complete 
even for those who did file. Payment settlement entities were also only 
required to file a Form 1099-K if the payee had more than 200 
transactions and $20,000 in gross proceeds, further limiting the 
information available. The Treasury Department and the IRS do not have 
adequate data to estimate the level of noncompliance regarding digital 
asset reporting by digital asset owners.
    These proposed regulations will have different effects on different 
types of digital asset owners. The majority of digital asset owners 
will see greatly reduced costs of monitoring and tracking their own 
digital asset portfolios. These reduced costs and the increased 
confidence potential digital asset owners will gain as a result of 
brokers being compliant with Federal tax laws will likely increase the 
number

[[Page 59620]]

of digital asset owners and may increase existing owners' trade volume.
    Due to the volatile nature of digital asset values, and due to the 
precision allowed for digital asset holdings, digital asset owners 
currently must closely monitor and maintain records of all their 
transactions to correctly report their tax liability at the end of the 
year. This is a complicated and time-consuming task that is prone to 
error. Those potential digital asset owners who have little experience 
with accounting for digital assets may have been unwilling to enter the 
market due to the high learning and record maintenance costs. 
Eliminating these high entry costs will allow more potential digital 
asset owners to enter the market.
    These proposed regulations also make clear which types of digital 
assets are subject to reporting requirements and which are not. Without 
this clarification, digital asset owners may have failed to properly 
maintain records for some of their transactions, believing them to not 
be subject to reporting per the existing regulations. Similarly, these 
digital asset owners may have also overallocated resources to 
monitoring taxable transactions that are now required to be reported, 
adding unnecessary costs to using digital assets.
    On the other hand, those digital asset owners who prefer to use 
digital assets due to the pseudonymity of the blockchain will see an 
additional privacy cost of making transactions with digital assets, 
since brokers will be required to collect information from them for tax 
reporting purposes. These digital asset owners may decrease their 
volume of digital asset trading through brokers.

II. Paperwork Reduction Act

    The collections of information in these proposed regulations are 
required under section 6045 of the Internal Revenue Code (the Code). 
The collection of information with respect to dispositions of digital 
assets in these proposed regulations is set forth in proposed Sec.  
1.6045-1 and the collection of information with respect to dispositions 
of real estate in consideration for digital assets in these proposed 
regulations is set forth in proposed Sec.  1.6045-4. Responses to these 
collections of information are mandatory.
    Section 1.6045-1(d) of these proposed regulations would generally 
require brokers to report to the customer and the IRS the gross 
proceeds paid to the customer or credited to the customer's account 
upon the broker's sale of digital assets on behalf of the customer, as 
well as, in certain circumstances, the customer's adjusted basis in, 
and date of purchase of, the digital assets sold. This information is 
necessary to allow the customer and the IRS to determine the amount and 
character of the customer's gain (or loss) from the sale of digital 
assets. Section 1.6045-4(i) of these proposed regulations would 
generally require real estate reporting persons (treated as brokers for 
purposes of proposed Sec.  1.6045-1) to report to the real estate 
transferor and to the IRS the fair market value of digital assets paid 
to the transferor as consideration in a real estate transaction. This 
information is necessary to allow the transferor and the IRS to 
determine the total gross proceeds from digital assets paid in the real 
estate transaction.
    The IRS intends that the collection of information pursuant to 
proposed Sec.  1.6045-1 will be conducted through a form prescribed by 
the Secretary for digital asset sales, and that the collection of 
information pursuant to proposed Sec.  1.6045-4 will be conducted 
through a revised Form 1099-S, Proceeds From Real Estate Transactions. 
For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), the reporting burden associated with the collection of 
information with respect to proposed Sec. Sec.  1.6045-1 and 1.6045-4 
will be reflected in the Paperwork Reduction Act Submissions associated 
with those Forms. The OMB Control Number for the Form 1099-S is 1545-
0997. Currently, there is no OMB Control Number for the form that will 
be prescribed by the Secretary for the collection of information 
pursuant to proposed Sec.  1.6045-1.
    The form prescribed by the Secretary for digital asset sales will 
be used by all digital asset brokers, digital asset payment processors, 
and certain other brokers with a reporting requirement. The revised 
Form 1099-S will be used by all real estate reporting persons with a 
reporting requirement. The Treasury Department and the IRS request 
comments on all aspects of information collection burdens related to 
these proposed regulations. In addition, when available, drafts of IRS 
forms will be posted for comment at www.irs.gov/draftforms.
    Regarding the form that will be prescribed by the Secretary for 
sales of digital assets, the burden estimate must reflect the 
continuing costs of collecting and reporting the information required 
by these regulations as well as the upfront or start-up costs 
associated with creating the systems to collect and report the 
information. A reasonable burden estimate for the average time to 
complete these Forms for each customer is between 7.5 minutes and 10.5 
minutes, with a mid-point of 9 minutes (or 0.15 hours). The Treasury 
Department and the IRS estimate that 13 to 16 million customers will be 
impacted by these proposed regulations. Taking the mid-points of the 
ranges for the number of taxpayers that are expected to report gain (or 
loss) from digital asset transactions (i.e., form recipients) and 
number of brokers expected to be impacted by these regulations (14.5 
million recipients and 5,050 brokers, respectively), we expect the 
average broker to incur 425 hours of time burden and $27,000 of 
monetized burden for the ongoing costs per year. The total estimated 
aggregate annual burden hours is 2,146,250. The total estimated 
monetized annual burden is $136,350,000. These estimates are based on 
survey data collected from filers of similar information returns, such 
as Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, 
and Form 1099-K, Payment Card and Third Party Network Transactions. 
Although these estimates are likely to increase once these proposed 
regulations are effective, the Treasury Department and the IRS do not 
have data that would allow for an accurate estimate of these increases.
    Additionally, start-up costs are estimated to be between three to 
eight times annual costs. Given that we expect per firm annual 
estimated burden hours to be 425 hours and $27,000 of estimated 
monetized burden, we estimate per firm start-up aggregate burden hours 
to range from 1,275 to 3,400 hours and $81,000 to $216,000 of aggregate 
monetized burden. Using the mid-points, start-up total estimated 
aggregate burden hours is 11,804,375 and total estimated monetized 
burden is $749,925,000.
    Based on the most recent OMB burden estimate for the average time 
to complete Form 1099-S, it was estimated that the IRS received a total 
number of 2,573,400 Form 1099-S responses with a total estimated time 
burden for those responses of 411,744 hours (or 9.6 minutes per Form). 
See https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-024. Neither a material change in the average time to complete the 
revised Form, nor a material increase in the number of Forms that will 
be filed is expected once these proposed regulations are effective. No 
material increase is expected in the start-up costs and it is 
anticipated that less than 1 percent of Form 1099-S issuers will be 
impacted by this change. There is no available data to predict the 
increase in the number of Forms to be

[[Page 59621]]

filed. The Treasury Department and the IRS request comments on all 
aspects of these estimates.
    Written comments and recommendations for the proposed information 
collection may be submitted via the Federal eRulemaking Portal at 
www.regulations.gov (indicate IRS and REG-122793-19) by following the 
online instructions for submitting comments and may also be sent to the 
Internal Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by October 30, 2023.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the duties of the IRS, including whether the 
information will have practical utility (including underlying 
assumptions and methodology);
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    When the IRS issues a proposed rulemaking imposing a collection of 
information requirement on small entities, the Regulatory Flexibility 
Act (RFA) requires the agency to ``prepare and make available for 
public comment an initial regulatory flexibility analysis,'' which will 
``describe the impact of the proposed rule on small entities.'' 5 
U.S.C. 603(a). Unless an agency determines that a proposal will not 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule.
    As discussed in Part I.D.2.c. of this Special Analyses, the 
expected number of impacted issuers of information returns under these 
proposed regulations is between 600 and 9,500 (mid-point 5,050). Small 
Business Administration regulations provide small business size 
standards by North American Industry Classification System (NAICS) 
Industry. See 13 CFR 121.201. The NAICS includes virtual currency 
exchange services in the NAICS code for Commodity Contracts Dealing 
(523130). According to Small Business Administration regulations, the 
maximum annual receipts for a concern and its affiliates to be 
considered small in this NAICS code is $41.5 million. Based on tax 
return data, only 150 of the 9,500 firms identified as impacted issuers 
in the upper bound estimate exceed the $41.5 million threshold. This 
implies there could be 450 to 9,350 impacted small business issuers 
under the Small Business Administration small business size standards. 
Notwithstanding these estimates and analysis, the Treasury Department 
and the IRS have not yet determined whether the proposed rule, when 
finalized, will likely have a significant economic impact on a 
substantial number of small entities. The determination of whether 
reporting by small brokers and real estate reporting persons on certain 
digital asset transactions will have a significant economic impact on a 
substantial number of these entities requires further study. However, 
because there is a possibility of significant economic impact on a 
substantial number of small entities, an Initial Regulatory Flexibility 
Analysis is provided in these proposed regulations. The Treasury 
Department and the IRS invite comments on both the number of entities 
affected and the economic impact on small entities.
A. Need for and Objectives of the Rule
    As discussed earlier in this preamble, the existing information 
reporting rules do not address how certain transactions involving 
digital assets must be reported to the party who disposes of the 
digital assets in exchange for cash, services, stored-value cards, or 
other property (including different digital assets). Information 
reporting by brokers and real estate reporting persons under section 
6045 of the Code with respect to certain digital asset dispositions and 
digital asset payments received by real estate transferors would lead 
to higher levels of taxpayer compliance because the income earned by 
taxpayers engaging in transactions involving digital assets would be 
made transparent to both the IRS and taxpayers. Clear information 
reporting rules that report gross proceeds and, in some cases, adjusted 
basis for taxpayers who engage in digital asset transactions will help 
the IRS to identify taxpayers who have engaged in these transactions, 
and thereby help to reduce the overall tax gap. The proposed rule is 
also expected to facilitate the preparation of tax returns (and reduce 
the number of inadvertent errors or intentional misstatements shown on 
those returns) by taxpayers who engage in digital asset transactions.
B. Affected Small Entities
    As discussed above, we anticipate 9,350 of the 9,500 (or 98 
percent) impacted issuers in the upper bound estimate could be small 
businesses.
C. Impact of the Rule and Alternatives Considered
1. Proposed Reporting and Compliance Requirements
    Section 1.6045-1(d) of these proposed regulations would generally 
require brokers to report to the IRS and the customer the gross 
proceeds paid to the customer or credited to the customer's account 
upon the broker's sale of digital assets on behalf of the customer, as 
well as, in certain circumstances, the customer's adjusted basis in, 
and date of purchase of, the digital assets sold. This information is 
necessary to allow the IRS and the customer to determine the amount and 
character of the customer's gain (or loss) from the sale of digital 
assets. Section 1.6045-4(i) of these proposed regulations would also 
generally require real estate reporting persons (treated as brokers for 
purposes of proposed Sec.  1.6045-1) to report to the IRS and the real 
estate transferor the fair market value of digital assets paid to the 
real estate transferor as consideration in a real estate transaction. 
This information is necessary to allow the IRS and the real estate 
transferor to determine the total gross proceeds from digital assets 
paid in the real estate transaction and assist the IRS and the real 
estate transferor to determine whether, and to what extent, the gross 
proceeds are taxable income to the real estate transferor.
    As previously stated in the Paperwork Reduction Act section of this 
preamble, the form prescribed by the Secretary for reporting sales of 
digital assets pursuant to Sec.  1.6045-1(d) of these proposed

[[Page 59622]]

regulations is expected to create an average estimated per customer 
burden on brokers of between 7.5 minutes and 10.5 minutes, with a mid-
point of 9 minutes (or 0.15 hours). In addition, the form is expected 
to create an average estimated per broker burden of between 1,275 and 
3,400 hours in start-up costs to build processes to comply with the 
information reporting requirements. The revised Form 1099-S prescribed 
by the Secretary for reporting gross proceeds from the payment of 
digital assets paid to real estate transferors as consideration in a 
real estate transaction pursuant to Sec.  1.6045-4(i) of these proposed 
regulations is not expected to materially change overall costs to 
complete the revised Form. Because we expect that filers of revised 
Form 1099-S will already be filers of the form, we do not expect them 
to incur a material increase in start-up costs associated with the 
revised form.
    Although small businesses may engage tax reporting services to 
complete, file, and furnish information returns to avoid the start-up 
costs associated with building an internal information return reporting 
system for sales of digital assets, it remains difficult to predict 
whether the economies of scale efficiencies of using these services 
will offset the somewhat more burdensome ongoing costs associated with 
using third party contractors.
2. Reporting Alternatives Considered for Small Businesses
    The Treasury Department and the IRS considered alternatives to 
these proposed regulations that would have created an exception to 
reporting, or a delayed applicability date, for small businesses but 
decided against such alternatives for several reasons. As discussed 
above, we anticipate 9,350 of the 9,500 (or 98 percent) impacted 
issuers in the upper bound estimate could be small businesses. First, 
one purpose of these proposed regulations is to eliminate the overall 
tax gap. Any exception or delay to the information reporting rules for 
small business brokers, which may comprise the vast majority of 
impacted issuers, would reduce the effectiveness of these proposed 
regulations. In addition, such an exception or delay could have the 
unintended effect of incentivizing taxpayers to move their business to 
excepted small businesses, thus thwarting IRS efforts to identify 
taxpayers engaged in digital asset transactions. Additionally, because 
the information reported on statements furnished to customers will 
likely be an aid to tax return preparation by those customers, small 
business brokers will be able to offer their customers the same amount 
of useful information as their larger competitors. Finally, to the 
extent investors in digital asset transactions are themselves small 
businesses, these proposed regulations will help these businesses with 
their own tax return preparation efforts.
D. Duplicate, Overlapping, or Relevant Federal Rules
    The proposed rule would not conflict or overlap with any relevant 
Federal rules. As discussed above, in certain instances, the proposed 
rule ensures duplicative reporting is not required.
    The Treasury Department and the IRS invite comments on any impact 
this rule would have on small entities. Pursuant to section 7805(f) of 
the Code, this notice of proposed rulemaking will be submitted to the 
Chief Counsel for the Office of Advocacy of the Small Business 
Administration for comment on its impact on small entities.

IV. Unfunded Mandates Reform Act

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

V. Executive Order 13132: Federalism

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

Comments and Requests To Participate in the Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to any comments that are 
submitted timely to the IRS as prescribed in this preamble under the 
ADDRESSES heading. The Treasury Department and the IRS request comments 
on all aspects of the proposed rules. All comments that are submitted 
by the public will be made available at https://www.regulations.gov. 
Once submitted to the Federal eRulemaking Portal, comments cannot be 
edited or withdrawn.
    A public hearing has been scheduled for November 7, 2023, beginning 
at 10 a.m. ET, in the Auditorium at the Internal Revenue Service, 1111 
Constitution Avenue NW, Washington, DC. If the number of requests to 
speak at the hearing exceed the number that can be accommodated in one 
day, a second public hearing date for this proposed regulation will be 
held on November 8, 2023. In this event and to the extent possible, 
persons requesting to testify in person will be assigned to speak on 
the first day of the public hearing. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
public hearing starts. Participants may alternatively attend the public 
hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the public hearing. 
Persons who wish to present oral comments at the public hearing must 
submit written or electronic comments and an outline of the topics to 
be discussed as well as the time to be devoted to each topic by October 
30, 2023, as prescribed in the preamble under the ADDRESSES section. 
For those requesting to speak during the public hearing, send an 
outline of topic submissions electronically via the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-122793-19). If no 
outlines are received by October 30, 2023, the public hearing will be 
cancelled. If the public hearing is cancelled, a notice of cancellation 
of the public hearing will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-122793-19 and the language ``TESTIFY In 
Person''. For example, the subject line may say: ``Request to TESTIFY 
In Person at Hearing for REG-122793-19''. Individuals who want to 
testify by telephone at the public hearing must send an email to

[[Page 59623]]

[email protected] to receive the telephone number and access code 
for the public hearing. The subject line of the email must contain the 
regulation number ``REG-122793-19'' and the language ``TESTIFY 
Telephonically''. For example, the subject line may say: ``Request to 
TESTIFY Telephonically at Hearing for REG-122793-19''.
    The email by persons requesting to testify either in person or 
telephonically should include a copy of the speaker's public comments 
and outline of topics. A period of ten minutes will be allocated to 
each person for making comments. After the deadline for receiving 
outlines has passed, the IRS will prepare an agenda containing the 
schedule of speakers. Copies of the agenda with the order of the 
speakers will be made available free of charge at the public hearing 
and will also be uploaded to https://www.regulations.gov.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
their names added to the building access list. The subject line of the 
email must contain the regulation number ``REG-122793-19'' and the 
words ``ATTEND in Person''. For example, the subject line may say: 
``Request to ATTEND Hearing in Person for REG-122793-19''. Requests to 
attend the public hearing must be received by 5 p.m. ET on November 3, 
2023.
    Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the public hearing. 
The subject line of the email must contain the regulation number ``REG-
122793-19'' and the words ``ATTEND Hearing Telephonically''. For 
example, the subject line may say: ``Request to ATTEND Hearing 
Telephonically for REG-122793-19''. Requests to attend the public 
hearing must be received by 5 p.m. ET on November 3, 2023.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during the telephonic hearing, contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-5306 
(not a toll-free number) by November 2, 2023.

Statement of Availability of IRS Documents

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

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

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

26 CFR Part 301

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

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR parts 1, 31, and 301 as follows:

PART 1--INCOME TAXES

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

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

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


Sec.  1.1001-1  Computation of gain or loss.

    (a) * * * For rules determining the amount realized for purposes of 
computing the gain or loss upon the sale, exchange, or other 
disposition of digital assets, as defined in Sec.  1.6045-1(a)(19), see 
Sec.  1.1001-7.
* * * * *
0
Par. 3. Section 1.1001-7 is added to read as follows:


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

    (a) In general. This section provides rules to determine the amount 
realized for purposes of computing the gain or loss upon the sale, 
exchange, or other disposition of digital assets, as defined in Sec.  
1.6045-1(a)(19).
    (b) Amount realized in a sale, exchange, or other disposition of 
digital assets for cash, other property, or services--(1) Computation 
of amount realized--(i) In general. If digital assets are sold or 
otherwise disposed of for cash, other property differing materially in 
kind or in extent, or services, the amount realized is the excess of:
    (A) The sum of:
    (1) Any cash received;
    (2) The fair market value of any property received or, in the case 
of a debt instrument described in paragraph (b)(1)(iv) of this section, 
the amount determined under paragraph (b)(1)(iv) of this section; and
    (3) The fair market value of any services received; over
    (B) The amount of digital asset transaction costs, as defined in 
paragraph (b)(2)(i) of this section, allocable to the sale or 
disposition of the transferred digital asset, as determined under 
paragraph (b)(2)(ii) of this section.
    (ii) Digital assets used to pay digital asset transaction costs. If 
digital assets are used (including withheld) to pay digital asset 
transaction costs, as defined in paragraph (b)(2)(i) of this section, 
such use is a disposition of the digital assets for services.
    (iii) Application of general rule to certain sales, exchanges, or 
other dispositions of digital assets. The following paragraphs apply 
the rules of this section to certain sales, exchanges, or other 
dispositions of digital assets.
    (A) Sales or other dispositions of digital assets for cash. The 
amount realized from the sale of digital assets for cash is the sum of 
the amount of cash received plus the fair market value of services 
received described in paragraph (b)(1)(ii) of this section, reduced by 
the amount of digital asset transaction costs allocable to the 
disposition of the transferred digital assets, as determined under 
paragraph (b)(2)(ii) of this section.
    (B) Exchanges or other dispositions of digital assets for services, 
or certain property. The amount realized on the exchange or other 
disposition of digital assets for services or property differing 
materially in kind or in extent, other than digital assets or debt 
instruments described in paragraph (b)(1)(iv) of this section, is the 
sum of the fair market value of such property and services received 
(including services received

[[Page 59624]]

described in paragraph (b)(1)(ii) of this section), reduced by the 
amount of digital asset transaction costs allocable to the disposition 
of the transferred digital assets, as determined under paragraph 
(b)(2)(ii) of this section.
    (C) Exchanges of digital assets. The amount realized on the 
exchange of one digital asset for another digital asset differing 
materially in kind or in extent is the sum of the fair market value of 
the digital asset received plus the fair market value of services 
received described in paragraph (b)(1)(ii) of this section, reduced by 
the amount of digital asset transaction costs allocable to the 
disposition of the transferred digital asset, as determined under 
paragraph (b)(2)(ii) of this section.
    (iv) Debt instrument issued in exchange for digital assets. For 
purposes of this section, if a debt instrument is issued in exchange 
for digital assets and the debt instrument is subject to Sec.  1.1001-
1(g), the amount attributable to the debt instrument is determined 
under Sec.  1.1001-1(g) (in general, the issue price of the debt 
instrument).
    (2) Digital asset transaction costs--(i) Definition. The term 
digital asset transaction costs means the amount paid in cash or 
property (including digital assets) to effect the disposition or 
acquisition of a digital asset. Digital asset transaction costs include 
transaction fees, transfer taxes, and commissions.
    (ii) Allocation of digital asset transaction costs. This paragraph 
(b)(2)(ii) provides the rules for allocating digital asset transaction 
costs to the disposition or acquisition of a digital asset.
    (A) In general. Except as provided in paragraph (b)(2)(ii)(B) of 
this section, in the case of a sale or disposition of digital assets, 
the total digital asset transaction costs paid by the taxpayer are 
allocable to the disposition of the digital assets. Such costs include 
any digital asset transaction costs paid by the taxpayer on the sale or 
disposition of a digital asset used or withheld to pay other digital 
asset transaction costs.
    (B) Special rule for certain exchanges. In the case of an exchange 
of digital assets described in paragraph (b)(1)(iii)(C) of this 
section, one-half of the total digital asset transaction costs paid by 
the taxpayer to effect the exchange are allocable to the disposition of 
the transferred digital assets, and the other half of such costs are 
allocable to the acquisition of the received digital assets for 
purposes of determining basis under Sec.  1.1012-1(a). See Sec.  
1.1012-1(h). Such costs include any digital asset transaction costs 
paid by the taxpayer on the sale or disposition of a digital asset used 
or withheld to pay other digital asset transaction costs. Accordingly, 
any other allocation or specific assignment of digital asset 
transaction costs is disregarded.
    (3) Time for determining fair market value of digital assets. 
Generally, the fair market value of a digital asset is determined as of 
the date and time of the exchange or disposition of the digital asset.
    (4) Special rule when the fair market value of property or services 
cannot be determined. If the fair market value of the property 
(including digital assets) or services received in exchange for digital 
assets cannot be determined with reasonable accuracy, the fair market 
value of such property or services must be determined by reference to 
the fair market value of the digital assets transferred as of the date 
and time of the exchange. This paragraph (b)(4), however, does not 
apply to a debt instrument described in paragraph (b)(1)(iv) of this 
section.
    (5) Examples. The following examples illustrate the application of 
paragraphs (b)(1) through (3) of this section. Unless the facts 
specifically state otherwise, the transactions described in the 
following examples occur after the applicability date set forth in 
paragraph (c) of this section. For purposes of the examples under this 
paragraph (b)(5), assume that TP is a digital asset investor, and each 
unit of digital asset A, B, and C is materially different in kind or in 
extent from the other units. See Sec.  1.1012-1(h)(4) for examples 
illustrating the determination of basis of digital assets.
    (i) Example 1: Exchange of digital assets for services--(A) Facts. 
TP owns a total of 20 units of digital asset A, and each unit has an 
adjusted basis of $0.50. X, an unrelated person, agrees to perform 
cleaning services for TP in exchange for 10 units of digital asset A. 
The fair market value of the services performed by X equals $10. X then 
performs the services, and TP transfers 10 units of digital asset A to 
X. Additionally, TP pays, in cash, $1 of transaction fees to dispose of 
digital asset A.
    (B) Analysis. Under paragraph (b)(1) of this section, TP has a 
disposition of 10 units of digital asset A for services received. Under 
paragraphs (b)(2)(i) and (b)(2)(ii)(A) of this section, TP has digital 
asset transaction costs of $1, which must be allocated to the 
disposition of digital asset A. Under paragraph (b)(1)(i) of this 
section, TP's amount realized on the disposition of the units of 
digital asset A is $9, which is the fair market value of the services 
received, $10, reduced by the digital asset transaction costs allocated 
to the disposition of digital asset A, $1. TP recognizes a gain of $4 
on the exchange ($9 amount realized reduced by $5 adjusted basis in 10 
units).
    (ii) Example 2: Digital asset transaction costs paid in cash in an 
exchange of digital assets--(A) Facts. TP owns a total of 10 units of 
digital asset A, and each unit has an adjusted basis of $0.50. TP uses 
BEX, an unrelated third party, to effect the exchange of 10 units of 
digital asset A for 20 units of digital asset B. At the time of the 
exchange, each unit of digital asset A has a fair market value of $2 
and each unit of digital asset B has a fair market value of $1. BEX 
charges $2 per transaction, which BEX requires its customers to pay in 
cash. At the time of the transaction, TP pays BEX $2 in cash.
    (B) Analysis. Under paragraph (b)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (b)(2)(ii)(B) of 
this section, TP must allocate one-half of such costs ($1) to the 
disposition of the 10 units of digital asset A and must allocate the 
remaining one-half ($1) to the acquisition of the 20 units of digital 
asset B. Under paragraphs (b)(1)(i) and (b)(3) of this section, TP's 
amount realized from the exchange is $19, which is the fair market 
value of the 20 units of digital asset B received ($20) as of the date 
and time of the transaction, reduced by the digital asset transaction 
costs allocated to the disposition of digital asset A ($1). TP 
recognizes a gain of $14 on the exchange ($19 amount realized reduced 
by $5 adjusted basis in the 10 units of digital asset A).
    (iii) Example 3: Digital asset transaction costs paid with digital 
assets in an exchange of digital assets--(A) Facts. The facts are the 
same as in paragraph (b)(5)(ii)(A) of this section (the facts in 
Example 2), except that BEX requires its customers to pay transaction 
costs using units of digital asset C. TP has an adjusted basis in each 
unit of digital asset C of $0.50. TP transfers 2 units of digital asset 
C to BEX to effect the exchange of digital asset A for digital asset B. 
TP also pays to BEX an additional unit of digital asset C to effect the 
disposition of digital asset C for payment of the transaction costs. 
The fair market value of each unit of digital asset C is $1.
    (B) Analysis. TP disposes of 3 units of digital asset C for 
services described in paragraph (b)(1)(ii) of this section. Therefore, 
under paragraph (b)(2)(i) of this section, TP has digital asset 
transaction costs of $3. Under paragraph (b)(2)(ii)(B) of this section, 
TP must allocate one-half of such costs ($1.50) to the disposition of 
the 10 units of digital

[[Page 59625]]

asset A and the remaining one-half ($1.50) to the acquisition of the 20 
units of digital asset B. None of the digital asset transaction costs 
are allocable to the disposition of digital asset C. Under paragraphs 
(b)(1)(i) and (b)(3) of this section, TP's amount realized on the 
disposition of digital asset A is $18.50, which is the excess of the 
fair market value of the 20 units of digital asset B received ($20) as 
of the date and time of the transaction over the allocated digital 
asset transaction costs ($1.50). Under paragraph (b)(1)(i) of this 
section, TP's amount realized on the disposition of the 3 units of 
digital asset C is $3, which is the fair market value of the services 
received as of the date and time of the transaction. TP recognizes a 
gain of $13.50 on the disposition of 10 units of digital asset A 
($18.50 amount realized over $5 adjusted basis) and a gain of $1.50 on 
the disposition of the 3 units of digital asset C ($3 amount realized 
over $1.50 adjusted basis).
    (iv) Example 4: Digital asset transaction costs withheld from the 
transferred digital assets in an exchange of digital assets--(A) Facts. 
The facts are the same as in paragraph (b)(5)(ii)(A) of this section 
(the facts in Example 2), except that BEX requires its payment be 
withheld from the units of the digital asset transferred. At the time 
of the transaction, BEX withholds 1 unit of digital asset A. TP 
exchanges the remaining 9 units of digital asset A for 18 units of 
digital asset B.
    (B) Analysis. The withholding of 1 unit of digital asset A is a 
disposition of a digital asset for services within the meaning of 
paragraph (b)(1)(ii) of this section. Under paragraph (b)(2)(i) of this 
section, TP has digital asset transaction costs of $2. Under paragraph 
(b)(2)(ii)(B) of this section, TP must allocate one-half of such costs 
to the disposition of the 10 units of digital asset A and must allocate 
the other half of such costs to the acquisition of the 18 units of 
digital asset B. Under paragraphs (b)(1)(i) and (b)(3) of this section, 
TP's amount realized on the 10 units of digital asset A is $19, which 
is the excess of the fair market value of the 18 units of digital asset 
B received ($18) and the fair market value of services received ($2) as 
of the date and time of the transaction over the allocated digital 
asset transaction costs ($1). TP recognizes a gain on the 10 units of 
digital asset A transferred of $14 ($19 amount realized reduced by 
$5.00 adjusted basis in the 10 units).
    (c) Applicability date. This section applies to all sales, 
exchanges, and dispositions of digital assets on or after January 1 of 
the calendar year immediately following [date of publication of final 
regulations in the Federal Register].
0
Par. 4. Section 1.1012-1 is amended by:
0
1. Adding paragraph (h);
0
2. Adding reserved paragraph (i); and
0
3. Adding paragraph (j).
    The additions read as follows:


Sec.  1.1012-1  Basis of property.

* * * * *
    (h) Determination of basis of digital assets--(1) Overview and 
general rule. This paragraph (h) provides rules to determine the basis 
of digital assets, as defined in Sec.  1.6045-1(a)(19), received in a 
purchase for cash, a transfer in connection with the performance of 
services, an exchange for digital assets or other property differing 
materially in kind or in extent, an exchange for a debt instrument 
described in paragraph (h)(1)(v) of this section, or in a part sale and 
part gift transfer described in paragraph (h)(1)(vi) of this section. 
Except as provided in paragraph (h)(1)(ii), (v), or (vi) of this 
section, the basis of digital assets received in a purchase or exchange 
is generally equal to the cost thereof at the date and time of the 
purchase or exchange, plus any allocable digital asset transaction 
costs as determined under paragraph (h)(2)(ii) of this section.
    (i) Basis of digital assets purchased for cash. The basis of 
digital assets purchased for cash is the amount of cash used to 
purchase the digital assets plus any allocable digital asset 
transaction costs as determined under paragraph (h)(2)(ii)(A) of this 
section.
    (ii) Basis of digital assets received in connection with the 
performance of services. For rules regarding digital assets received in 
connection with the performance of services, see Sec. Sec.  1.61-
2(d)(2) and 1.83-4(b).
    (iii) Basis of digital assets received in exchange for property 
other than digital assets. The basis of digital assets received in 
exchange for property differing materially in kind or in extent, other 
than digital assets, is the cost as described in paragraph (h)(3) of 
this section of the digital assets received plus any allocable digital 
asset transaction costs as determined under paragraph (h)(2)(ii)(A) of 
this section.
    (iv) Basis of digital assets received in exchange for other digital 
assets. The basis of digital assets received in an exchange for other 
digital assets differing materially in kind or in extent is the cost as 
described in paragraph (h)(3) of this section of the digital assets 
received plus one-half of the total allocable digital asset transaction 
costs as determined under paragraph (h)(2)(ii)(B) of this section.
    (v) Basis of digital assets received in exchange for the issuance 
of a debt instrument. If a debt instrument is issued in exchange for 
digital assets, the cost of the digital assets attributable to the debt 
instrument is the amount determined under paragraph (g) of this 
section, plus any allocable digital asset transaction costs as 
determined under paragraph (h)(2)(ii)(A) of this section.
    (vi) Basis of digital assets received in a part sale and part gift 
transfer. To the extent digital assets are received in a transfer, 
which is in part a sale and in part a gift, see Sec.  1.1012-2.
    (2) Digital asset transaction costs--(i) Definition. The term 
digital asset transaction costs under paragraph (h) of this section has 
the same meaning as in Sec.  1.1001-7(b)(2)(i).
    (ii) Allocation of digital asset transaction costs. This paragraph 
(h)(2)(ii) provides the rules for allocating digital asset transaction 
costs to the acquisition of digital assets described in paragraph 
(h)(1) of this section.
    (A) Allocation of digital asset transaction costs on a purchase or 
exchange for digital assets. Except for an exchange described in 
paragraph (h)(2)(ii)(B) of this section, the total digital asset 
transaction costs paid by the taxpayer are allocable to the digital 
assets received.
    (B) Special rule for the allocation of digital asset transaction 
costs on an exchange of digital assets for other digital assets. In the 
case of an exchange of digital assets for other digital assets 
differing materially in kind or in extent, one-half of the total 
digital asset transaction costs paid by the taxpayer is allocable to 
the disposition of the transferred digital assets for purposes of 
determining the amount realized under Sec.  1.1001-7(b)(1). The other 
half of such costs is allocable to the acquisition of the digital 
assets for purposes of determining the basis of such digital assets 
under paragraph (h)(1) of this section. Accordingly, any other 
allocation or specific assignment of digital asset transaction costs is 
disregarded.
    (3) Determining the cost of the digital assets received. In the 
case of an exchange described in either paragraph (h)(1)(iii) or (iv) 
of this section, the cost of the digital assets received is the same as 
the fair market value used in determining the amount realized on the 
sale or disposition of the transferred property for purposes of section 
1001 of the Code. Generally, the cost of a digital asset received is 
determined at the date and time of the exchange. The special rule in 
Sec.  1.1001-7(b)(4) also applies in this section for purposes of 
determining

[[Page 59626]]

the fair market value of a received digital asset when it cannot be 
determined with reasonable accuracy.
    (4) Examples. The following examples illustrate the application of 
this section. Unless the facts specifically state otherwise, the 
transactions described in the following examples occur after the 
applicability date set forth in paragraph (h)(5) of this section. For 
purposes of the examples under this paragraph (h)(4), assume that TP is 
a digital asset investor, and that digital assets A, B, and C are 
materially different in kind or in extent from each other. See Sec.  
1.1001-7(b)(5) for examples illustrating the determination of the 
amount realized and gain or loss in a sale or disposition of a digital 
asset for cash, other property differing materially in kind or in 
extent, or services.
    (i) Example 1: Transaction fee paid in cash--(A) Facts. TP uses 
BEX, an unrelated third party, to exchange 10 units of digital asset A 
for 20 units of digital asset B. At the time of the exchange, a unit of 
digital asset A has a fair market value of $2, and a unit of digital 
asset B has a fair market value of $1. BEX charges TP a transaction fee 
of $2, which TP pays to BEX in cash at the time of the exchange.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of 
this section, TP allocates one-half of the digital asset transaction 
costs ($1) to the disposition of the 10 units of digital asset A and 
allocates the other half of such costs ($1) to the acquisition of 20 
units of digital asset B. Under paragraphs (h)(1)(iv) and (h)(3) of 
this section, TP's basis in the 20 units of digital asset B received is 
$21, which is the sum of the fair market value of the 20 units of 
digital asset B received ($20), plus the allocated digital asset 
transaction costs ($1).
    (ii) Example 2: Transaction fee paid in other property--(A) Facts. 
The facts are the same as in paragraph (h)(4)(i)(A) of this section 
(the facts in Example 1), except that BEX requires its customers to pay 
transaction fees using units of digital asset C. TP pays the 
transaction fees using 2 units of digital asset C that TP holds. At the 
time TP pays the transaction fees, each unit of digital asset C has a 
fair market value of $1. TP acquires 20 units of digital asset B with a 
fair market value of $20 in the exchange.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of 
this section, TP must allocate one-half of the digital asset 
transaction costs ($1) to the disposition of the 10 units of digital 
asset A and must allocate the remaining one-half of such costs ($1) to 
the acquisition of the 20 units of digital asset B. Under paragraphs 
(h)(1)(iv) and (h)(3) of this section, TP's basis in the 20 units of 
digital asset B is $21, which is the sum of the fair market value of 
the 20 units of digital asset B received ($20) plus the allocated 
digital asset transaction costs ($1).
    (iii) Example 3: Digital asset transaction costs withheld from the 
transferred digital assets--(A) Facts. The facts are the same as in 
paragraph (h)(4)(i)(A) of this section (the facts in Example 1), except 
that BEX withholds 1 unit of digital asset A in payment of the 
transaction fees and TP receives 18 units of digital asset B.
    (B) Analysis. Under paragraph (h)(2)(i) of this section, TP has 
digital asset transaction costs of $2. Under paragraph (h)(2)(ii)(B) of 
this section, TP must allocate one-half of the digital asset 
transaction costs ($1) to the disposition of the 10 units of digital 
asset A and must allocate the remaining one-half of such costs ($1) to 
the acquisition of the 18 units of digital asset B received. Under 
paragraphs (h)(1)(iv) and (h)(3) of this section, TP's total basis in 
the digital asset B units is $19, which is the sum of the fair market 
value of the 18 units of digital asset B received ($18) plus the 
allocated digital asset transaction costs ($1).
    (5) Applicability date. This paragraph (h) is applicable to all 
acquisitions and dispositions of digital assets on or after January 1 
of the calendar year immediately following [date of publication of 
final regulations in the Federal Register].
* * * * *
    (j) Sale, disposition, or transfer of digital assets--(1) In 
general. Except as provided in paragraph (j)(3) of this section for 
digital assets in the custody of a broker, if a taxpayer sells, 
disposes of, or transfers less than all units of the same digital 
asset, as defined in Sec.  1.6045-1(a)(19), held in a single wallet or 
account, as defined in Sec.  1.6045-1(a)(23), the basis and holding 
period of the disposed units are determined by making a specific 
identification of the units in the wallet or account that are sold, 
disposed of, or transferred, as provided in paragraph (j)(2) of this 
section. If a specific identification is not made, units in the wallet 
or account are disposed of in order of time from the earliest acquired. 
For purposes of the preceding sentence, the date the units were 
transferred into the taxpayer's wallet or account is disregarded.
    (2) Specific identification of digital assets. A specific 
identification of the units of a digital asset sold, disposed of, or 
transferred is made if, no later than the date and time of the sale, 
disposition, or transfer, the taxpayer identifies on its books and 
records the particular units to be sold, disposed of, or transferred by 
reference to any identifier, such as purchase date and time or the 
purchase price for the unit, that is sufficient to identify the units 
sold, disposed of, or transferred in order to determine the basis and 
holding period of such units. A specific identification can be made 
only if adequate records are maintained for all units of a specific 
digital asset held in a single wallet or account to establish that a 
disposed unit is removed from the wallet or account for purposes of 
subsequent transactions.
    (3) Digital assets in the custody of a broker--(i) Unit of a 
digital asset sold, disposed of, or transferred. Notwithstanding the 
general rule set forth in paragraph (j)(1) of this section, where 
multiple units of the same digital asset are left in the custody of a 
broker, as defined in Sec.  1.6045-1(a)(1), and, no later than the date 
and time of sale, disposition, or transfer, the taxpayer does not 
provide the broker with an adequate identification of which units are 
sold, disposed of, or transferred, as provided in paragraph (j)(3)(ii) 
of this section, the basis and holding period of the units disposed of, 
sold, or transferred must be determined in order of time from the 
earliest units acquired of that same digital asset in the taxpayer's 
account with the broker.
    (ii) Identification of units. Where multiple units of the same 
digital asset are left in the custody of a broker, an adequate 
identification occurs if, no later than the date and time of the sale, 
disposition, or transfer, the taxpayer specifies to the broker having 
custody of the digital assets the particular units of the digital asset 
to be sold, disposed of, or transferred by reference to any identifier, 
such as purchase date and time or purchase price that the broker 
designates as sufficiently specific to determine the units transferred 
in order to determine the basis and holding period of such units. The 
taxpayer is responsible for maintaining records to substantiate the 
identification.
    (4) Method for specifically identifying units of a digital asset. A 
method of specifically identifying the units of a digital asset sold, 
disposed of, or transferred under this paragraph (j), for example, by 
the earliest acquired, the latest acquired, or the highest basis, is 
not a method of accounting. Therefore, a change in the method of 
specifically identifying the digital asset sold, disposed of, or 
transferred, for example,

[[Page 59627]]

from the earliest acquired to the latest acquired, is not a change in 
method of accounting to which sections 446 and 481 apply.
    (5) Examples. The following examples illustrate the application of 
this section. Unless the facts specifically state otherwise, the 
transactions described in the following examples occur after the 
applicability date set forth in paragraph (j)(6) of this section. For 
purposes of the examples under this paragraph (j)(5), assume that TP is 
a digital asset investor.
    (i) Example 1: Identification of the digital asset not in the 
custody of a broker--(A) Facts. On September 1, Year 2, TP transfers 
two lots of digital asset DE to a newly opened digital asset wallet 
that is not in the custody of a broker, as defined in Sec.  1.6045-
1(a)(1). The first lot transferred into TP's wallet, with a transaction 
ID 1114ABC, comes from digital asset address AAA123 and consists of 10 
units of digital asset DE, with a purchase date of January 1, Year 1, 
and a basis of $2 per unit. The second lot transferred into TP's 
wallet, with transaction ID 9996XYZ, comes from digital asset address 
BBB456 and consists of 20 units of digital asset DE, with a purchase 
date of January 1, Year 2, and a basis of $5 per unit. On September 2, 
Year 2, when the DE units have a fair market value of $10 per unit, TP 
purchases $100 worth of consumer goods from Merchant M. To make 
payment, TP transfers 10 units of digital asset DE from TP's wallet to 
CPP, a digital asset payment processor that then pays $100 to M. Prior 
to making the transfer to CPP, TP keeps a record that the 10 units of 
DE sold in this transaction were from the second lot of units 
transferred into TP's wallet, that is, from digital asset address 
BBB456 and purchased with transaction ID 9996XYZ.
    (B) Analysis. Under the facts in paragraph (j)(5)(i)(A) of this 
section, TP's notation in its records on the date of sale, specifying 
that the 10 units sold were from the 20 units acquired in transaction 
ID 9996XYZ, is a specific identification within the meaning of 
paragraph (j)(2) of this section. TP's notation in its records that the 
10 units sold were from the 20 units that had previously been at 
digital asset address BBB456 is also a specific identification within 
the meaning of paragraph (j)(2) of this section. Either of these 
notations is sufficient to identify the basis and holding period of the 
10 units of digital asset DE sold. Accordingly, TP has identified the 
units disposed of for purposes of determining the basis ($5 per unit) 
and holding period (one year or less) of the units sold in order to 
purchase the merchandise.
    (ii) Example 2: Identification of digital assets not in the custody 
of a broker--(A) Facts. The facts are the same as in paragraph 
(j)(5)(i)(A) of this section (the facts in Example 1), except in making 
the transfer to CPP, TP did not keep a record of the specific 10 units 
of digital asset DE that TP intended to sell.
    (B) Analysis. TP did not make a specific identification within the 
meaning of paragraph (j)(2) of this section for the 10 units of digital 
asset DE that were sold. Pursuant to the ordering rule provided in 
paragraph (j)(1) of this section, the units disposed of are the 
earliest acquired. Accordingly, TP must treat the 10 units sold as the 
10 units with a purchase date of January 1, Year 1, and a basis of $2 
per unit, transferred into the wallet with transaction ID 1114ABC (that 
is, the units previously held in digital asset address AAA123).
    (iii) Example 3: Identification of the digital asset sold at 
broker--(A) Facts. On August 1, Year 1, TP opens an account at CRX, a 
broker within the meaning of Sec.  1.6045-1(a)(1) and purchases through 
CRX 10 units of digital asset DE for $9 per unit. On January 1, Year 2, 
TP opens an account at BEX, an unrelated broker and purchases through 
BEX 20 units of digital asset DE for $5 per unit. On August 1, Year 3, 
TP transfers the digital assets TP holds with CRX into TP's account 
with BEX. BEX does not account for its customers' digital asset 
holdings by transaction ID, but rather keeps a centralized account of 
its customers' holdings. BEX has a policy that purchase or transfer 
date and time, if necessary, is a sufficiently specific identifier for 
customers to determine the basis and holding period of units sold, 
disposed of, or transferred. On September 1, Year 3, TP directs BEX to 
sell 10 units of digital asset DE for $10 per unit and specifies that 
BEX sell the units that were transferred into TP's account with BEX on 
August 1, Year 3. BEX effects the sale.
    (B) Analysis. No later than the date and time of the sale, TP 
specified to BEX the particular units of digital assets to be sold. 
Accordingly, under paragraph (j)(3)(ii) of this section, TP provided an 
adequate identification of the 10 units of digital asset DE sold.
    (iv) Example 4: Identification of the digital asset sold at a 
broker--(A) Facts. The facts are the same as in paragraph 
(j)(5)(iii)(A) of this section (the facts in Example 3) except that TP 
directs BEX to sell 10 units of digital asset DE but does not make any 
identification of which units to sell.
    (B) Analysis. Because TP did not specify to BEX no later than the 
date and time of the sale the particular units of digital assets to be 
sold, TP did not make an adequate identification within the meaning of 
paragraph (j)(3)(ii) of this section. Thus, TP must use the ordering 
rule provided in paragraph (j)(3)(i) of this section to determine the 
units of digital asset DE sold. Pursuant to this rule, the units sold 
must be attributed to the earliest units of digital asset DE purchased 
within or transferred into the TP's account with BEX. The 10 units of 
digital asset DE sold must be attributed to 10 of the 20 units of 
digital asset DE purchased by TP at BEX on January 1, Year 2, which are 
the earliest units of digital asset DE acquired in TP's account.
    (6) Applicability date. This paragraph (j) is applicable to all 
acquisitions and dispositions of digital assets on or after January 1 
of the calendar year immediately following [date of publication of 
final regulations in the Federal Register].
0
Par. 5. Section 1.6045-0 is added to read as follows:


Sec.  1.6045-0  Table of contents.

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


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

    (a) Definitions.
    (1) Broker.
    (2) Customer.
    (i) In general.
    (ii) Special rules for payment transactions involving digital 
assets.
    (3) Security.
    (4) Barter exchange.
    (5) Commodity.
    (6) Regulated futures contract.
    (7) Forward contract.
    (8) Closing transaction.
    (9) Sale.
    (i) In general.
    (ii) Sales with respect to digital assets.
    (A) In general.
    (B) Dispositions of digital assets for certain property.
    (C) Dispositions of digital assets for certain services.
    (D) Special rule for sales effected by digital asset payment 
processors.
    (10) Effect.
    (i) In general.
    (ii) Actions relating to certain options and forward contracts.
    (11) Foreign currency.
    (12) Cash.
    (13) Person.
    (14) Specified security.
    (15) Covered security.
    (i) In general.

[[Page 59628]]

    (ii) Acquired in an account.
    (iii) Corporate actions and other events.
    (iv) Exceptions.
    (16) Noncovered security.
    (17) Debt instrument, bond, debt obligation, and obligation.
    (18) Securities futures contract.
    (19) Digital asset.
    (i) In general.
    (ii) No inference.
    (20) Digital asset address.
    (21) Digital asset middleman.
    (i) In general.
    (ii) Position to know.
    (A) Identity.
    (B) Nature of the transaction.
    (iii) Facilitative service.
    (A) In general.
    (B) Special rule involving sales of digital assets under paragraphs 
(a)(9)(ii)(B) and (C) of this section.
    (22) Digital asset payment processor.
    (i) In general.
    (ii) Special rule for digital asset transfers pursuant to paragraph 
(a)(22)(i)(A) of this section.
    (iii) Processor agreement.
    (23) Held in a wallet or account.
    (24) Hosted wallet.
    (25) Stored-value card.
    (26) Transaction identification.
    (27) Unhosted wallet.
    (b) Examples.
    (c) Reporting by brokers.
    (1) Requirement of reporting.
    (2) Sales required to be reported.
    (3) Exceptions.
    (i) Sales effected for exempt recipients.
    (A) In general.
    (B) Exempt recipient defined.
    (C) Exemption certificate.
    (1) In general.
    (2) Limitation for corporate customers.
    (ii) Excepted sales.
    (iii) Multiple brokers.
    (iv) Cash on delivery transactions.
    (v) Fiduciaries and partnerships.
    (vi) Money market funds.
    (A) In general.
    (B) Effective/applicability date.
    (vii) Obligor payments on certain obligations.
    (viii) Foreign currency.
    (ix) Fractional share.
    (x) Certain retirements.
    (xi) Short sales.
    (A) In general.
    (B) Short sale closed by delivery of a noncovered security.
    (C) Short sale obligation transferred to another account.
    (xii) Cross reference.
    (xiii) Short-term obligations issued on or after January 1, 2014.
    (xiv) Certain redemptions.
    (4) Examples.
    (5) Form of reporting for regulated futures contracts.
    (i) In general.
    (ii) Determination of profit or loss from foreign currency 
contracts.
    (iii) Examples.
    (6) Reporting periods and filing groups.
    (i) Reporting period.
    (A) In general.
    (B) Election.
    (ii) Filing group.
    (A) In general.
    (B) Election.
    (iii) Example.
    (7) Exception for certain sales of agricultural commodities and 
commodity certificates.
    (i) Agricultural commodities.
    (ii) Commodity Credit Corporation certificates.
    (iii) Sales involving designated warehouses.
    (iv) Definitions.
    (A) Agricultural commodity.
    (B) Spot sale.
    (C) Forward sale.
    (D) Designated warehouse.
    (8) Special coordination rules for certain information returns 
relating to digital assets.
    (i) Digital assets that constitute securities or commodities.
    (ii) Digital assets that constitute real estate.
    (iii) Digital assets that constitute contracts covered by section 
1256(b).
    (iv) Examples.
    (d) Information required.
    (1) In general.
    (2) Transactional reporting.
    (i) Required information.
    (A) General rule for sales described in paragraph (a)(9)(i) of this 
section.
    (B) Required information for digital asset transactions.
    (C) Acquisition information for sales of certain digital assets.
    (D) Penalty relief for certain digital asset reporting.
    (ii) Specific identification of specified securities.
    (A) In general.
    (B) Specific identification of digital assets.
    (iii) Penalty relief for reporting information not subject to 
reporting.
    (A) Noncovered securities.
    (B) Digital assets sold before applicability date.
    (iv) Information from other parties and other accounts.
    (A) Transfer and issuer statements for securities.
    (B) Other information with respect to securities.
    (v) Failure to receive a complete transfer statement for 
securities.
    (vi) Reporting by other parties after a sale of securities.
    (A) Transfer statements.
    (B) Issuer statements.
    (C) Exception.
    (vii) Examples.
    (3) Sales between interest payment dates.
    (4) Sale date and time.
    (i) In general.
    (ii) Special rules for digital asset sales.
    (iii) Examples.
    (5) Gross proceeds.
    (i) In general.
    (ii) Sales of digital assets.
    (A) In general.
    (B) Consideration value not readily ascertainable.
    (C) Reasonable valuation method for digital assets.
    (D) Digital asset data aggregator.
    (iii) Digital asset transactions effected by digital asset payment 
processors.
    (iv) Allocation of digital asset transaction costs.
    (v) Examples.
    (6) Adjusted basis.
    (i) In general.
    (ii) Initial basis.
    (A) Cost basis for specified securities acquired for cash.
    (B) Basis of transferred securities.
    (1) In general.
    (2) Securities acquired by gift.
    (C) Digital assets acquired in exchange for property.
    (1) In general.
    (2) Allocation of digital asset transaction costs.
    (iii) Adjustments for wash sales.
    (A) In general.
    (B) Securities in different accounts.
    (C) Effect of election under section 475(f)(1).
    (D) Reporting at or near the time of sale.
    (iv) Certain adjustments not taken into account.
    (v) Average basis method adjustments.
    (vi) Regulated investment company and real estate investment trust 
adjustments.
    (vii) [Reserved]
    (viii) Examples.
    (ix) [Reserved]
    (x) Examples.
    (7) Long-term or short-term gain or loss.
    (i) In general.
    (ii) Adjustments for wash sales.
    (A) In general.
    (B) Securities in different accounts.
    (C) Effect of election under section 475(f)(1).
    (D) Reporting at or near the time of sale.
    (iii) Constructive sale and mark-to-market adjustments.
    (iv) Regulated investment company and real estate investment trust 
adjustments.

[[Page 59629]]

    (v) No adjustments for hedging transactions or offsetting 
positions.
    (8) Conversion into United States dollars of amounts paid or 
received in foreign currency.
    (i) Conversion rules.
    (ii) Effect of identification under Sec.  1.988-5(a), (b), or (c) 
when the taxpayer effects a sale and a hedge through the same broker.
    (iii) Example.
    (9) Coordination with the reporting rules for widely held fixed 
investment trusts under Sec.  1.671-5.
    (e) Reporting of barter exchanges.
    (1) Requirement of reporting.
    (2) Exchanges required to be reported.
    (i) In general.
    (ii) Exemption.
    (iii) Coordination rules for exchanges of digital assets made 
through barter exchanges.
    (f) Information required.
    (1) In general.
    (2) Transactional reporting.
    (i) In general.
    (ii) Exception for corporate member or client.
    (iii) Definition.
    (3) Exchange date.
    (4) Amount received.
    (5) Meaning of terms.
    (6) Reporting period.
    (g) Exempt foreign persons.
    (1) Brokers.
    (2) Barter exchange.
    (3) Applicable rules.
    (i) Joint owners.
    (ii) Special rules for determining who the customer is.
    (iii) Place of effecting sale.
    (A) Sale outside the United States.
    (B) Sale inside the United States.
    (iv) Special rules where the customer is a foreign intermediary or 
certain U.S. branches.
    (4) Rules for sales of digital assets.
    (i) Definitions.
    (A) U.S. digital asset broker.
    (B) CFC digital asset broker.
    (C) Non-U.S. digital asset broker.
    (D) Conducting activities as a money services business.
    (E) Foreign kiosk.
    (ii) Rules for U.S. digital asset brokers.
    (A) Place of effecting sale.
    (B) Determination of foreign status.
    (iii) Rules for CFC digital asset brokers not conducting activities 
as MSBs.
    (A) Place of effecting sale.
    (B) Determination of foreign status.
    (iv) Rules for non-U.S. digital asset brokers not conducting 
activities as MSBs.
    (A) Sale outside the United States.
    (B) Sale treated as effected at an office inside the United States 
as a result of U.S. indicia.
    (C) Consequences of treatment as sale effected at an office inside 
the United States.
    (D) Type of documentation that may be obtained where there are U.S. 
indicia.
    (1) Collection of U.S. indicia other than U.S. place of birth.
    (2) Collection of information showing U.S. place of birth.
    (v) Rules for CFC digital asset brokers and non-U.S. digital asset 
brokers conducting activities as MSBs.
    (vi) Rules applicable to brokers that obtain or are required to 
obtain documentation for a customer and presumption rules.
    (A) In general.
    (1) Documentation of foreign status.
    (2) Presumption rules.
    (3) Grace period to collect valid documentation in the case of 
indicia of a foreign customer.
    (4) Blocked income.
    (B) Reliance on beneficial ownership withholding certificates to 
determine foreign status.
    (C) Reliance on documentary evidence to determine foreign status.
    (D) Joint owners.
    (E) Special rules for customer that is a foreign intermediary, a 
flow-through entity, or certain U.S. branches.
    (1) Foreign intermediaries.
    (2) Foreign flow-through entities.
    (3) U.S. branches that are not beneficial owners.
    (F) Transition rule for obtaining documentation to treat a customer 
as an exempt foreign person.
    (vii) Barter exchange.
    (5) Examples.
    (6) Examples.
    (h) Identity of customer.
    (1) In general.
    (2) Examples.
    (i) [Reserved]
    (j) Time and place for filing; cross-references to penalty and 
magnetic media filing requirements.
    (k) Requirement and time for furnishing statement; cross-reference 
to penalty.
    (1) General requirements.
    (2) Time for furnishing statements.
    (3) Consolidated reporting.
    (4) Cross-reference to penalty.
    (l) Use of magnetic media.
    (m) Additional rules for option transactions.
    (1) In general.
    (2) Scope.
    (i) In general.
    (ii) Delayed effective date for certain options.
    (iii) Compensatory option.
    (3) Option subject to section 1256.
    (4) Option not subject to section 1256.
    (i) Physical settlement.
    (ii) Cash settlement.
    (iii) Rules for warrants and stock rights acquired in a section 305 
distribution.
    (iv) Examples.
    (5) Multiple options documented in a single contract.
    (6) Determination of index status.
    (n) Reporting for debt instrument transactions.
    (1) In general.
    (2) Debt instruments subject to January 1, 2014, reporting.
    (i) In general.
    (ii) Exceptions.
    (iii) Remote or incidental.
    (iv) Penalty rate.
    (3) Debt instruments subject to January 1, 2016, reporting.
    (4) Holder elections.
    (i) Election to amortize bond premium.
    (ii) Election to currently include accrued market discount.
    (iii) Election to accrue market discount based on a constant yield.
    (iv) Election to treat all interest as OID.
    (v) Election to translate interest income and expense at the spot 
rate.
    (5) Broker assumptions and customer notice to brokers.
    (i) Broker assumptions if the customer does not notify the broker.
    (ii) Effect of customer notification of an election or revocation.
    (A) Election to amortize bond premium.
    (B) Other debt elections.
    (iii) Electronic notification.
    (6) Reporting of accrued market discount.
    (i) Sale.
    (ii) Current inclusion election.
    (7) Adjusted basis.
    (i) Original issue discount.
    (ii) Amortizable bond premium.
    (A) Taxable bond.
    (B) Tax-exempt bonds.
    (iii) Acquisition premium.
    (iv) Market discount.
    (v) Principal and certain other payments.
    (8) Accrual period.
    (9) Premium on convertible bond.
    (10) Effect of broker assumptions on customer.
    (11) Additional rules for certain holder elections.
    (i) In general.
    (A) Election to treat all interest as OID.
    (B) Election to accrue market discount based on a constant yield.
    (ii) [Reserved]
    (12) Certain debt instruments treated as noncovered securities.
    (i) In general.
    (ii) Effective/applicability date.
    (o) [Reserved]
    (p) Electronic filing.
    (q) Applicability date.
    (r) Cross-references.

[[Page 59630]]

0
Par. 6. Section 1.6045-1 is amended by:
0
1. Revising paragraphs (a), (b), (c)(3)(i)(B)(3), and (c)(3)(i)(C)(2) 
introductory text;
0
2. In paragraph (c)(3)(xi)(A), removing the language ``(d)(2)(i)'' and 
adding the language ``(d)(2)(i)(A)'' in its place, wherever it appears;
0
3. Adding paragraph (c)(8);
0
4. Revising paragraphs (d)(2)(i) through (iii);
0
5. In paragraph (d)(2)(iv)(A), revising the heading and the first 
sentence;
0
6. Revising the heading in paragraph (d)(2)(iv)(B);
0
7. In paragraph (d)(2)(v), revising the heading and the first sentence;
0
8. Revising the heading of paragraph (d)(2)(vi);
0
9. In paragraph (d)(2)(vii), revising the introductory text and 
designating Examples 1 and 2 as paragraphs (d)(2)(vii)(A) and (B), 
respectively;
0
10. In newly designated paragraphs (d)(2)(vii)(A) and (B), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
             Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(d)(2)(vii)(A)(i) and (ii).............  (d)(2)(vii)(A)(1) and (2).
(d)(2)(vii)(B)(i) and (ii).............  (d)(2)(vii)(B)(1) and (2).
------------------------------------------------------------------------

0
11. In newly redesignated paragraph (d)(2)(vii)(B)(2), removing the 
language ``(d)(2)(i)'' and ``(d)(2)(iii)'' and adding the language 
``(d)(2)(i)(A)'' and ``(d)(2)(iii)(A)'' in their places, respectively;
0
12. Adding paragraphs (d)(2)(vii)(C) through (F);
0
13. Revising paragraphs (d)(4) and (5);
0
14. In paragraph (d)(6)(i), revising the first and second sentences;
0
15. In paragraph (d)(6)(ii)(A), revising the heading and the first 
sentence and removing the language ``on or after January 1, 2014,'' and 
adding the language ``on or after January 1, 2014, or upon the vesting 
or exercise of a digital asset-based compensation arrangement granted 
or acquired on or after January 1, 2025,'' in its place;
0
16. Adding paragraph (d)(6)(ii)(C);
0
17. In paragraph (d)(6)(iii)(A), revising the first sentence;
0
18. Redesignating paragraph (d)(6)(vii) as paragraph (d)(6)(viii);
0
19. Adding new reserved paragraph (d)(6)(vii);
0
20. In newly redesignated paragraph (d)(6)(viii), designating Examples 
1 through 4 as paragraphs (d)(6)(viii)(A) through (D), respectively;
0
21. In newly designated paragraphs (d)(6)(viii)(A) and (C), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
             Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(d)(6)(viii)(A)(i), (ii), and (iii)....  (d)(6)(viii)(A)(1), (2), and
                                          (3).
(d)(6)(viii)(C)(i) and (ii)............  (d)(6)(viii)(C)(1) and (2).
------------------------------------------------------------------------

0
22. In newly redesignated paragraph (d)(6)(viii)(B), removing the 
language ``Example 1'' and ``(d)(2)(iii)'' and adding the language 
``paragraph (d)(6)(viii)(A)(1) of this section (the facts in Example 
1)'' and ``(d)(2)(iii)(A)'' in their places, respectively;
0
23. Adding reserved paragraph (d)(6)(ix) and paragraph (d)(6)(x);
0
24. In paragraph (d)(7)(ii)(A), removing the language ``covered 
securities'' and adding the language ``covered securities described in 
paragraphs (a)(15)(i)(A) through (G) of this section'' in its place;
0
25. Adding paragraph (e)(2)(iii);
0
26. Revising paragraph (g)(1) introductory text;
0
27. In the first sentence of paragraphs (g)(1)(i) and (iii), removing 
the language ``With respect to a sale'' and adding the language ``With 
respect to a sale as defined in paragraph (a)(9)(i) of this section 
(relating to sales other than sales of digital assets) that is'' in its 
place;
0
28. Revising paragraph (g)(2);
0
29. In paragraph (g)(3)(ii), removing the language ``this paragraph 
(g)'' and adding the language ``paragraph (g)(1) of this section'' in 
its place;
0
30. In paragraph (g)(3)(iii)(A), revising the first sentence;
0
31. Redesignating paragraph (g)(4) as paragraph (g)(5) and adding a new 
paragraph (g)(4);
0
32. In newly redesignated paragraph (g)(5):
0
i. Removing the language ``this paragraph (g)'' in the introductory 
text and adding the language ``paragraphs (g)(1) through (3) of this 
section'' in its place; and
0
ii. Designating Examples 1 through 8 as paragraphs (g)(5)(i) through 
(viii), respectively;
0
33. In newly designated paragraph (g)(5)(ii), removing ``Example 1'' 
and adding ``paragraph (g)(5)(i) of this section (the facts in Example 
1)'' in its place;
0
34. In newly designated paragraph (g)(5)(iii), removing ``Example 2'' 
and adding ``paragraph (g)(5)(ii) of this section (the facts in Example 
2)'' in its place;
0
35. In newly designated paragraph (g)(5)(iv), removing ``Example 1'' 
and adding ``paragraph (g)(5)(i) of this section (the facts in Example 
1)'' in its place;
0
36. In newly designated paragraphs (g)(5)(v) and (vi), removing 
``Example 4'' and adding ``paragraph (g)(5)(iv) of this section (the 
facts in Example 4)'' in its place;
0
37. In newly designated paragraphs (g)(5)(vii) and (viii), 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
             Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(g)(5)(vii)(i) and (ii)................  (g)(5)(vii)(A) and (B).
(g)(5)(viii)(i) and (ii)...............  (g)(5)(viii)(A) and (B).
------------------------------------------------------------------------

0
38. In newly designated paragraph (g)(5)(viii) introductory text, 
removing ``Example 7'' and adding ``paragraph (g)(5)(vii) of this 
section (the facts in Example 7)'' in its place;

[[Page 59631]]

0
39. Adding paragraph (g)(6);
0
40. Revising paragraphs (j) and (m)(1);
0
41. Adding paragraph (m)(2)(ii)(C);
0
42. In paragraph (n)(6)(i), removing the language ``(a)(9)'' and adding 
the language ``(a)(9)(i)'' in its place;
0
43. Revising paragraph (q); and
0
44. Adding paragraph (r).
    The revisions and additions read as follows:


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

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.6045-2 and 1.6045-4.
    (1) Broker. The term broker means any person (other than a person 
who is required to report a transaction under section 6043 of the 
Code), U.S. or foreign, that, in the ordinary course of a trade or 
business during the calendar year, stands ready to effect sales to be 
made by others. A broker includes an obligor that regularly issues and 
retires its own debt obligations, a corporation that regularly redeems 
its own stock, or a person that regularly offers to redeem digital 
assets that were created or issued by that person. A broker also 
includes a real estate reporting person under Sec.  1.6045-4(e) who 
(without regard to any exceptions provided by Sec.  1.6045-4(c) and 
(d)) would be required to make an information return with respect to a 
real estate transaction under Sec.  1.6045-4(a). However, with respect 
to a sale (including a redemption or retirement) effected at an office 
outside the United States under paragraph (g)(3)(iii) of this section 
(relating to sales other than sales of digital assets) or under 
paragraph (g)(4) of this section (relating to sales of digital assets), 
a broker includes only a person described as a U.S. payor or U.S. 
middleman in Sec.  1.6049-5(c)(5). In addition, a broker does not 
include an international organization described in Sec.  1.6049-
4(c)(1)(ii)(G) that redeems or retires an obligation of which it is the 
issuer.
    (2) Customer--(i) In general. The term customer means, with respect 
to a sale effected by a broker, the person (other than such broker) 
that makes the sale, if the broker acts as--
    (A) An agent for such person in the sale;
    (B) A principal in the sale;
    (C) The participant in the sale responsible for paying to such 
person or crediting to such person's account the gross proceeds on the 
sale; or
    (D) A digital asset middleman, as defined in paragraph (a)(21) of 
this section, that effects the sale of a digital asset for such person.
    (ii) Special rules for payment transactions involving digital 
assets. In addition to the persons defined as customers in paragraph 
(a)(2)(i) of this section, the term customer includes:
    (A) The person who transfers, or is treated under paragraph 
(a)(22)(ii) of this section as transferring, digital assets to a 
digital asset payment processor in a sale described in paragraph 
(a)(9)(ii)(D) of this section;
    (B) The person who transfers digital assets or directs the transfer 
of digital assets--
    (1) In exchange for property of a type the later sale of which, if 
effected by such broker, would constitute a sale of that property under 
paragraph (a)(9) of this section; or
    (2) In exchange for the acquisition of services performed by such 
broker; and
    (C) In the case of a real estate reporting person under Sec.  
1.6045-4(e) with respect to a real estate transaction as defined in 
Sec.  1.6045-4(b)(1), the person who transfers digital assets or 
directs the transfer of digital assets to the transferor of real estate 
(or the seller's nominee or agent) to acquire such real estate.
    (3) Security. The term security means:
    (i) A share of stock in a corporation (foreign or domestic);
    (ii) An interest in a trust;
    (iii) An interest in a partnership;
    (iv) A debt obligation;
    (v) An interest in or right to purchase any of the foregoing in 
connection with the issuance thereof from the issuer or an agent of the 
issuer or from an underwriter that purchases any of the foregoing from 
the issuer;
    (vi) An interest in a security described in paragraph (a)(3)(i) or 
(iv) of this section (but not including executory contracts that 
require delivery of such type of security);
    (vii) An option described in paragraph (m)(2) of this section; or
    (viii) A securities futures contract.
    (4) Barter exchange. The term barter exchange means any person with 
members or clients that contract either with each other or with such 
person to trade or barter property or services either directly or 
through such person. The term does not include arrangements that 
provide solely for the informal exchange of similar services on a 
noncommercial basis.
    (5) Commodity. The term commodity means:
    (i) Any type of personal property or an interest therein (other 
than securities as defined in paragraph (a)(3) of this section) the 
trading of regulated futures contracts in which has been approved by or 
has been certified to the Commodity Futures Trading Commission (see 17 
CFR 40.3 or 40.2);
    (ii) Lead, palm oil, rapeseed, tea, tin, or an interest in any of 
the foregoing; or
    (iii) Any other personal property or an interest therein that is of 
a type the Secretary determines is to be treated as a commodity under 
this section, from and after the date specified in a notice of such 
determination published in the Federal Register.
    (6) Regulated futures contract. The term regulated futures contract 
means a regulated futures contract within the meaning of section 
1256(b) of the Code.
    (7) Forward contract. The term forward contract means:
    (i) An executory contract that requires delivery of a commodity in 
exchange for cash and which contract is not a regulated futures 
contract;
    (ii) An executory contract that requires delivery of personal 
property or an interest therein in exchange for cash, or a cash 
settlement contract, if such executory contract or cash settlement 
contract is of a type the Secretary determines is to be treated as a 
``forward contract'' under this section, from and after the date 
specified in a notice of such determination published in the Federal 
Register; or
    (iii) An executory contract that--
    (A) Requires delivery of a digital asset in exchange for cash, 
stored-value cards, a different digital asset, or any other property or 
services described in paragraph (a)(9)(ii)(B) or (C) of this section; 
and
    (B) Is not a regulated futures contract.
    (8) Closing transaction. The term closing transaction means a 
lapse, expiration, settlement, abandonment, or other termination of a 
position. For purposes of the preceding sentence, a position includes a 
right or an obligation under a forward contract, a regulated futures 
contract, a securities futures contract, or an option.
    (9) Sale--(i) In general. The term sale means any disposition of 
securities, commodities, options, regulated futures contracts, 
securities futures contracts, or forward contracts and includes 
redemptions of stock, retirements of debt instruments (including a 
partial retirement attributable to a principal payment received on or 
after January 1, 2014), and enterings into short sales, but only to the 
extent any of these actions are conducted for cash. In the case of an 
option, a regulated futures contract, a securities futures contract, or 
a forward contract, a sale under this paragraph (a)(9)(i) includes any 
closing transaction. When a closing transaction for a contract 
described in section 1256(b)(1)(A) involves making or taking delivery, 
there are two sales, one resulting in profit or loss on the contract, 
and a separate sale on the delivery. When a closing transaction for a 
contract described in section 988(c)(5)

[[Page 59632]]

of the Code involves making delivery, there are two sales, one 
resulting in profit or loss on the contract, and a separate sale on the 
delivery. For purposes of the preceding sentence, a broker may assume 
that any customer's functional currency is the U.S. dollar. When a 
closing transaction in a forward contract involves making or taking 
delivery, the broker may treat the delivery as a sale without 
separating the profit or loss on the contract from the profit or loss 
on the delivery, except that taking delivery for U.S. dollars is not a 
sale. The term sale does not include entering into a contract that 
requires delivery of personal property or an interest therein, the 
initial grant or purchase of an option, or the exercise of a purchased 
call option for physical delivery (except for a contract described in 
section 988(c)(5)). For purposes of this section only, a constructive 
sale under section 1259 and a mark to fair market value under section 
475 or 1296 are not sales.
    (ii) Sales with respect to digital assets--(A) In general. In 
addition to the specific rules provided in paragraphs (a)(9)(ii)(B) 
through (D) of this section, the term sale also includes:
    (1) Any disposition of a digital asset in exchange for cash or 
stored-value cards;
    (2) Any disposition of a digital asset in exchange for a different 
digital asset; and
    (3) The delivery of a digital asset pursuant to the settlement of a 
forward contract, option, regulated futures contract, any similar 
instrument, or any other executory contract which would be treated as a 
sale of a digital asset under this paragraph (a)(9)(ii) if the contract 
had not been executory. For transactions involving a contract described 
in the previous sentence, see paragraph (a)(9)(i) of this section for 
rules applicable to determining whether a sale has occurred or how to 
report the making or taking delivery of the underlying asset.
    (B) Dispositions of digital assets for certain property. Solely in 
the case of a broker that is a real estate reporting person defined in 
Sec.  1.6045-4(e) with respect to real property or is in the business 
of effecting sales of property for others, which sales when effected 
would constitute sales under paragraph (a)(9)(i) of this section, the 
term sale also includes any disposition of a digital asset in exchange 
for such property.
    (C) Dispositions of digital assets for certain services. The term 
sale also includes any disposition of a digital asset in consideration 
for any services provided by a broker that is a real estate reporting 
person defined in Sec.  1.6045-4(e) with respect to real property or is 
in the business of effecting sales of property described in paragraph 
(a)(9)(i), paragraphs (a)(9)(ii)(A) and (B), or paragraph (a)(9)(ii)(D) 
of this section.
    (D) Special rule for sales effected by digital asset payment 
processors. In the case of a digital asset payment processor as defined 
in paragraph (a)(22) of this section, the term sale also includes the 
payment by a party of a digital asset to a digital asset payment 
processor in return for the payment of cash or a different digital 
asset to a second party, or the treatment under paragraph (a)(22)(ii) 
of this section of the digital asset as paid by a party to the digital 
asset payment processor in exchange for cash or a different digital 
asset paid to a second party. In the case of a digital asset payment 
processor defined in either paragraph (a)(22)(i)(B) or (C) of this 
section, a sale of a digital asset includes any payment by a party of a 
digital asset to that digital asset payment processor, or to a second 
party pursuant to instructions provided by that digital asset payment 
processor or its agent in exchange for goods or services provided to 
the first party.
    (10) Effect--(i) In general. The term effect means, with respect to 
a sale, to act as--
    (A) An agent for a party in the sale wherein the nature of the 
agency is such that the agent ordinarily would know the gross proceeds 
from the sale;
    (B) In the case of a broker described in the second sentence of 
paragraph (a)(1) of this section, a person that is an obligor retiring 
its own debt obligations, a corporation redeeming its own stock, or an 
issuer of digital assets redeeming those digital assets;
    (C) A principal that is a dealer in such sale; or
    (D) A digital asset middleman as defined in paragraph (a)(21) of 
this section for a party in a sale of digital assets.
    (ii) Actions relating to certain options and forward contracts. For 
purposes of paragraph (a)(10)(i) of this section, acting as an agent, 
principal or digital asset middleman with respect to grants or 
purchases of options, exercises of call options, or enterings into 
contracts that require delivery of personal property or an interest 
therein is not of itself effecting a sale. A broker that has on its 
books a forward contract under which delivery is made effects such 
delivery.
    (11) Foreign currency. The term foreign currency means currency of 
a foreign country.
    (12) Cash. The term cash means United States dollars or any 
convertible foreign currency that is issued by a government or a 
central bank, whether in physical or digital form.
    (13) Person. The term person includes any governmental unit and any 
agency or instrumentality thereof.
    (14) Specified security. The term specified security means:
    (i) Any share of stock (or any interest treated as stock, 
including, for example, an American Depositary Receipt) in an entity 
organized as, or treated for Federal tax purposes as, a corporation, 
either foreign or domestic (provided that, solely for purposes of this 
paragraph (a)(14)(i), a security classified as stock by the issuer is 
treated as stock, and if the issuer has not classified the security, 
the security is not treated as stock unless the broker knows that the 
security is reasonably classified as stock under general Federal tax 
principles);
    (ii) Any debt instrument described in paragraph (a)(17) of this 
section, other than a debt instrument subject to section 1272(a)(6) of 
the Code (certain interests in or mortgages held by a real estate 
mortgage investment conduit (REMIC), certain other debt instruments 
with payments subject to acceleration, and pools of debt instruments 
the yield on which may be affected by prepayments) or a short-term 
obligation described in section 1272(a)(2)(C);
    (iii) Any option described in paragraph (m)(2) of this section;
    (iv) Any securities futures contract;
    (v) Any digital asset as defined in paragraph (a)(19) of this 
section; or
    (vi) Any forward contract described in paragraph (a)(7)(iii) of 
this section requiring the delivery of a digital asset.
    (15) Covered security. The term covered security means a specified 
security described in this paragraph (a)(15).
    (i) In general. Except as provided in paragraph (a)(15)(iv) of this 
section, the following specified securities are covered securities:
    (A) A specified security described in paragraph (a)(14)(i) of this 
section acquired for cash in an account on or after January 1, 2011, 
except stock for which the average basis method is available under 
Sec.  1.1012-1(e).
    (B) Stock for which the average basis method is available under 
Sec.  1.1012-1(e) acquired for cash in an account on or after January 
1, 2012.
    (C) A specified security described in paragraphs (a)(14)(ii) and 
(n)(2)(i) of this section (not including the debt instruments described 
in paragraph (n)(2)(ii) of this section) acquired for cash in an 
account on or after January 1, 2014.
    (D) A specified security described in paragraphs (a)(14)(ii) and 
(n)(3) of this

[[Page 59633]]

section acquired for cash in an account on or after January 1, 2016.
    (E) Except for an option described in paragraph (m)(2)(ii)(C) of 
this section (relating to an option on a digital asset), an option 
described in paragraph (a)(14)(iii) of this section granted or acquired 
for cash in an account on or after January 1, 2014.
    (F) A securities futures contract described in paragraph 
(a)(14)(iv) of this section entered into in an account on or after 
January 1, 2014.
    (G) A specified security transferred to an account if the broker or 
other custodian of the account receives a transfer statement (as 
described in Sec.  1.6045A-1) reporting the security as a covered 
security.
    (H) An option on a digital asset described in paragraphs 
(a)(14)(iii) and (m)(2)(ii)(C) of this section (other than an option 
described in paragraph (a)(14)(v) of this section) granted or acquired 
in an account on or after January 1, 2023.
    (I) [Reserved]
    (J) A specified security described in paragraph (a)(14)(v) of this 
section that is acquired in a customer's account by a broker providing 
hosted wallet services on or after January 1, 2023, in exchange for 
cash, stored-value cards, different digital assets, or any other 
property or services described in paragraph (a)(9)(ii)(B) or (C) of 
this section, respectively.
    (K) A specified security described in paragraph (a)(14)(vi) of this 
section, not described in paragraph (a)(14)(v) of this section, that is 
entered into or acquired in an account on or after January 1, 2023.
    (ii) Acquired in an account. For purposes of this paragraph 
(a)(15), a security is considered acquired in a customer's account at a 
broker or custodian if the security is acquired by the customer's 
broker or custodian or acquired by another broker and delivered to the 
customer's broker or custodian. Acquiring a security in an account 
includes granting an option and entering into a forward contract or 
short sale.
    (iii) Corporate actions and other events. For purposes of this 
paragraph (a)(15), a security acquired due to a stock dividend, stock 
split, reorganization, redemption, stock conversion, recapitalization, 
corporate division, or other similar action is considered acquired for 
cash in an account.
    (iv) Exceptions. Notwithstanding paragraph (a)(15)(i) of this 
section, the following specified securities are not covered securities:
    (A) Stock acquired in 2011 that is transferred to a dividend 
reinvestment plan (as described in Sec.  1.1012-1(e)(6)) in 2011. 
However, a covered security acquired in 2011 that is transferred to a 
dividend reinvestment plan after 2011 remains a covered security.
    (B) A specified security, other than a specified security described 
in paragraph (a)(14)(v) or (vi) of this section, acquired through an 
event described in paragraph (a)(15)(iii) of this section if the basis 
of the acquired security is determined from the basis of a noncovered 
security.
    (C) A specified security that is excepted at the time of its 
acquisition from reporting under paragraph (c)(3) or (g) of this 
section. However, a broker cannot treat a specified security as 
acquired by an exempt foreign person under paragraph (g)(1)(i) or 
paragraphs (g)(4)(ii) through (v) of this section at the time of 
acquisition if, at that time, the broker knows or should have known 
(including by reason of information that the broker is required to 
collect under section 1471 or 1472 of the Code) that the customer is 
not a foreign person.
    (D) A security for which reporting under this section is required 
by Sec.  1.6049-5(d)(3)(ii) (certain securities owned by a foreign 
intermediary or flow-through entity).
    (E) Digital assets in a sale required to be reported under 
paragraph (g)(4)(vi)(E) of this section by a broker making a payment of 
gross proceeds from the sale to a foreign intermediary, flow-through 
entity, or U.S. branch.
    (16) Noncovered security. The term noncovered security means any 
specified security that is not a covered security.
    (17) Debt instrument, bond, debt obligation, and obligation. For 
purposes of this section, the terms debt instrument, bond, debt 
obligation, and obligation mean a debt instrument as defined in Sec.  
1.1275-1(d) and any instrument or position that is treated as a debt 
instrument under a specific provision of the Internal Revenue Code 
(Code) (for example, a regular interest in a REMIC as defined in 
section 860G(a)(1) and Sec.  1.860G-1). Solely for purposes of this 
section, a security classified as debt by the issuer is treated as 
debt. If the issuer has not classified the security, the security is 
not treated as debt unless the broker knows that the security is 
reasonably classified as debt under general Federal tax principles or 
that the instrument or position is treated as a debt instrument under a 
specific provision of the Code.
    (18) Securities futures contract. For purposes of this section, the 
term securities futures contract means a contract described in section 
1234B(c) whose underlying asset is described in paragraph (a)(14)(i) of 
this section and which is entered into on or after January 1, 2014.
    (19) Digital asset--(i) In general. For purposes of this section, 
the term digital asset means any digital representation of value that 
is recorded on a cryptographically secured distributed ledger (or any 
similar technology), without regard to whether each individual 
transaction involving that digital asset is actually recorded on that 
ledger, and that is not cash.
    (ii) No inference. Nothing in this paragraph (a)(19) or elsewhere 
in this section may be construed to mean that a digital asset is or is 
not properly classified as a security, commodity, option, securities 
futures contract, regulated futures contract, or forward contract for 
any other purpose of the Code.
    (20) Digital asset address. For purposes of this section, the term 
digital asset address means the unique set of alphanumeric characters, 
in some cases referred to as a quick response or QR Code, that is 
generated by the wallet into which the digital asset will be 
transferred.
    (21) Digital asset middleman--(i) In general. The term digital 
asset middleman means any person who provides a facilitative service as 
described in paragraph (a)(21)(iii) of this section with respect to a 
sale of digital assets wherein the nature of the service arrangement is 
such that the person ordinarily would know or be in a position to know 
the identity of the party that makes the sale and the nature of the 
transaction potentially giving rise to gross proceeds from the sale.
    (ii) Position to know--(A) Identity. A person ordinarily would know 
or be in a position to know the identity of the party that makes the 
sale if that person maintains sufficient control or influence over the 
facilitative services provided to have the ability to set or change the 
terms under which its services are provided to request that the party 
making the sale provide that party's name, address, and taxpayer 
identification number upon request. For purposes of the previous 
sentence, a person with the ability to change the fees charged for 
facilitative services is an example of a person that maintains 
sufficient control or influence over provided facilitative services to 
have the ability to set or change the terms under which its services 
are provided to request that the party making the sale provide that 
party's name, address, and taxpayer identification number upon request.

[[Page 59634]]

    (B) Nature of the transaction. A person ordinarily would know or be 
in a position to know the nature of the transaction potentially giving 
rise to gross proceeds from a sale if that person maintains sufficient 
control or influence over the facilitative services provided to have 
the ability to determine whether and the extent to which the transfer 
of digital assets involved in a transaction gives rise to gross 
proceeds, including by reference to the consideration that the person 
receives or pursuant to the operations of or modifications to an 
automatically executing contract or protocol to which the person 
provides access. For purposes of the previous sentence, a person with 
the ability to change the fees charged for facilitative services is an 
example of a person that maintains sufficient control or influence over 
provided facilitative services to have the ability to determine whether 
and the extent to which the transfer of digital assets involved in a 
transaction gives rise to gross proceeds.
    (iii) Facilitative service--(A) In general. 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. A facilitative service does not include 
validating distributed ledger transactions (whether through proof-of-
work, proof-of-stake, or any other similar consensus mechanism) without 
providing other functions or services if provided by a person solely 
engaged in the business of providing such validating services. A 
facilitative service also does not include the selling of hardware or 
the licensing of 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 if such functions are conducted by a 
person solely engaged in the business of selling such hardware or 
licensing such software. Software that provides users with direct 
access to trading platforms from the wallet platform is not an example 
of software with the sole function of providing users with the ability 
to control private keys to send and receive digital assets.
    (B) Special rule involving sales of digital assets under paragraphs 
(a)(9)(ii)(B) and (C) of this section. A facilitative service includes 
the acceptance or processing of digital assets as payment for property 
of a type which when sold would constitute a sale under paragraph 
(a)(9)(i) of this section by a broker that is in the business of 
effecting sales of such property. A facilitative service also includes 
any service performed by a real estate reporting person as defined in 
Sec.  1.6045-4(e) with respect to a real estate transaction in which 
digital assets are paid by the real estate buyer in full or partial 
consideration for the real estate. Finally, a facilitative service 
includes the acceptance or processing of digital assets as payment for 
any service provided by a broker described in paragraph (a)(1) of this 
section determined without regard to any sales under paragraph 
(a)(9)(ii)(C) of this section that are effected by such broker.
    (22) Digital asset payment processor--(i) In general. For purposes 
of this section, the term digital asset payment processor means a 
person who in the ordinary course of a trade or business stands ready 
to effect sales of digital assets as defined in paragraph (a)(9)(ii)(D) 
of this section by:
    (A) Regularly facilitating payments from one party to a second 
party by receiving digital assets from the first party and exchanging 
those digital assets into cash or different digital assets paid to the 
second party;
    (B) Acting as a third party settlement organization (as defined in 
Sec.  1.6050W-1(c)(2)) that facilitates payments, either by making or 
submitting instructions to make payments, using one or more digital 
assets in settlement of a reportable payment transaction under Sec.  
1.6050W-1(a)(2), without regard to whether the third party settlement 
organization contracts with an agent to make, or to submit the 
instructions to make, such payments; or
    (C) Acting as a payment card issuer that facilitates payments, 
either by making or submitting the instruction to make payments, in one 
or more digital assets to a merchant acquiring entity as defined under 
Sec.  1.6050W-1(b)(2) in a transaction that is associated with a 
payment made by the merchant acquiring entity, or its agent, in 
settlement of a reportable payment transaction under Sec.  1.6050W-
1(a)(2).
    (ii) Special rule for digital asset transfers pursuant to paragraph 
(a)(22)(i)(A) of this section. For purposes of paragraph (a)(22)(i)(A) 
of this section, the transfer of a digital asset from one party to a 
second party, such as a vendor of goods or services, pursuant to a 
processor agreement between that second person and a payment processor 
must be treated as if the digital asset was paid by the first party to 
the payment processor in exchange for cash or a different digital asset 
paid to the second party.
    (iii) Processor agreement. For purposes of paragraph (a)(22)(ii) of 
this section, the term processor agreement means an agreement between a 
payment processor and a second party, such as a vendor of goods or 
services, that in order to facilitate one party's payment to that 
second party provides for the temporary fixing of the exchange rate to 
be applied to the digital asset received by that second party from the 
first party as payment in a transaction.
    (23) Held in a wallet or account. For purposes of this section, a 
digital asset is considered held in a wallet or account if the wallet, 
whether hosted or unhosted, or account stores the private keys 
necessary to transfer control of the digital asset. A digital asset 
associated with a digital asset address that is generated by a wallet, 
and a digital asset associated with a sub-ledger account of a wallet, 
are similarly considered held in a wallet. References to variations of 
held in a wallet or account, such as held at a broker, held with a 
broker, held by the user of a wallet, held on behalf of another, 
acquired in a wallet or account, or transferred into a wallet or 
account, each have a similar meaning.
    (24) Hosted wallet. A hosted wallet is a custodial service provided 
to a user that electronically stores the private keys to digital assets 
held on behalf of others.
    (25) Stored-value card. For purposes of this section, the term 
stored-value card means a card, including any gift card, with a prepaid 
value in U.S. dollars, any convertible foreign currency, or any digital 
asset, without regard to whether the card is in physical or digital 
form.
    (26) Transaction identification. For purposes of this section, the 
term transaction identification, or transaction ID, means the unique 
set of alphanumeric identification characters that a digital asset 
distributed ledger associates with a transaction involving the transfer 
of a digital asset from one digital asset address to another. A 
transaction ID includes terms such as a ``Txid'' or ``transaction 
hash.''
    (27) Unhosted wallet. An unhosted wallet is a non-custodial means 
of storing, electronically or otherwise, a user's private keys to 
digital assets held by or for the user. Unhosted wallets, sometimes 
referred to as self-hosted or self-custodial wallets, can be provided 
through software that is connected to the internet (a hot wallet) or 
through hardware or physical media that is

[[Page 59635]]

disconnected from the internet (a cold wallet).
    (b) Examples. The following examples illustrate the definitions in 
paragraph (a) of this section.
    (1) Example 1. The following persons generally are brokers within 
the meaning of paragraph (a)(1) of this section--
    (i) A mutual fund, an underwriter of the mutual fund, or an agent 
for the mutual fund, any of which stands ready to redeem or repurchase 
shares in such mutual fund.
    (ii) A professional custodian (such as a bank) that regularly 
arranges sales for custodial accounts pursuant to instructions from the 
owner of the property.
    (iii) A depositary trust or other person who regularly acts as an 
escrow agent in corporate acquisitions, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (iv) A stock transfer agent for a corporation, which agent records 
transfers of stock in such corporation, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (v) A dividend reinvestment agent for a corporation that stands 
ready to purchase or redeem shares.
    (vi) A person who in the ordinary course of a trade or business 
provides users with hosted wallet services to the extent such person 
stands ready to effect the sale of digital assets on behalf of its 
customers, including by acting as an agent for a party in the sale 
wherein the nature of the agency is as described in paragraph 
(a)(10)(i)(A) of this section or as a digital asset middleman as 
defined in paragraph (a)(21) of this section.
    (vii) A digital asset payment processor as described in paragraph 
(a)(22) of this section.
    (viii) A person who in the ordinary course of a trade or business 
either owns or operates one or more physical electronic terminals or 
kiosks that stand ready to act on behalf of other persons to effect the 
sale of digital assets for cash stored-value cards, or different 
digital assets, regardless of whether the other person is the disposer 
or the acquirer of the digital assets in such an exchange.
    (ix) A person who in the ordinary course of a trade or business 
operates a non-custodial trading platform or website that stands ready 
to effect sales of digital assets for others by allowing persons to 
exchange digital assets directly with other persons for cash stored-
value cards, or different digital assets, including by providing access 
to automatically executing contracts, protocols, or other software 
programs that automatically effect such sales.
    (x) A person who in the ordinary course of a trade or business 
stands ready at a physical location to effect sales of digital assets 
on behalf of others.
    (xi) A person who sells or licenses software to unhosted wallet 
users if that person as part of its trade or business also offers 
services to such wallet users that effect sales of digital assets, 
provided the person would ordinarily know or be in a position to know 
the identity of the wallet users that effect the sales and the nature 
of the transactions potentially giving rise to gross proceeds from the 
sales as described in paragraphs (a)(21)(ii)(A) and (B) of this 
section.
    (2) Example 2. The following persons are not brokers within the 
meaning of paragraph (a)(1) of this section in the absence of 
additional facts that indicate the person is a broker--
    (i) A stock transfer agent for a corporation, which agent daily 
records transfers of stock in such corporation, if the nature of the 
activities of the agent is such that the agent ordinarily would not 
know the gross proceeds from sales.
    (ii) A person (such as a stock exchange) that merely provides 
facilities in which others effect sales.
    (iii) An escrow agent or nominee if such agency is not in the 
ordinary course of a trade or business.
    (iv) An escrow agent, otherwise a broker, which agent effects no 
sales other than such transactions as are incidental to the purpose of 
the escrow (such as sales to collect on collateral).
    (v) A floor broker on a commodities exchange, which broker 
maintains no records with respect to the terms of sales.
    (vi) A corporation that issues and retires long-term debt on an 
irregular basis.
    (vii) A clearing organization.
    (viii) A merchant who is not otherwise required to make a return of 
information under section 6045 of the Code and who regularly sells 
goods or other property (other than digital assets) or services in 
return for digital assets.
    (ix) A person solely engaged in the business of validating 
distributed ledger transactions, through proof-of-work, proof-of-stake, 
or any other similar consensus mechanism, without providing other 
functions or services.
    (x) A person solely engaged in the business of selling hardware or 
licensing software, the sole function of which is to permit a person to 
control private keys which are used for accessing digital assets on a 
distributed ledger, without providing other functions or services.
    (3) Example 3: Barter exchange. A, B, and C belong to a carpool in 
which they commute to and from work. Every third day, each member of 
the carpool provides transportation for the other two members. Because 
the carpool arrangement provides solely for the informal exchange of 
similar services on a noncommercial basis, the carpool is not a barter 
exchange within the meaning of paragraph (a)(4) of this section.
    (4) Example 4: Barter exchange. X is an organization whose members 
include retail merchants, wholesale merchants, and persons in the trade 
or business of performing services. X's members exchange property and 
services among themselves using credits on the books of X as a medium 
of exchange. Each exchange through X is reflected on the books of X by 
crediting the account of the member providing property or services and 
debiting the account of the member receiving such property or services. 
X also provides information to its members concerning property and 
services available for exchange through X. X charges its members a 
commission on each transaction in which credits on its books are used 
as a medium of exchange. X is a barter exchange within the meaning of 
paragraph (a)(4) of this section.
    (5) Example 5: Commodity, forward contract. A warehouse receipt is 
an interest in personal property for purposes of paragraph (a) of this 
section. Consequently, a warehouse receipt for a quantity of lead is a 
commodity under paragraph (a)(5)(ii) of this section. Similarly, an 
executory contract that requires delivery of a warehouse receipt for a 
quantity of lead is a forward contract under paragraph (a)(7)(ii) of 
this section.
    (6) Example 6: Customer. The only customers of a depository trust 
acting as an escrow agent in corporate acquisitions, which trust is a 
broker, are shareholders to whom the trust makes payments or 
shareholders for whom the trust is acting as an agent.
    (7) Example 7: Customer. The only customers of a stock transfer 
agent, which agent is a broker, are shareholders to whom the agent 
makes payments or shareholders for whom the agent is acting as an 
agent.
    (8) Example 8: Customer. D, an individual not otherwise exempt from 
reporting, is the holder of an obligation issued by P, a corporation. 
R, a broker, acting as an agent for P, retires such obligation held by 
D. Such obligor payments from R represent obligor payments by P. D, the 
person to whom the gross proceeds are paid or credited by R, is the 
customer of R.

[[Page 59636]]

    (9) Example 9: Covered security. E, an individual not otherwise 
exempt from reporting, maintains an account with S, a broker. On June 
1, 2012, E instructs S to purchase stock that is a specified security 
for cash. S places an order to purchase the stock with T, another 
broker. E does not maintain an account with T. T executes the purchase. 
Custody of the purchased stock is transferred to E's account at S. 
Under paragraph (a)(15)(ii) of this section, the stock is considered 
acquired for cash in E's account at S. Because the stock is acquired on 
or after January 1, 2012, under paragraph (a)(15)(i) of this section, 
it is a covered security.
    (10) Example 10: Covered security. F, an individual not otherwise 
exempt from reporting, is granted 100 shares of stock in F's employer 
by F's employer. Because F does not acquire the stock for cash or 
through a transfer to an account with a transfer statement (as 
described in Sec.  1.6045A-1), under paragraph (a)(15) of this section, 
the stock is not a covered security.
    (11) Example 11: Covered security. G, an individual not otherwise 
exempt from reporting, owns 400 shares of stock in Q, a corporation, in 
an account with U, a broker. Of the 400 shares, 100 are covered 
securities and 300 are noncovered securities. Q takes a corporate 
action to split its stock in a 2-for-1 split. After the stock split, G 
owns 800 shares of stock. Because the adjusted basis of 600 of the 800 
shares that G owns is determined from the basis of noncovered 
securities, under paragraphs (a)(15)(iii) and (a)(15)(iv)(B) of this 
section, these 600 shares are not covered securities and the remaining 
200 shares are covered securities.
    (12) Example 12: Digital asset payment processor, sale, and 
customer--(i) Facts. Company Z is an online retailer of merchandise 
that accepts digital asset DE as a form of payment. To facilitate the 
use of digital asset DE as payment, Z contracts with CPP, an unrelated 
party that is in the business of facilitating payments using digital 
assets. Under Z's contractual agreement with CPP, when purchasers of 
merchandise initiate payment on Z's website using DE, they are directed 
to CPP's website to complete the payment part of the transaction. 
Customer R seeks to purchase merchandise from Z that is priced at $15 
(or 15 units of DE). After R initiates purchase, R is directed to CPP's 
website where R is directed to transfer 15 units of DE to a digital 
asset address controlled by CPP. CPP then pays $15 in cash to Z, who in 
turn processes R's merchandise order.
    (ii) Analysis. CPP is a digital asset payment processor within the 
meaning of paragraph (a)(22)(i)(A) of this section because CPP, in the 
ordinary course of its business, effects payments from customers to 
retailers by receiving digital assets from customers in exchange for 
cash paid to retailers. CPP is also a broker under paragraph (a)(1) of 
this section because CPP stands ready to effect sales of digital assets 
to be made by others. R's payment of 15 units of DE to CPP in return 
for the payment of $15 cash to Z is a sale of digital assets under 
paragraph (a)(9)(ii)(D) of this section. Additionally, because R 
transferred digital assets to CPP in a sale described in paragraph 
(a)(9)(ii)(D) of this section, R is CPP's customer under paragraph 
(a)(2)(ii)(A) of this section. Finally, CPP's payment to Z may also be 
a third party network transaction under Sec.  1.6050W-1(c) subject to 
reporting under Sec.  1.6050W-1(a) if CPP is a third party settlement 
organization under the definition in Sec.  1.6050W-1(c)(2).
    (13) Example 13: Digital asset payment processor, sale, and 
customer--(i) Facts. The facts are the same as in paragraph (b)(12)(i) 
of this section (the facts in Example 12), except that under Z's 
contractual arrangement with CPP, when Z's purchasers seek to make 
payments using DE and are directed to CPP's website, they are 
instructed to transfer their units of DE to a digital asset address 
owned by Z pursuant to a temporarily fixed exchange rate of DE for 
cash, which CPP communicates to Z and which Z passes along to its 
purchasers. Additionally, the purchasers are required to provide CPP 
with the information CPP will need, such as name, address, and taxpayer 
identification number, to report the purchaser's sale of DE. To effect 
the purchase of Z's merchandise, R transfers 15 units of DE equal 
directly to Z's wallet. CPP provides similar services to other retail 
purchasers and merchants.
    (ii) Analysis. CPP is a digital asset payment processor within the 
meaning of paragraph (a)(22) of this section because CPP, in the 
ordinary course of its business, effects payments from customers (Z's 
purchasers) in exchange for digital assets paid to a second person (Z) 
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 retailer (Z). Such transactions are treated for 
purposes of paragraph (a)(22)(i) of this section as if R paid the 
digital assets to CPP in exchange for cash or different digital assets. 
R's payment of digital assets directly to Z pursuant to a temporarily 
fixed exchange rate of DE for cash is a sale of the digital assets 
within the meaning of paragraph (a)(9)(ii)(D) of this section because 
the transaction is treated for purposes of paragraph (a)(22)(i) of this 
section as if R paid the digital assets to CPP in exchange for cash or 
different digital assets. R's payment of digital assets directly to Z 
pursuant to the temporarily fixed exchange rate of DE for cash is a 
sale without regard to whether Z, after the payment is made, decides to 
exchange the digital assets pursuant to that fixed exchange rate. R is 
CPP's customer under paragraph (a)(2)(ii)(A) of this section because R 
is the person who is treated as transferring digital assets to a 
digital asset payment processor in a sale as defined in paragraph 
(a)(9)(ii)(D) of this section. Finally, the transfer of DE units by R 
to Z pursuant to CPP's instructions may also be a third party network 
transaction under Sec.  1.6050W-1(c) subject to reporting under Sec.  
1.6050W-1(a) if CPP is a third party settlement organization under the 
definition in Sec.  1.6050W-1(c)(2).
    (14) Example 14: Third party settlement organization as digital 
asset payment processor--(i) Facts. The facts are the same as in 
paragraph (b)(12)(i) of this section (the facts in Example 12) except 
that CPP is also a third party settlement organization, as defined in 
Sec.  1.6050W-1(c)(2), with respect to the payments it makes (or 
submits instructions for others to make) to Z. To process R's payment 
and settle the transaction, CPP submits instructions to R to transfer 
15 units of digital asset DE to a digital asset address held in a 
wallet owned by Z. Z, in turn, processes R's merchandise order. Z does 
not have any arrangement with CPP to temporarily fix the exchange rate 
of DE for cash.
    (ii) Analysis. CPP is a digital asset payment processor as defined 
in paragraph (a)(22)(i)(B) of this section because it is a third party 
settlement organization that submitted an instruction to R to make 
payment to Z in settlement of a reportable payment transaction under 
Sec.  1.6050W-1(a)(2) using digital asset DE. Accordingly, CPP is a 
broker under paragraph (a)(1) of this section, and the transaction is a 
sale of R's 15 units of digital asset DE under paragraph (a)(9)(ii)(D) 
of this section.
    (15) Example 15: Broker. The facts are the same as in paragraph 
(b)(12)(i) of this section (the facts in Example 12), except that Z 
accepts digital asset DE from its purchasers directly without the 
services of CPP or any other digital asset payment processor. To pay 
for the merchandise R purchases on Z's website, R is directed by Z to 
transfer 15 units of DE directly to Z's digital asset address. Z is not 
a broker under the definition of paragraph (a)(1) of this

[[Page 59637]]

section because Z does not stand ready as part of its trade or business 
to effect sales as defined in paragraph (a)(9) of this section made by 
others. That is, the sales that Z is in the business of conducting are 
of property that is not subject to reporting under section 6045.
    (16) Example 16: Payment card issuer as digital asset payment 
processor--(i) Facts. Customer S purchases goods for 10 units of 
digital asset DE from merchant M using a digital asset DE credit card 
issued by Bank X. Merchant M is one of a network of unrelated persons 
that has agreed to accept credit cards issued by Bank X as payment 
under an agreement that provides standards and mechanisms for settling 
the transaction between a merchant acquiring bank and the persons who 
accept the cards. Under these standards, payments are made by 
customers, to the issuing bank, and by the issuing bank to the merchant 
acquiring bank in units of DE. Bank MAB is the merchant acquiring 
entity within the meaning of Sec.  1.6050W-1(b)(2) with the contractual 
obligation to make payments to merchant M for goods provided to S in 
this transaction. The arrangement between merchant M and Bank MAB 
provides that M may direct Bank MAB to make payment to M in either 
digital asset DE or cash. To make payment for S's purchase of goods 
from merchant M, at Bank X's direction, S transfers 10 units of digital 
asset DE to Bank X. Bank X pays the 10 units of DE, less its processing 
fee, to Bank MAB, which amount Bank MAB pays, less its processing fee, 
to M.
    (ii) Analysis. Bank MAB is a merchant acquiring entity under Sec.  
1.6050W-1(b)(2), and the payment made by Bank MAB to merchant M is in 
settlement of a reportable payment transaction under Sec.  1.6050W-
1(a)(2). Accordingly, Bank X is a digital asset payment processor as 
defined in paragraph (a)(22)(i)(C) of this section because Bank X is a 
payment card issuer that made payment to Bank MAB in DE in a 
transaction that is associated with Bank MAB's reportable payment 
transaction under Sec.  1.6050W-1(a)(2). Additionally, S's payment of 
DE is a sale transaction under paragraph (a)(9)(ii)(D) of this section 
because that payment was made pursuant to the instructions provided by 
Bank X.
    (17) Example 17: Effect, and digital asset middleman--(i) Facts. 
P2X, a business that is jointly operated by several individuals, 
created a website that regularly provides online services to customers 
in order to match would-be sellers of digital assets with would-be 
buyers. As part of this business, P2X directs matched buyers and 
sellers to use automatically executing contracts to settle the desired 
exchange without any additional services from P2X. The software 
underlying the automatically executing contracts was originally 
developed and then open-sourced by Z, a person unrelated to P2X. Z does 
not maintain the software and does not receive any fee when 
transactions are settled using the software. Customers undertaking 
transactions using the automatically executing contracts are charged a 
small percentage of the transaction value as a fee that is transferred 
to unrelated persons (miners) who validate transactions on the 
applicable blockchains. Additionally, P2X has modified the software so 
that buyers and sellers using P2X's platform are charged an additional 
1% transaction fee, which is automatically taken from the accounts of 
buyers and sellers and transferred to P2X when transactions are 
executed.
    (ii) Analysis with respect to P2X. The group of individuals that 
operate P2X are treated for U.S. Federal income tax purposes as a 
business entity that is a partnership, or as a sole proprietorship, 
depending on the facts, and therefore as a person within the meaning of 
paragraph (a)(13) of this section. P2X provides facilitative services 
as described in paragraph (a)(21)(iii)(A) of this section because it 
provides buyers and sellers a digital marketplace for digital asset as 
well as automatically executing contracts to effectuate sales of 
digital assets. P2X is in a position to know the identity of the 
parties that make sales on its platform within the meaning of paragraph 
(a)(21)(ii)(A) of this section because it can request the name, 
address, and taxpayer identification number of each digital asset buyer 
and seller in advance of the sale. P2X is also in a position to know 
the nature of the transactions potentially giving rise to gross 
proceeds from sales within the meaning of paragraph (a)(21)(ii)(B) of 
this section because it can determine that information from the 
transaction fees P2X collects from each transaction. Accordingly, P2X 
acts as a digital asset middleman within the meaning of paragraph 
(a)(21) of this section to effect sales of digital assets on behalf of 
others on its platform within the meaning of paragraph (a)(10)(i)(D) of 
this section.
    (iii) Analysis with respect to Z. Although the software developed 
by Z that underlies the automatically executing contracts facilitates 
sales of digital assets on P2X's platform, Z is not in a position to 
know the identity of the parties that make sales using these contracts 
within the meaning of paragraph (a)(21)(ii)(A) of this section because 
Z open-sourced the software and has no connection to P2X. As a result, 
Z does not have the power to set or change the terms under which its 
software can be used. Accordingly, Z is not a digital asset middleman 
within the meaning of paragraph (a)(21) of this section.
    (18) Example 18: Digital asset middleman--(i) Facts. The facts are 
the same as in paragraph (b)(17)(i) of this section (the facts in 
Example 17) except Individual K utilizes P2X's website to find a 
counterparty and to trade 10 units of digital asset DE, which are held 
in a personal unhosted wallet, for 50 units of digital asset ST. When 
the transfer of K's 10 units of DE to the counterparty is validated on 
the blockchain, a small percentage of the 10 units are withheld from 
the amount received by K's counterparty and are, instead, transferred 
to Miner M, who performed the validation of the transaction on the DE 
blockchain.
    (ii) Analysis. The validation services provided by M are not 
facilitative services under paragraph (a)(21)(iii)(A) of this section. 
Accordingly, M is not a digital asset middleman within the meaning of 
paragraph (a)(21) of this section and is also not a broker under 
paragraph (a)(1) of this section.
    (19) Example 19: Digital asset middleman--(i) Facts. The facts are 
the same as in paragraph (b)(17)(i) of this section (the facts in 
Example 17), except that P2X's automatically executing contract charges 
a flat transaction fee (instead of a fee that is contingent on the 
value of the transaction) that is paid to P2X upon the execution of a 
trade.
    (ii) Analysis with respect to P2X. For the same reasons discussed 
in paragraph (b)(17)(ii) of this section (the analysis in Example 17), 
P2X provides facilitative services and is in a position to know the 
identity of the parties that make sales on its platform. Although P2X 
cannot determine the nature of the transactions potentially giving rise 
to gross proceeds from sales within the meaning of paragraph 
(a)(21)(ii)(B) of this section that are undertaken on its website from 
the flat transaction fees P2X collects from each transaction, P2X has 
the ability to alter the automatically executing contracts to provide 
that information to P2X. Additionally, because P2X provides 
facilitative services that matches would-be sellers of digital assets 
with would-be buyers, P2X is in a position to know the nature of the 
transactions potentially giving rise to gross proceeds from sales. 
Accordingly, P2X acts as a digital asset middleman under paragraph 
(a)(21) of this section to effect transactions on behalf of P2X 
platform users.

[[Page 59638]]

    (20) Example 20: Effect--(i) Facts. Individual J is an artist in 
the business of creating non-fungible tokens (NFTs) representing 
ownership interests in J's artwork for sale. Transfers of J's NFTs are 
recorded on a cryptographically secured distributed ledger called the 
DE blockchain. J regularly sells these newly created NFTs to buyers in 
return for units of digital asset DE. To find buyers and to execute 
these transactions, J uses the services of P2X, an unrelated digital 
asset broker that provides a digital marketplace for NFT sellers to 
find buyers and automatically executing contracts in return for a 
transaction fee. J does not perform any other services with respect to 
these transactions. Using P2X's platform, buyer K purchases J's NFT-4 
for 1,000 units of DE. At the direction of P2X, J and K execute their 
exchange using an automatically executing contract, which automatically 
transfers J's NFT-4 to K and K's 1,000 units of DE to J. The contract 
also automatically transfers P2X's transaction fee from K's wallet to 
P2X.
    (ii) Analysis. NFT-4 is a digital representation of value that is 
recorded on a cryptographically secured distributed ledger and is not 
cash. Accordingly, NFT-4 is a digital asset under paragraph (a)(19) of 
this section. Although J is a principal in the exchange of the NFT-4 
for 1,000 units of DE, J is not acting as an obligor retiring its own 
debt obligations, a corporation redeeming its own stock, or an issuer 
of digital assets that is redeeming those digital assets, as described 
in paragraph (a)(10)(i)(B) of this section. Because J creates the NFTs 
as part of J's business, J is also not acting as a dealer as described 
in paragraph (a)(10)(i)(C) of this section in these transactions. 
Accordingly, J is not effecting sales of digital assets on behalf of 
others under the definition of paragraph (a)(10)(i)(B) or (C) of this 
section.
    (21) Example 21: Digital asset middleman--(i) Facts. Corporation H 
is solely engaged in the business of developing and selling H-brand 
unhosted hardware wallets. H-brand wallets permit users to store 
private keys used for accessing digital assets on hardware devices that 
can either be connected to or disconnected from the internet. Users who 
seek to transfer digital assets controlled by an H-brand hardware 
wallet must connect the H-brand wallet to the internet and use 
connecting software (not licensed by H) to execute the transfer. Once H 
sells a hardware wallet to a customer, H does not have access to any 
information about transactions the customer undertakes using the 
connecting software not licensed by H.
    (ii) Analysis. The sale by H of the H-brand wallets is not a 
facilitative service under paragraph (a)(21)(iii)(A) of this section. 
Accordingly, H is not acting as a digital asset middleman under 
paragraph (a)(21) of this section with respect to digital asset sale 
transactions made by H-brand wallet users.
    (22) Example 22: Digital asset middleman--(i) Facts. Corporation S 
is engaged in the business of operating and maintaining a website that 
licenses S-brand unhosted wallets (or S-Wallets) that are accessible 
online and allow users to control private keys to digital assets and 
transfer (and receive) digital assets directly from (into) their S-
Wallets. S requests each user's name, address, and tax identification 
number when first licensing its S-Wallets. S also provides each S-
Wallet user a digital asset trading service (S-Trades) that compares 
pricing at several unrelated non-custodial trading platforms to 
facilitate access to the most competitive buy and sell prices offered 
by these unrelated platforms. Sales of digital assets from S-Wallets 
using S-Trade are automatically executed from digital assets held in S-
wallets using contracts that deduct and pay a 1% transaction fee to S 
from digital assets transferred out of the S-Wallets. This fee is in 
addition to any fees charged by the unrelated non-custodial trading 
platforms.
    (ii) Analysis. The access provided by S to unrelated digital asset 
brokers and market-making services are facilitative services as 
described in paragraph (a)(21)(iii)(A) of this section. Because S has 
the ability to request each wallet user's name, address, and taxpayer 
identification number, S is in a position to know the identity of the 
S-Wallet users under paragraph (a)(21)(ii)(A) of this section. S is 
also in a position to know the nature of the transactions potentially 
giving rise to gross proceeds of S-Wallet users from digital asset 
sales using S-Trade under paragraph (a)(21)(ii)(B) of this section 
because S can determine the gross proceeds from the 1% transaction fee 
it collects on each transaction by operation of the automatically 
executing contract to which it provides access. Accordingly, S is 
acting as a digital asset middleman with respect to the sale 
transactions made by S-Wallet users using S-Trade.
    (23) Example 23: Digital asset middleman--(i) Facts. The facts are 
the same as in paragraph (b)(22)(i) of this section (the facts in 
Example 22), except S does not provide the S-Trade digital asset 
trading service, with wallet connection services, or with direct 
platform access to any digital asset trading platform that facilitates 
the purchase or sale of digital assets. S-Wallet users seeking to make 
exchanges of digital assets from their S-Wallets at one of these 
unrelated non-custodial trading platforms must initiate the trade on 
the unrelated trading platform, which in turn will provide the 
functionality for users of S-Wallets to trade digital assets held in 
their S-Wallets using the services of that unrelated trading platform. 
Trades using these unrelated trading platforms are completed directly 
from the users' S-Wallets using automatically executing contracts that 
deduct and pay a 0.9% transaction fee to the non-custodial trading 
platforms. The unrelated trading platforms do not pay compensation to S 
for the wallet connection service these platforms provide to S-Wallet 
users in making trades on the unrelated trading platforms.
    (ii) Analysis. Because the software licensed by S provides S-Wallet 
users solely with the ability to control digital assets directly from 
their S-Wallets, S does not provide S-Wallet users with a facilitative 
service as described in paragraph (a)(21)(iii)(A) of this section. 
Accordingly, S is a not acting as a digital asset middleman under 
paragraph (a)(21) of this section with respect to sale transactions 
made by S-Wallet users on unrelated trading platforms.
    (24) Example 24: Digital asset middleman and effect--(i) Facts. SBK 
is in the business of effecting sales of stock and other securities on 
behalf of customers. To open an account with SBK, each customer must 
provide SBK with their name, address, and tax identification number. 
SBK accepts 20 units of digital asset DE from Customer P as payment for 
10 shares of AB stock. Additionally, P pays SBK an additional 1 unit of 
digital asset DE as a commission for SBK's services.
    (ii) Analysis. SBK's acceptance of 20 units of DE as payment for 
the AB stock is a facilitative service under paragraph (a)(21)(iii)(B) 
of this section because the payment is for property (the AB stock) that 
when sold would constitute a sale under paragraph (a)(9)(i) of this 
section by a broker that is in the business of effecting sales of stock 
and other securities. Because SBK is a broker under paragraph (a)(1) of 
this section with respect to any type of sale under paragraph (a)(9) of 
this section, SBK's acceptance of 1 unit of DE as payment for SBK's 
commission is also a facilitative service under paragraph 
(a)(21)(iii)(B) of this section. Additionally, SBK is in a position to 
know, under paragraphs (a)(21)(ii)(A)

[[Page 59639]]

and (B) of this section, P's identity and the nature of P's transaction 
involving the 20 units of DE and the commission payment. Accordingly, 
SBK is acting as a digital asset middleman to effect P's sale of 10 
units of DE in return for the AB stock and P's sale of 1 unit of DE as 
payment for SBK's commission under paragraphs (a)(10)(i)(D) and (a)(21) 
of this section.
    (25) Example 25: Digital asset middleman and effect--(i) Facts. B 
is an individual that purchases real estate from individual S in 
exchange for cash and 1,000 units of digital asset DE. The transaction 
is a real estate transaction under Sec.  1.6045-4(b) and is closed by 
closing attorney CA, who is a real estate reporting person under Sec.  
1.6045-4(e). As part of performing its services as closing attorney, CA 
requests the name, address, and tax identification number from both B 
and S.
    (ii) Analysis. The closing services provided by CA are facilitative 
services under paragraph (a)(21)(iii)(B) of this section because CA is 
performing services as a real estate reporting person as defined in 
Sec.  1.6045-4(e) with respect to a real estate transaction in which 
the real estate buyer (B) pays digital assets in full or partial 
consideration for the real estate. As part of its services in closing 
the real estate transaction, CA is in a position to know B's identity 
and the nature of B's real estate transaction under paragraphs 
(a)(21)(ii)(A) and (B) of this section. Accordingly, CA is acting as a 
digital asset middleman under paragraph (a)(21) of this section to 
effect B's sale of 1,000 DE units under paragraph (a)(10)(i)(D) of this 
section. These conclusions are not impacted by whether or not CA is 
required to report the sale of the real estate by S under Sec.  1.6045-
4(a).
    (26) Example 26: Digital asset and cash--(i) Facts. Y is a 
privately held corporation that issues DL, a digital representation of 
value designed to track the value of the U.S. dollar. DL is backed in 
part or in full by U.S. dollars held by Y, and Y offers to redeem units 
of DL for U.S. dollars at par at any time. Transactions involving DL 
utilize cryptography to secure transactions that are digitally recorded 
on a cryptographically secured distributed ledger called the DL 
blockchain. CRX is a digital asset broker that also provides hosted 
wallet services for its customers seeking to made trades of digital 
assets using CRX. R is a customer of CRX. R exchanges 100 units of DL 
for $100 in cash from CRX. CRX does not record this transaction on the 
DL blockchain, but instead records the transaction on CRX's own 
centralized private ledger.
    (ii) Analysis. DL is not cash under paragraph (a)(12) of this 
section because it is not issued by a government or central bank. DL is 
a digital asset under paragraph (a)(19) of this section because it is a 
digital representation of value that is recorded on a cryptographically 
secured distributed ledger. The fact that CRX recorded R's transaction 
on its own private ledger and not on the DL blockchain does not change 
this conclusion.
    (27) Example 27: Digital asset and security. M owns 10 units of a 
fund that was formed to invest in digital assets. M's units of the fund 
are held in a securities brokerage account and are not recorded using 
cryptographically secured distributed ledger technology. Although the 
fund's underlying investments are comprised of one or more digital 
assets, M's investment is in units of the fund, which are not digital 
assets under paragraph (a)(19) of this section because transactions 
involving these fund units are not secured using cryptography and are 
not digitally recorded on a ledger, such as a blockchain.
    (28) Example 28: Forward contract, closing transaction, and sale--
(i) Facts. On February 24, Year 1, J contracts with broker CRX to sell 
J's 10 units of digital asset DE to CRX at an agreed upon price, with 
delivery under the contract to occur at 4 p.m. on March 10, Year 1. 
Pursuant to this agreement, J delivers the 10 units of DE to CRX, and 
CRX pays J the agreed upon price in cash.
    (ii) Analysis. Under paragraph (a)(7)(iii) of this section, the 
contract between J and CRX is a forward contract. J's delivery of 
digital asset DE pursuant to the forward contract is a closing 
transaction described in paragraph (a)(8) of this section that is 
treated as a sale of the underlying digital asset DE under paragraph 
(a)(9)(ii)(A)(3) of this section. Pursuant to the rules of paragraphs 
(a)(9)(ii)(A)(3) and (a)(9)(i) of this section, CRX may treat the 
delivery of DE as a sale without separating the profit or loss on the 
forward contract from the profit or loss on the delivery.
    (29) Example 29: Digital asset--(i) Facts. On February 7, Year 1, J 
purchases a regulated futures contract on digital asset DE through 
futures commission merchant FCM. The contract is not recorded using 
cryptographically secured distributed ledger technology. The contract 
expires on the last Friday in June, Year 1. On May 1, Year 1, J enters 
into an offsetting closing transaction with respect to the regulated 
futures contract.
    (ii) Analysis. Although the regulated futures contract's underlying 
assets are comprised of digital assets, J's investment is in the 
regulated futures contract, which is not a digital asset under 
paragraph (a)(19) of this section because transactions involving the 
contract are not secured using cryptography and are not digitally 
recorded using cryptographically secured distributed ledger technology, 
such as a blockchain. When J disposes of the contract, the transaction 
is a sale of a regulated futures contract covered by paragraph 
(a)(9)(i) of this section.
    (30) Example 30: Closing transaction and sale--(i) Facts. On 
January 15, Year 1, J purchases digital asset DE through Broker. On 
March 1, Year 1, J sells a regulated futures contract on DE through 
Broker. The contract expires on the last Friday in June, Year 1, at an 
exercise price of $5,000 for the contract. On the last Friday in June, 
Year 1, the fair market value of the DE covered by the regulated 
futures contract is $5,050. J delivers the DE in settlement of the 
regulated futures contract.
    (ii) Analysis. J's delivery of the DE pursuant to the regulated 
futures contract is a closing transaction described in paragraph (a)(8) 
of this section that is treated as a sale of the regulated futures 
contract under paragraph (a)(9)(i) of this section. In addition, under 
paragraph (a)(9)(ii)(A)(3) of this section, J's delivery of digital 
asset DE pursuant to the settlement of the regulated futures contract 
is a sale of the underlying digital asset DE.
    (c) * * *
    (3) * * *
    (i) * * *
    (B) * * *
    (3) The United States or a State, the District of Columbia, the 
Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana 
Islands, the U.S. Virgin Islands, or American Samoa, a political 
subdivision of any of the foregoing, a wholly owned agency or 
instrumentality of any one or more of the foregoing, or a pool or 
partnership composed exclusively of any of the foregoing;
* * * * *
    (C) * * *
    (2) Limitation for corporate customers. For sales of covered 
securities acquired on or after January 1, 2012, a broker may not treat 
a customer as an exempt recipient described in paragraph 
(c)(3)(i)(B)(1) of this section based on the indicators of corporate 
status described in Sec.  1.6049-4(c)(1)(ii)(A). However, for sales of 
all securities and for sales of digital assets, a broker may treat a 
customer as an exempt recipient if one of the following applies--
* * * * *

[[Page 59640]]

    (8) Special coordination rules for certain information returns 
relating to digital assets--(i) Digital assets that constitute 
securities or commodities. For any sale of a digital asset under 
paragraph (a)(9)(ii) of this section that also constitutes a sale under 
paragraph (a)(9)(i) of this section of a security not described in 
paragraph (c)(8)(iii) of this section or of a commodity, the broker 
must report the sale only as a sale of a digital asset under paragraph 
(a)(9)(ii) of this section. See paragraph (d)(2)(i)(B) of this section 
for the information required to be reported for such a sale.
    (ii) Digital assets that constitute real estate. For any 
transaction involving a sale of a digital asset under paragraph 
(a)(9)(ii) of this section that also constitutes a sale of reportable 
real estate under Sec.  1.6045-4(b)(2) that is subject to reporting 
under Sec.  1.6045-4(a), the broker must report the transaction as a 
sale only of reportable real estate under Sec.  1.6045-4(b)(2).
    (iii) Digital assets that constitute contracts covered by section 
1256(b). For a sale of a digital asset that is also a contract covered 
by section 1256(b), the broker must report the sale only under 
paragraph (c)(5) of this section including, as appropriate, the 
application of the rules in paragraph (m)(3) of this section.
    (iv) Examples. The following examples illustrates the rules of this 
paragraph (c)(8):
    (A) Example 1: Digital asset securities--(1) Facts. Digital asset 
broker CRX effects on behalf of its customers sales of DSK, which is a 
security within the meaning of paragraph (a)(3) of this section. 
Transactions involving DSK are recorded on a cryptographically secured 
distributed ledger called the DSK blockchain. L is an individual 
customer of CRX that is not otherwise exempt from reporting. Using 
CRX's services, L exchanges 100 units of DSK for $200 in cash. CRX does 
not record this transaction on the DSK blockchain, but instead records 
the transaction on CRX's private ledger.
    (2) Analysis. DSK is both a security under paragraph (a)(3) of this 
section and a digital asset under paragraph (a)(19) of this section. 
L's sale of 100 units of DSK for $200 in cash constitutes a sale of 
securities for cash under paragraph (a)(9)(i) of this section and a 
sale of digital assets in exchange for cash under paragraph 
(a)(9)(ii)(A)(1) of this section. Accordingly, pursuant to the 
coordination rule set forth in paragraph (c)(8)(i) of this section, CRX 
is required to report this transaction as a sale of digital assets 
under paragraph (a)(9)(ii) of this section and not as a sale of 
securities.
    (B) Example 2: Digital asset representing real estate--(1) Facts. 
Digital asset broker CRX effects on behalf of its customers sales of 
tokenized real estate interests, including RE, which is a digital 
representation of value representing a partial ownership interest in a 
physical building in City X. Transactions involving RE are recorded on 
a cryptographically secured distributed ledger called the Z blockchain. 
S is an individual customer of CRX that is not otherwise exempt from 
reporting. S sells 1 unit of RE for $20,000 in cash to another customer 
of CRX, Individual B. The transfer of the RE token from S's digital 
asset address to B's digital asset address is recorded on the Z 
blockchain.
    (2) Analysis. RE is both an interest in reportable real estate 
under Sec.  1.6045-4(b)(2) and a digital asset under paragraph (a)(19) 
of this section. Although the sale of the RE unit by L to B for $20,000 
in cash constitutes a sale of a digital asset in exchange for cash 
under paragraph (a)(9)(ii)(A)(1) of this section, L's sale of the RE 
unit also constitutes a real estate transaction under Sec.  1.6045-
4(b)(1) that is subject to reporting under Sec.  1.6045-4(a). 
Accordingly, pursuant to the coordination rule set forth in paragraph 
(c)(8)(ii) of this section, CRX is required to report this transaction 
as a sale of a reportable real estate interest under Sec.  1.6045-4(a) 
and not as a sale of a digital asset.
    (C) Example 3: Digital asset representing real estate--(1) Facts. 
The facts are the same as in paragraph (c)(8)(iv)(B) of this section 
(the facts in Example 2), except that S's sale of the RE token to B is 
for $500 instead of $20,000 in cash.
    (2) Analysis. Although RE constitutes both an interest in 
reportable real estate under Sec.  1.6045-4(b)(2) and a digital asset 
under paragraph (a)(19) of this section, S's sale of RE is for a total 
consideration of less than $600. Pursuant to the de minimis transaction 
rule under Sec.  1.6045-4(c)(1)(iii), the sale of RE is not subject to 
reporting under Sec.  1.6045-4(a). Accordingly, CRX is required to 
report this transaction as a sale of a digital asset under paragraph 
(c) of this section.
    (d) * * *
    (2) * * *
    (i) Required information--(A) General rule for sales described in 
paragraph (a)(9)(i) of this section. Except as provided in paragraph 
(c)(5) of this section, for each sale described in paragraph (a)(9)(i) 
of this section for which a broker is required to make a return of 
information under this section, the broker must report on Form 1099-B, 
``Proceeds From Broker and Barter Exchange Transactions,'' or any 
successor form, the name, address, and taxpayer identification number 
of the customer, the property sold, the Committee on Uniform Security 
Identification Procedures (CUSIP) number of the security sold (if 
applicable) or other security identifier number that the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2) of this chapter), the 
adjusted basis of the security sold, whether any gain or loss with 
respect to the security sold is long-term or short-term (within the 
meaning of section 1222 of the Code), the gross proceeds of the sale, 
the sale date, and other information required by the form in the manner 
and number of copies required by the form. In addition, for a sale of a 
covered security on or after January 1, 2014, a broker must report on 
Form 1099-B whether any gain or loss is ordinary. See paragraph (m) of 
this section for additional rules related to options and paragraph (n) 
of this section for additional rules related to debt instruments. See 
paragraph (c)(8) of this section for rules related to sales of 
securities or sales of commodities under paragraph (a)(9)(i) of this 
section that are also sales of digital assets under paragraph 
(a)(9)(ii) of this section.
    (B) Required information for digital asset transactions. For each 
sale of a digital asset described in paragraph (a)(9)(ii) of this 
section for which a broker is required to make a return of information 
under this section, the broker must report on the form prescribed by 
the Secretary the name, address, and taxpayer identification number of 
the customer; the name and number of units of the digital asset sold; 
the sale date and time; the gross proceeds amount (after reduction for 
the allocable digital asset transaction costs as defined and allocated 
pursuant to paragraph (d)(5)(iv) of this section); the transaction ID 
as defined in paragraph (a)(26) of this section in connection with the 
sale, if any; the digital asset address as defined in paragraph (a)(20) 
of this section (or digital asset addresses if multiple) from which the 
digital asset was transferred in connection with the sale, if any; 
whether the sale was for cash stored-value cards, or in exchange for 
services, or other property; and any other information required by the 
form in the manner and number of copies required by the form or 
instructions. In the case of any sale described in the previous 
sentence that is also described in paragraph (c)(8)(i) of this section, 
the broker must also report any information

[[Page 59641]]

required under paragraph (d)(2)(i)(A) of this section to the extent 
required by the form or instructions. For each such sale of a digital 
asset that was held by the broker in a hosted wallet on behalf of a 
customer and was previously transferred into an account at the broker 
(transferred-in digital asset), the broker must also report the date 
and time of such transfer in; the transaction ID of such transfer in, 
if any; the digital asset address (or digital asset addresses if 
multiple) from which the digital asset was transferred, if any; and the 
number of units transferred in by the customer. If a sale of a digital 
asset gives rise to digital asset transaction costs that are paid using 
digital assets, the sale of the digital asset to pay for the digital 
asset transaction costs must also be reported as a sale.
    (C) Acquisition information for sales of certain digital assets. 
For each sale described in paragraph (a)(9) of this section on or after 
January 1, 2026, of a covered security defined in paragraph 
(a)(15)(i)(H), (J), or (K) of this section, for which a broker is 
required to make a return of information under paragraph (d)(2)(i) of 
this section, the broker must also report the adjusted basis of the 
covered security sold calculated in accordance with paragraph (d)(6) of 
this section, the date and time such covered security was purchased, 
and whether any gain or loss with respect to the covered security sold 
is long-term or short-term (within the meaning of section 1222).
    (ii) Specific identification of specified securities--(A) In 
general. Except as provided in Sec.  1.1012-1(e)(7)(ii), for a 
specified security described in paragraph (a)(14)(i) of this section 
sold on or after January 1, 2011, or for a specified security described 
in paragraph (a)(14)(ii) of this section sold on or after January 1, 
2014, a broker must report a sale of less than the entire position in 
an account of a specified security that was acquired on different dates 
or at different prices consistently with a customer's adequate and 
timely identification of the security to be sold. See Sec.  1.1012-
1(c). If the customer does not provide an adequate and timely 
identification for the sale, the broker must first report the sale of 
securities in the account for which the broker does not know the 
acquisition or purchase date followed by the earliest securities 
purchased or acquired, whether covered securities or noncovered 
securities.
    (B) Specific identification of digital assets. For a specified 
security described in paragraph (a)(14)(v) of this section, a broker 
must report a sale of less than the entire position in an account of 
such specified security that was acquired on different dates or at 
different prices consistently with the adequate identification of the 
digital asset to be sold. See Sec.  1.1012-1(j)(3)(ii) for rules 
relating to the identification of units sold, exchanged, or 
transferred. If the customer does not provide an adequate and timely 
identification for the sale, the broker must first report the sale of 
the earliest units of the digital asset purchased within or transferred 
into the customer's account at the broker. Units of a digital asset are 
transferred into the customer's account as of the date and time of the 
transfer.
    (iii) Penalty relief for reporting information not subject to 
reporting--(A) Noncovered securities. A broker is not required to 
report adjusted basis and the character of any gain or loss for the 
sale of a noncovered security if the return identifies the sale as a 
sale of a noncovered security. A broker that chooses to report this 
information for a noncovered security is not subject to penalties under 
section 6721 or 6722 of the Code for failure to report this information 
correctly if the return identifies the sale as a sale of a noncovered 
security. For purposes of this paragraph (d)(2)(iii)(A), a broker must 
treat a security for which a broker makes the single-account election 
described in Sec.  1.1012-1(e)(11)(i) as a covered security.
    (B) Digital assets sold before applicability date. A broker is not 
required to report the gross proceeds from the sale of a digital asset 
as described in paragraph (a)(9)(ii) of this section if the sale is 
effected prior to January 1, 2025, or the adjusted basis and the 
character of any gain or loss with respect to a sale of a covered 
security described in paragraph (a)(15)(i)(H), (J), or (K) of this 
section if the sale is effected prior to January 1, 2026. A broker that 
chooses to report this information on either the Form 1099-B, 
``Proceeds From Broker and Barter Exchange Transactions,'' or when 
available the form prescribed by the Secretary pursuant to paragraph 
(d)(2)(i)(B) of this section is not subject to penalties under section 
6721 or 6722 for failure to report this information correctly.
    (iv) * * *
    (A) Transfer and issuer statements for securities. When reporting a 
sale of a covered security other than a digital asset described in 
paragraph (a)(19) of this section, a broker must take into account all 
information, other than the classification of the security (such as 
stock), furnished on a transfer statement (as described in Sec.  
1.6045A-1) and all information furnished or deemed furnished on an 
issuer statement (as described in Sec.  1.6045B-1), unless the 
statement is incomplete or the broker has actual knowledge that it is 
incorrect. * * *
    (B) Other information with respect to securities. * * *
    (v) Failure to receive a complete transfer statement for 
securities. A broker that has not received a complete transfer 
statement as required under Sec.  1.6045A-1(a)(3) for a transfer of a 
specified security described in paragraphs (a)(14)(i) through (iv) of 
this section must request a complete statement from the applicable 
person effecting the transfer unless, under Sec.  1.6045A-1(a), the 
transferor has no duty to furnish a transfer statement for the 
transfer. * * *
    (vi) Reporting by other parties after a sale of securities-- * * *
    (vii) Examples. The following examples illustrate the rules of this 
paragraph (d)(2). Unless otherwise indicated, all events and 
transactions described in paragraphs (d)(2)(vii)(C) through (F) of this 
section (Examples 3 through 6) occur after the applicability date set 
forth in paragraph (q) of this section.
* * * * *
    (C) Example 3: Reporting required by broker providing hosted wallet 
services--(1) Facts. TRX is a digital asset broker that also provides 
hosted wallet services. As part of TRX's regular operations, TRX does 
not record customer purchases of DE on the DE blockchain, but instead 
holds all digital assets in a TRX omnibus account. TRX, in turn, keeps 
a centralized record on which it allocates digital assets held on 
behalf of each of its customers. K, an individual not otherwise exempt 
from reporting, purchases 100 units of digital asset DE in a hosted 
wallet account at TRX. On March 9, Year 1, K directs TRX to transfer 
the 100 units to CRX, another digital asset broker that owns and 
operates a digital asset trading platform and provides hosted wallet 
services. CRX does not record customer purchases of DE on the DE 
blockchain, but instead holds all digital assets in a CRX omnibus 
account and keeps a centralized record on which it allocates digital 
assets held on behalf of each of its customers. The transaction ID of 
this transfer to CRX is kbcsj123. The digital asset address from which 
the units were transferred is 2hh77100. K directs CRX to sell the 100 
units of DE on April 1, Year 1. CRX does not record K's sale on the DE 
blockchain, but instead reallocates the 100 units of DE previously 
allocated to K back to CRX's omnibus account.
    (2) Analysis. Under paragraph (d)(2)(i)(B) of this section, CRX is

[[Page 59642]]

required to make a return of information with respect to K's sale of 
100 units of DE. CRX must report the gross proceeds from the sale, the 
date (April 1, Year 1) and time of the sale, the name of the digital 
asset (DE) sold, and the number of units (100) sold, and any other 
information required by the form prescribed by the Secretary pursuant 
to paragraph (d)(2)(i)(B) of this section. CRX is not required to 
report the transaction ID of the sale transaction or the digital asset 
address from which the units were transferred because CRX did not 
record K's sale on the DE blockchain (and therefore there is no 
transaction ID or digital asset address in connection with the sale). 
Because K previously transferred the DE units treated as sold into K's 
account at CRX, paragraph (d)(2)(i)(B) of this section requires that 
CRX also report the transaction ID (kbcsj123) associated with the 
transferred-in digital assets, the digital asset address (2hh77100) 
from which the digital assets were transferred, and the date (March 9, 
Year 1) and time the units were transferred to CRX.
    (D) Example 4: Reporting required by broker not providing hosted 
wallet services--(1) Facts. J, an individual not otherwise exempt from 
reporting, purchases 500 units of digital asset DE in an unhosted 
wallet. Of these 500 units purchased, 350 are held at digital asset 
address 1ss9925 and 150 are held at digital asset address 2tt8875. On 
April 28, Year 1, J exchanges all 500 units of DE for 500 units of ST 
using the services of P2X, a digital asset broker that effects sales of 
digital assets directly between customers by providing customers with 
access to automatically executing contracts. The transaction ID of J's 
exchange is ghj789.
    (2) Analysis. Under paragraph (d)(2)(i)(B) of this section, P2X is 
required to make a return of information with respect to J's sale of 
500 units of DE. P2X must report the gross proceeds from the sale, the 
date (April 28, Year 1) and time of the sale, the name of the digital 
asset (DE) sold, the number of units (500) sold, and any other 
information required by the form prescribed by the Secretary pursuant 
to paragraph (d)(2)(i)(B) of this section. Additionally, P2X must also 
report the transaction ID (ghj789) of the sale transaction and the 
digital asset addresses (350 units from 1ss9925 and 150 units from 
2tt8875) from which the digital assets were transferred.
    (E) Example 5: Reporting required by real estate reporting person--
(1) Facts. J, an unmarried individual not otherwise exempt from 
reporting, agrees to exchange with B, an individual not otherwise 
exempt from reporting, J's principal residence, Blackacre, which has a 
fair market value of $225,000 for digital assets with a value of 
$225,000. Prior to closing, J provides CA with the certifications 
required under Sec.  1.6045-4(c)(2)(iv) (to exempt the transaction from 
reporting under Sec.  1.6045-4(a) due to Blackacre being J's principal 
residence). At closing, B transfers the digital assets directly from 
B's wallet to J's wallet. CA is the closing attorney and real estate 
reporting person under Sec.  1.6045-4 with respect to the transaction.
    (2) Analysis. CA is required to report. Although CA is not required 
to file an information report with respect to the gross proceeds 
received by J as a result of the exception to reporting provided under 
Sec.  1.6045-4(c)(2), CA is required to report on the form prescribed 
by the Secretary pursuant to paragraph (d)(2)(i)(B) of this section the 
gross proceeds received by B ($225,000) in exchange for B's sale of 
digital assets in this transaction because B's exchange of digital 
assets for Blackacre is a sale under paragraph (a)(9)(ii)(B) of this 
section and CA is a broker under paragraph (a)(1) of this section 
notwithstanding the exception from reporting to J.
    (F) Example 6: Ordering rule--(1) Facts. On August 1, Year 1, TP 
opens a hosted wallet account at CRX, a digital asset broker that owns 
and operates a digital asset trading platform, and purchases within the 
account 10 units of digital asset DE for $1 per unit. On January 1, 
Year 2, TP opens a hosted wallet account at BEX, another digital asset 
broker that owns and operates a digital asset trading platform, and 
purchases within this account 20 units of digital asset DE for $5 per 
unit. On August 1, Year 3, TP transfers the digital asset units held in 
TP's hosted wallet account with CRX into TP's hosted wallet account 
with BEX. On August 3, Year 3, TP directs BEX to sell 10 units of DE 
but does not specify which units are to be sold. BEX effects the sale 
on TP's behalf for $10 per unit.
    (2) Analysis. TP did not make an adequate identification of the 
units to be sold in a sale of DE units that was less than TP's entire 
position in digital asset DE. Therefore, BEX must treat the units of 
digital asset DE sold according to the ordering rule provided in 
paragraph (d)(2)(ii)(B) of this section. Pursuant to that rule, the 
units sold must be attributed to the earliest units of digital asset DE 
purchased within or transferred into TP's account. Accordingly, the 10 
units sold must be attributed to 10 of the 20 DE units purchased by TP 
on January 1, Year 2, in the BEX account because based on the 
information known to BEX these units were purchased prior to the date 
(August 1, Year 3) when TP transferred the other units purchased at CRX 
into the account.
* * * * *
    (4) Sale date and time--(i) In general. For sales of property that 
are reportable under this section other than digital assets, a broker 
must report a sale as occurring on the date the sale is entered on the 
books of the broker.
    (ii) Special rules for digital asset sales. For sales of digital 
assets that are effected when digitally recorded using 
cryptographically secured distributed ledger technology, such as a 
blockchain or similar technology, the broker must report the date and 
time of sale as the date and time when the transactions are recorded on 
the ledger. For sales of digital assets that are effected on a system 
outside of a blockchain, the broker must report the date and time of 
sale as the date and time when the transactions are recorded on that 
outside system without regard to the date and time that the 
transactions may be later recorded on a blockchain. Unless otherwise 
specified on the form prescribed by the Secretary pursuant to paragraph 
(d)(2)(i)(B) of this section or its instructions, all dates and times 
reported with respect to a digital asset transaction should be set 
forth in hours, minutes, and seconds using Coordinated Universal Time 
(UTC).
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (d)(4). Unless otherwise indicated, all events and 
transactions in the following examples occur after the applicability 
date set forth in paragraph (q) of this section.
    (A) Example 1: Digital assets sale date and time--(1) Facts. J, an 
individual not otherwise exempt from reporting, purchases 500 units of 
digital asset DE in an unhosted wallet. On April 28, Year 1, J 
initiates an exchange of these 500 units of DE for 500 units of ST 
using the services of P2X, a digital asset broker that effects sales of 
digital assets by providing customers with access to automatically 
executing contracts. The completed exchange is recorded on the DE 
blockchain at 10:00:00 a.m. UTC on April 28, Year 1.
    (2) Analysis. Under paragraph (d)(4) of this section, the date and 
time P2X must report with respect to J's sale is April 28, Year 1, at 
10:00:00 a.m. UTC because that is the time the sale transaction was 
recorded on the DE distributed ledger.
    (B) Example 2: Digital assets sale date and time--(1) Facts. The 
facts are the same as in paragraph (d)(4)(iii)(A)(1) of

[[Page 59643]]

this section (the facts in Example 1), except J initiates the exchange 
on December 31, Year 1, at 10:00:00 p.m. Eastern Standard Time (EST), 
which is the time zone J was in at the time of the exchange. The 
completed exchange is recorded on the DE blockchain at 3:00:00 a.m. UTC 
on January 1, Year 2.
    (2) Analysis. Under paragraph (d)(4) of this section, P2X must 
report the date and time of the transaction using UTC time. Because the 
transaction was recorded at 3:00:00 a.m. UTC on January 1, Year 2, P2X 
must report J's sale in calendar year of Year2 as of that UTC date and 
time and not in calendar year of Year 1.
    (C) Example 3: Digital assets sale date and time--(1) Facts. TRX is 
a digital asset broker that also provides hosted wallet services. As 
part of TRX's regular operations, TRX does not record customer 
purchases of DE on the DE blockchain, but instead holds all digital 
assets in a TRX omnibus account. TRX, in turn, keeps a centralized 
record on which it allocates digital assets held on behalf of each of 
its customers. On January 1, Year 1, K, an individual not otherwise 
exempt from reporting, purchases 100 units of digital asset DE in a 
hosted wallet account at TRX. On March 9, Year 4, K directs TRX to 
sell, and TRX sells, the 100 units of DE. TRX does not record K's sale 
on the DE blockchain, but instead debits from K's account the 100 units 
of DE previously allocated to K's account. TRX's records reflect that 
this debit was recorded on March 9, Year 4, at 10:45:00 a.m. UTC.
    (2) Analysis. Under paragraph (d)(4) of this section, the date and 
time TRX must report with respect to K's sale is March 9, Year 4, at 
10:45:00 a.m. UTC because that is the time the sale transaction was 
recorded on TRX's internal records.
    (D) Example 4: Information reporting required--(1) Facts. The facts 
are the same as in paragraph (d)(4)(iii)(C)(1) of this section (the 
facts in Example 3), except TRX keeps its records using Eastern 
Standard Time (EST), and those records reflect that the debited units 
associated with K's transaction was recorded on March 9, Year 4, at 
9:45:00 a.m. EST.
    (2) Analysis. Under paragraph (d)(4) of this section, TRX must 
convert the time recorded in its records using EST into UTC time. 
Because 9:45:00 a.m. EST on March 9, Year 4, is equivalent to 2:45:00 
p.m. UTC, the date and time TRX must report with respect to K's sale is 
March 9, Year 4, at 2:45:00 p.m. UTC.
    (5) Gross proceeds--(i) In general. Except as otherwise provided in 
paragraph (d)(5)(ii) of this section with respect to digital asset 
sales, for purposes of this section, gross proceeds on a sale are the 
total amount paid to the customer or credited to the customer's account 
as a result of the sale reduced by the amount of any qualified stated 
interest reported under paragraph (d)(3) of this section and increased 
by any amount not paid or credited by reason of repayment of margin 
loans. In the case of a closing transaction (other than a closing 
transaction related to an option) that results in a loss, gross 
proceeds are the amount debited from the customer's account. For sales 
before January 1, 2014, a broker may, but is not required to, reduce 
gross proceeds by the amount of commissions and transfer taxes, 
provided the treatment chosen is consistent with the books of the 
broker. For sales on or after January 1, 2014, a broker must reduce 
gross proceeds by the amount of commissions and transfer taxes related 
to the sale of the security. For securities sold pursuant to the 
exercise of an option granted or acquired before January 1, 2014, a 
broker may, but is not required to, take the option premiums into 
account in determining the gross proceeds of the securities sold, 
provided the treatment chosen is consistent with the books of the 
broker. For securities sold pursuant to the exercise of an option 
granted or acquired on or after January 1, 2014, or for the treatment 
of an option granted or acquired on or after January 1, 2014, see 
paragraph (m) of this section. A broker must report the gross proceeds 
of identical stock (within the meaning of Sec.  1.1012-1(e)(4)) by 
averaging the proceeds of each share if the stock is sold at separate 
times on the same calendar day in executing a single trade order and 
the broker executing the trade provides a single confirmation to the 
customer that reports an aggregate total price or an average price per 
share. However, a broker may not average the proceeds if the customer 
notifies the broker in writing of an intent to determine the proceeds 
of the stock by the actual proceeds per share and the broker receives 
the notification by January 15 of the calendar year following the year 
of the sale. A broker may extend the January 15 deadline but not beyond 
the due date for filing the return required under this section.
    (ii) Sales of digital assets. The rules contained in paragraphs 
(d)(5)(ii)(A) through (D) of this section apply solely for purposes of 
this section.
    (A) In general. Except as otherwise provided in this section, gross 
proceeds from the sale of a digital asset are equal to the sum of the 
total amount in U.S. dollars paid to the customer or credited to the 
customer's account from the sale plus the fair market value of any 
property or services received (including services giving rise to 
digital asset transaction costs), reduced by the amount of digital 
asset transaction costs, as defined and allocated under paragraph 
(d)(5)(iv) of this section. In the case of a debt instrument issued in 
exchange for the digital asset and subject to Sec.  1.1001-1(g), the 
amount realized attributable to the debt instrument is determined under 
Sec.  1.1001-7(b)(1)(iv) rather than by reference to the fair market 
value of the debt instrument. See paragraph (d)(5)(iv) of this section 
for a special rule setting forth how digital asset transaction costs 
are to be allocated in an exchange of one digital asset for a different 
digital asset. Fair market value is measured at the date and time the 
transaction was effected. Except as provided in the next sentence, in 
determining the fair market value of services or property received or 
credited in exchange for a digital asset, the broker must use a 
reasonable valuation method that looks to contemporaneous evidence of 
value, such as the purchase price of the services, goods or other 
property, the exchange rate, and the U.S. dollar valuation applied by 
the broker to effect the exchange. In determining the fair market value 
of services giving rise to digital asset transaction costs, the broker 
must look to the fair market value of the digital assets used to pay 
for such transaction costs.
    In determining the fair market value of a digital asset, the broker 
may perform its own valuations or rely on valuations performed by a 
digital asset data aggregator as defined in paragraph (d)(5)(ii)(D) of 
this section, provided such valuations apply a reasonable valuation 
method for digital assets as described in paragraph (d)(5)(ii)(C) of 
this section.
    (B) Consideration value not readily ascertainable. When valuing 
services or property (including digital assets) received in exchange 
for a digital asset, the value of what is received should ordinarily be 
identical to the value of the digital asset exchanged. If there is a 
disparity between the value of services or property received and the 
value of the digital asset exchanged, the gross proceeds received by 
the customer is the fair market value at the date and time the 
transaction was effected of the services or property, including digital 
assets, received. If the broker or digital asset data aggregator, in 
the case of digital assets, reasonably determines that the fair market 
value of the services or property received cannot be determined with 
reasonable accuracy, the fair market value of the received

[[Page 59644]]

services or property must be determined by reference to the fair market 
value of the transferred digital asset at the time of the exchange. See 
Sec.  1.1001-7(b)(4). If the broker or digital asset data aggregator, 
in the case of a digital asset, reasonably determines that neither the 
value of the received services or property nor the value of the 
transferred digital asset can be determined with reasonable accuracy, 
the broker must report that the received services or property has an 
undeterminable value.
    (C) Reasonable valuation method for digital assets. A reasonable 
valuation method for digital assets is a method that considers and 
appropriately weighs the pricing, trading volumes, market 
capitalization and other factors relevant to the valuation of digital 
assets traded through digital asset trading platforms. A valuation 
method is not a reasonable valuation method for digital assets if it, 
for example, gives an underweight effect to exchange prices lying near 
the median price value, an overweight effect to digital asset trading 
platforms having low trading volume, or otherwise inappropriately 
weighs factors associated with a price that would make that price an 
unreliable indicator of value.
    (D) Digital asset data aggregator. A digital asset data aggregator 
is an information service provider that provides valuations of digital 
assets based on any reasonable valuation method.
    (iii) Digital asset transactions effected by digital asset payment 
processors. The amount of gross proceeds under paragraph (d)(5)(ii) of 
this section received by a party who sells a digital asset through a 
digital asset payment processor is equal to: the sum of the amount paid 
in cash, or the fair market value of the amount paid in digital assets 
by that digital asset payment processor to a second party, plus any 
digital asset transaction costs withheld (whether withheld from the 
digital assets transferred by first party or withheld from the amount 
due to the second party); and reduced by the amount of digital asset 
transaction costs paid by or withheld from the first party, as defined 
and allocated under the rules of paragraph (d)(5)(iv) of this section. 
For purposes of this paragraph (d)(5)(iii), if a digital asset payment 
processor transfers digital assets to a second person pursuant to a 
processor agreement that temporarily fixes the exchange rate in a 
transaction described in paragraph (a)(22)(ii) of this section, the 
fair market value of the amount paid in digital assets is the amount 
determined by reference to the fixed exchange rate.
    (iv) Allocation of digital asset transaction costs. The term 
digital asset transaction costs means the amount paid in cash or 
property (including digital assets) to effect the disposition or 
acquisition of a digital asset. Digital asset transaction costs include 
transaction fees, transfer taxes, and commissions. Except as provided 
in the following sentence, in the case of a sale or disposition of 
digital assets, the total digital asset transaction costs paid by the 
customer are allocable to the disposition of the digital assets. In an 
exchange of one digital asset for another digital asset differing 
materially in kind or in extent, one-half of any digital asset 
transaction costs paid by the customer in cash or property to effect 
the exchange is allocable to the disposition of the transferred digital 
asset and the other half of such costs is allocable to the acquisition 
of the received digital asset.
    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(5). Unless otherwise indicated, all events and 
transactions in the following examples occur after the applicability 
date set forth in paragraph (q) of this section.
    (A) Example 1: Determination of gross proceeds--(1) Facts. CRX, a 
digital asset broker, buys, sells, and exchanges various digital assets 
for cash or different digital assets on behalf of its customers. For 
this service, CRX charges a transaction fee equal to 1 unit of CRX's 
proprietary digital asset CM per transaction. Using the services of 
CRX, customer K, an individual not otherwise exempt from reporting, 
purchases 15 units of CM and 10 units of digital asset DE. On April 28, 
Year 1, when the CM units have a value of $2 per unit, the DE units 
have a value of $8 per unit, and digital asset ST units have a value of 
$0.80 per unit, K instructs CRX to exchange K's 10 units of DE for 100 
units of digital asset ST. CRX charges K one unit of CM as a 
transaction fee for the exchange.
    (2) Analysis. Under paragraph (d)(5)(iv) of this section, K has 
digital asset transaction costs of $2, which is the value of 1 CM unit. 
Under paragraph (d)(5)(ii)(A) of this section, the gross proceeds 
amount that CRX must report from K's sale of the 10 units of DE is 
equal to the fair market value of the 100 units of ST that K received 
(less one-half of the value of the CM unit sold to pay the digital 
asset transaction cost to CRX). The fair market value of the 100 units 
of ST at the date and time the transaction was effected is equal to $80 
(the product of $0.80 and 100 units). One-half of such costs ($1) is 
allocable to the sale of the DE units. Accordingly, CRX must report 
gross proceeds of $79 from K's sale of the 10 units of DE. CRX must 
also report the gross proceeds from K's sale of one CM unit to pay for 
CRX's services. Under paragraph (d)(5)(ii)(A) of this section, the 
gross proceeds from K's sale of one unit of CM is equal to the fair 
market value of the digital assets used to pay for such transaction 
costs. Accordingly, CRX must report $2 as gross proceeds from K's sale 
of one unit of CM.
    (B) Example 2: Determination of gross proceeds--(1) Facts. CPP, a 
digital asset payment processor, offers debit cards to its customers 
who hold digital asset FE in their accounts with CPP. The debit cards 
allow CPP's customers to use digital assets held in accounts with CPP 
to make payments to merchants who do not accept digital assets. CPP 
charges its card holders a 2% transaction fee for purchases made using 
the debit card and sets forth in its terms and conditions the process 
CPP will use to determine the exchange rate provided at the date and 
time of its customers' transactions. CPP has issued a debit card to B, 
an individual not otherwise exempt from reporting, who wants to make 
purchases using digital assets. B transfers 1,000 units of FE into B's 
account with CPP. B then uses the debit card to purchase merchandise 
from a U.S. retail merchant STR for $1,000. An exchange rate of 1 FE = 
$2 USD is applied to effect the transaction, based on the exchange rate 
at that date and time and pursuant to B's account agreement. To settle 
the transaction, CPP removes 510 units of FE from B's account equal to 
$1,020 ($1,000 plus a 2% transaction fee equal to $20). CPP then pays 
STR $1,000 in cash.
    (2) Analysis. Under paragraph (d)(5)(iv) of this section, B has 
digital asset transaction costs of $20. Under paragraph (d)(5)(iii) of 
this section, the gross proceeds amount that CPP must report with 
respect to B's sale of the 510 units of FE to purchase the merchandise 
is $1,000, which is the sum of the amount of cash paid by CPP to STR 
plus the $20 digital asset transaction costs paid by B, reduced by the 
$20 digital asset transaction costs paid by B. CPP's payment of cash to 
STR is also a payment card transaction under Sec.  1.6050W-1(b) subject 
to reporting under Sec.  1.6050W-1(a).
    (C) Example 3: Determination of gross proceeds--(1) Facts. STR, a 
U.S. retail corporation, advertises that it accepts digital asset FE as 
payment for its merchandise. Customers making purchases at STR using 
digital asset FE are directed to create an account with digital asset 
payment processor CXX, which, pursuant to a preexisting

[[Page 59645]]

agreement with STR, accepts digital asset FE in return for payments in 
cash made to STR. CXX charges a 2% transaction fee, which is paid by 
STR and not STR's customers. S, an individual not otherwise exempt from 
reporting, seeks to purchase merchandise from STR for $1,000. To effect 
payment, S is directed by STR to CXX, with whom S has an account. An 
exchange rate of 1 FE = $2 USD is applied to effect the purchase 
transaction. Pursuant to this exchange rate, S then transfers 500 units 
of FE to CXX, which, in turn, pays STR $980 ($1,000 less a 2% 
transaction fee equal to $20).
    (2) Analysis. Under paragraph (d)(5)(iii) of this section, the 
gross proceeds amount that CXX must report with respect to this sale is 
$1,000, which is the sum of the amount in U.S. dollars paid by CPP to 
STR ($980) plus the $20 digital asset transaction costs withheld from 
the payment due to STR. Under paragraph (d)(5)(iv) of this section, S 
has no allocable digital asset transaction costs. Therefore, the $980 
amount is not reduced by any digital asset transaction costs charged to 
STR because that fee was not paid by S. In addition, CXX's payment of 
cash to STR (plus the withheld transaction fee) may be reportable under 
Sec.  1.6050W-1(a) as a third party network transaction under Sec.  
1.6050W-1(c) if CXX is a third party settlement organization under the 
definition in Sec.  1.6050W-1(c)(2).
    (D) Example 4: Determination of gross proceeds in a real estate 
transaction--(1) Facts. J, an unmarried individual not otherwise exempt 
from reporting, agrees to exchange with B, an individual not otherwise 
exempt from reporting, J's principal residence, Blackacre, which has a 
fair market value of $300,000 for cash in the amount of $75,000 and 
digital assets with a value of $225,000. At closing, B transfers the 
digital assets directly from B's wallet to J's wallet. CA is the 
closing attorney, real estate reporting person under Sec.  1.6045-4, 
and broker under paragraph (a)(1) of this section with respect to the 
transaction.
    (2) Analysis. CA is required to report on the form prescribed by 
the Secretary pursuant to paragraph (d)(2)(i)(B) of this section the 
gross proceeds received by B in exchange for B's sale of digital assets 
in this transaction. The gross proceeds amount to be reported under 
paragraph (d)(5)(ii)(A) of this section is equal to $225,000, which is 
the $300,000 value of Blackacre less $75,000 that B paid in cash. In 
addition, under Sec.  1.6045-4, CA is required to report on Form 1099-S 
the $300,000 of gross proceeds received by J ($75,000 cash and $225,000 
in digital assets) as consideration for J's disposition of Blackacre.
    (6) * * *
    (i) * * * For purposes of this section, the adjusted basis of a 
specified security is determined from the initial basis under paragraph 
(d)(6)(ii) of this section as of the date the specified security is 
acquired in an account, increased by the commissions and transfer taxes 
related to its sale to the extent not accounted for in gross proceeds 
as described in paragraph (d)(5) of this section. A broker is not 
required to consider transactions or events occurring outside the 
account except for an organizational action taken by an issuer of a 
specified security other than a digital asset during the period the 
broker holds custody of the security (beginning with the date that the 
broker receives a transferred security) reported on an issuer statement 
(as described in Sec.  1.6045B-1) furnished or deemed furnished to the 
broker. * * *
    (ii) * * *
    (A) Cost basis for specified securities acquired for cash. For a 
specified security acquired for cash, the initial basis generally is 
the total amount of cash paid by the customer or credited against the 
customer's account for the specified security, increased by the 
commissions, transfer taxes, and digital asset transaction costs 
related to its acquisition. * * *
* * * * *
    (C) Digital assets acquired in exchange for property--(1) In 
general. This paragraph (d)(6)(ii)(C) applies solely for purposes of 
this section. For a digital asset acquired in exchange for property 
that is not a debt instrument described in Sec.  1.1012-1(h)(1)(v), the 
initial basis of the digital asset is the fair market value of the 
digital asset received at the time of the exchange, increased by any 
digital asset transaction costs allocable to the acquisition of the 
digital asset pursuant to the rules under paragraph (d)(6)(ii)(C)(2) of 
this section. The fair market value of the digital asset received must 
be determined using a reasonable valuation method as of the date and 
time the exchange transaction was effected. In valuing the digital 
asset received, the broker may perform its own valuations or rely on 
valuations performed by a digital asset data aggregator as defined in 
paragraph (d)(5)(ii)(D) of this section, provided such valuations apply 
a reasonable valuation method for digital assets as described in 
paragraph (d)(5)(ii)(C) of this section. If the broker or digital asset 
data aggregator reasonably determines that the fair market value of the 
digital asset received cannot be determined with reasonable accuracy, 
the fair market value of the digital asset received must be determined 
by reference to the property transferred at the time of the exchange. 
If the broker or digital asset data aggregator reasonably determines 
that neither the value of the digital asset received nor the value of 
the property transferred can be determined with reasonable accuracy, 
the fair market value of the received digital asset must be treated as 
zero. For a digital asset acquired in exchange for a debt instrument 
described in Sec.  1.1012-1(h)(1)(v), the initial basis of the digital 
asset attributable to the debt instrument is the amount determined 
under Sec.  1.1012-1(h)(1)(v).
    (2) Allocation of digital asset transaction costs. Except as 
provided in the following sentence, in the case of an acquisition of 
digital assets, the total digital asset transaction costs paid by the 
customer are allocable to the digital assets received. In an exchange 
of one digital asset for a different digital asset differing materially 
in kind or in extent, one-half of the total digital asset transaction 
costs paid by the customer in cash or property to effect the exchange 
is allocable to the disposition of the transferred digital asset and 
one-half of such costs is allocable to the acquisition of the received 
digital asset for the purpose of determining basis.
    (iii) * * *
    (A) * * * A broker must apply the wash sale rules under section 
1091 of the Code if both the sale and purchase transactions are of 
covered securities described in paragraphs (a)(15)(i)(A) through (G) of 
this section with the same CUSIP number or other security identifier 
number that the Secretary may designate by publication in the Federal 
Register or in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) 
of this chapter). * * *
* * * * *
    (x) Examples. The following examples illustrate the rules of 
paragraphs (d)(5) and (6) of this section as applied to digital assets. 
Unless otherwise indicated, all events and transactions in the 
following examples occur using the services of CRX, an entity that owns 
and operates a digital asset trading platform and provides digital 
asset broker and hosted wallet services. In performing these services, 
CRX holds and records all customer purchase and sale transactions using 
CRX's centralized omnibus account. CRX does not record any of its 
customer's purchase or sale transactions on the relevant 
cryptographically secured distributed ledgers. Additionally, unless 
otherwise

[[Page 59646]]

indicated, all events and transactions in the following examples occur 
after the applicability date for reporting acquisition information set 
forth in paragraph (d)(2)(i)(C) of this section.
    (A) Example 1: Determination of basis in digital assets--(1) Facts. 
As a digital asset broker, CRX generally charges transaction fees equal 
to 1 unit of CRX's proprietary digital asset CM per transaction. CRX 
does not, however, charge transaction fees for the purchase of CM. On 
March 9, Year 1, K, an individual not otherwise exempt from reporting, 
purchases 20 units of CM for $20 in K's account at CRX. A week later, 
on March 16, Year 1, K uses CRX's services to purchase 10 units of 
digital asset DE for $80 in cash. To pay for CRX's transaction fee, K 
directs CRX to debit 1 unit of CM (worth $1 at the time of transfer) 
from K's account.
    (2) Analysis. The units of CM purchased by K are covered securities 
under paragraph (a)(15)(i) of this section because they were purchased 
in K's account at CRX by a broker (CRX) providing hosted wallet 
services. Accordingly, under paragraphs (d)(2)(i)(B) and (C) of this 
section, CRX must report the disposition by K of 1 unit of CM as a sale 
by K. The gross proceeds from that sale is equal to the fair market 
value of the CM units on March 16, Year 1 ($1), and the adjusted basis 
of that unit is equal to the amount K paid in cash for the CM unit on 
March 9, Year 1 ($1). This reporting is required regardless of the fact 
that there is $0 of gain or loss associated with this sale. 
Additionally, K's adjusted basis in the 10 units of DE acquired is 
equal to the initial basis in DE, $80 plus the $1 value of 1 unit of CM 
paid as a digital asset transaction cost for the purchase of the DE 
units.
    (B) Example 2: Determination of basis in digital assets--(1) Facts. 
The facts are the same as in paragraph (d)(6)(x)(A)(1) of this section 
(the facts in Example 1), except that on June 12, Year 2, K instructs 
CRX to exchange K's 10 units of DE for 50 units of digital asset ST. 
CRX effects this exchange using its own omnibus account holdings of ST 
at an exchange rate of 1 DE = 5 ST. The total value of the 50 units of 
ST received by K is $100. K directs CRX to debit 1 CM unit (worth $2 at 
the time of the transfer) from K's account to pay CRX for the 
transaction fee.
    (2) Analysis. Under paragraph (d)(5)(iv) of this section, K has 
digital asset transaction costs of $2, which is the value of 1 unit of 
CM. Under paragraphs (d)(2)(i)(B) and (C) of this section, CRX must 
report the gross proceeds from K's exchange of DE for ST (as a sale of 
K's 10 units of DE) and the gross proceeds from K's disposition of 1 
unit of CM for CRX's services. Additionally, because the units of DE 
and CM were purchased in K's account at CRX by a broker (CRX) providing 
hosted wallet services, the units of DE and CM are covered securities 
under paragraph (a)(15)(i) of this section, and CRX must report K's 
adjusted basis in the 10 units of DE and 1 unit of CM. Under paragraph 
(d)(5)(ii)(A) of this section, the gross proceeds from K's sale of the 
DE units is $99 (the fair market value of the 50 units of ST that K 
received less one-half of the $2 digital asset transaction costs paid 
by K, or $1, paid in CM), that is allocable to the sale of the DE 
units. The gross proceeds from K's sale of the single unit of CM is $2. 
Under paragraph (d)(6) of this section, K's adjusted basis in the 10 
units of DE is $81, resulting in a long-term capital gain to K of $18 
($99-$81). K's adjusted basis in the ST units under paragraph 
(d)(6)(ii)(C) of this section is equal to the initial basis in ST, 
which is $101.
    (C) Example 3: Basis reporting for digital assets--(1) Facts. On 
August 26, 2023, Customer P purchases 10 units of DE for $2 per unit in 
cash in an account at CRX. CRX charges P a fixed transaction fee of $5 
in cash for the exchange. DE is a digital representation of value, the 
transfer of which is recorded on Blockchain DE, a cryptographically 
secured distributed ledger. On October 26, 2027, P directs CRX to 
exchange P's 10 units of DE for units of digital asset FG. At the time 
of the exchange, CRX determines that each unit of DE has a fair market 
value of $100 and each unit of FG has a fair market value of $50. As a 
result of this determination, CRX effects an exchange of P's 10 units 
of DE for 20 units of FG. CRX charges P a fixed transaction fee of $20 
in cash for the exchange.
    (2) Analysis. DE is a digital asset under paragraph (a)(19) of this 
section because it is a digital representation of value that is 
recorded on a cryptographically secured distributed ledger and, 
therefore, a specified security under paragraph (a)(14)(v) of this 
section. Because the 10 units of DE that P exchanged for FG through CRX 
were acquired in an account at CRX on August 26, 2023, which is after 
January 1, 2023, these units are covered securities under paragraph 
(a)(15)(i)(J) of this section. Under paragraph (d)(5)(iv) of this 
section, P has digital asset transaction costs of $20. For the 
transaction that took place on October 26, 2027, under paragraph 
(d)(2)(i)(B) of this section, CRX must report the amount of gross 
proceeds from the sale of DE in the amount of $990 (the $1,000 fair 
market value of FG received on the date and time of transfer, less one-
half of the digital asset transaction costs of $20, or $10 allocated to 
the sale). CRX must also report the $10 digital asset transaction costs 
allocated to the sale. Additionally, CRX must also report the adjusted 
basis of P's DE units under paragraph (d)(2)(i)(C) of this section 
because they are covered securities. Under paragraph (d)(6)(ii)(C) of 
this section, the adjusted basis of P's DE units is equal to $25, which 
the $20 paid in cash for the 10 units increased by the $5 digital asset 
transaction costs allocable to that purchase. Finally, P's adjusted 
basis in the 20 units of FG is equal to the fair market value of the FG 
received, $1,000, plus one-half of the $20 transaction fee, or $10, 
which is allocated under paragraph (d)(6)(ii)(C)(2) of this section to 
the acquisition of P's FG units.
* * * * *
    (e) * * *
    (2) * * *
    (iii) Coordination rules for exchanges of digital assets made 
through barter exchanges. Exchange transactions involving the exchange 
of one digital asset held by one customer of a broker for a different 
digital asset held by a second customer of the same broker must be 
treated as a sale under paragraph (a)(9)(ii) of this section subject to 
reporting under paragraphs (c) and (d) of this section, and not as an 
exchange of personal property through a barter exchange subject to 
reporting under paragraphs (e) and (f) of this section, with respect to 
both customers involved in the exchange transaction. In the case of an 
exchange transaction that involves the transfer of a digital asset for 
personal property or services that are not also digital assets, if the 
digital asset payment also is a reportable payment transaction subject 
to reporting by the barter exchange under Sec.  1.6050W-1(a)(1), the 
exchange transaction must be treated as a reportable payment 
transaction and not as an exchange of personal property through a 
barter exchange subject to reporting under paragraphs (e) and (f) of 
this section with respect to the member or client disposing of personal 
property or services. Additionally, an exchange transaction described 
in the previous sentence must be treated as a sale under paragraph 
(a)(9)(ii)(D) of this section subject to reporting under paragraphs (c) 
and (d) of this section and not as an exchange of personal property 
through a barter exchange subject to reporting under paragraphs (e) and 
(f) of this section with respect to the member or client disposing of 
the digital asset. Nothing in this paragraph (e)(2)(iii) may

[[Page 59647]]

be construed to mean that any broker is or is not properly classified 
as a barter exchange.
* * * * *
    (g) * * *
    (1) * * * No return of information is required to be made by a 
broker with respect to a customer who is considered to be an exempt 
foreign person under paragraphs (g)(1)(i) through (iii) or paragraph 
(g)(4) of this section. See paragraph (a)(1) of this section for when a 
person is not treated as a broker under this section for a sale 
effected at an office outside the United States. See paragraphs 
(g)(1)(i) through (g)(3) of this section for rules relating to sales as 
defined in paragraph (a)(9)(i) of this section and see paragraph (g)(4) 
of this section for rules relating to sales of digital assets.
* * * * *
    (2) Barter exchange. No return of information is required by a 
barter exchange under the rules of paragraphs (e) and (f) of this 
section with respect to a client or a member that the barter exchange 
may treat as an exempt foreign person pursuant to the procedures 
described in paragraph (g)(1) of this section.
    (3) * * *
    (iii) * * *
    (A) * * * For purposes of this paragraph (g), a sale as defined in 
paragraph (a)(9)(i) of this section (relating to sales other than sales 
of digital assets) is considered to be effected by a broker at an 
office outside the United States if, in accordance with instructions 
directly transmitted to such office from outside the United States by 
the broker's customer, the office completes the acts necessary to 
effect the sale outside the United States. * * *
* * * * *
    (4) Rules for sales of digital assets. The rules of this paragraph 
(g)(4) apply to a sale of a digital asset as defined in paragraph 
(a)(9)(ii) of this section. See paragraph (a)(1) of this section for 
when a person is treated as a broker under this section with respect to 
a sale of a digital asset. See paragraph (c) of this section for rules 
requiring brokers to report sales. See paragraph (g)(1) of this section 
providing that no return of information is required to be made by a 
broker effecting a sale of a digital asset for a customer who is 
considered to be an exempt foreign person under this paragraph (g)(4).
    (i) Definitions. The following definitions apply for purposes of 
this section.
    (A) U.S. digital asset broker. A U.S. digital asset broker is a 
U.S. payor or U.S. middleman as defined in Sec.  1.6049-5(c)(5), other 
than a controlled foreign corporation within the meaning of Sec.  
1.6049-5(c)(5)(i)(C), that effects sales of digital assets on behalf of 
others.
    (B) CFC digital asset broker. A CFC digital asset broker is a 
controlled foreign corporation within the meaning of Sec.  1.6049-
5(c)(5)(i)(C) that effects sales of digital assets on behalf of others.
    (C) Non-U.S. digital asset broker. A non-U.S. digital asset broker 
is a non-U.S. payor or non-U.S. middleman as defined in Sec.  1.6049-
5(c)(5) that effects sales of digital assets on behalf of others.
    (D) Conducting activities as a money services business. A CFC 
digital asset broker or a non-U.S. digital asset broker is conducting 
activities as a money services business (conducting activities as a 
money services business (MSB)) under this paragraph (g)(4) with respect 
to its sales of digital assets, except as provided in the next 
sentence, if it is registered with the Department of the Treasury under 
31 CFR 1022.380 or any successor guidance as an MSB, as defined in 31 
CFR 1010.100(ff) or any successor guidance. Notwithstanding any 
registration as an MSB described in the preceding sentence, solely for 
purposes of this paragraph (g)(4), CFC digital asset brokers and non-
U.S. digital asset brokers may not be treated as conducting activities 
as an MSB with respect to any sale of a digital asset that is effected 
by that broker on behalf of a customer at a foreign kiosk to the extent 
provided in paragraph (g)(4)(i)(E) of this section.
    (E) Foreign kiosk. A foreign kiosk means a physical electronic 
terminal that is located outside the United States and is owned or 
operated by a CFC digital asset broker or a non-U.S. digital asset 
broker that is not required under the Bank Secrecy Act to implement an 
anti-money laundering program (AML program), file reports, or otherwise 
comply with requirements for MSBs under the Bank Secrecy Act with 
respect to sales effected on behalf of its customers at the foreign 
kiosk.
    (ii) Rules for U.S. digital asset brokers--(A) Place of effecting 
sale. For purposes of this section, a sale of a digital asset that is 
effected by a U.S. digital asset broker is considered a sale effected 
at an office inside the United States.
    (B) Determination of foreign status. A U.S. digital asset broker 
may treat a customer as an exempt foreign person with respect to a sale 
effected at an office inside the United States provided that, prior to 
the payment to such customer of the gross proceeds from the sale, the 
broker has a beneficial owner withholding certificate described in 
Sec.  1.1441-1(e)(2)(i) that the broker may treat as valid under Sec.  
1.1441-1(e)(2)(ii) and that satisfies the requirements of paragraph 
(g)(4)(vi) of this section. Additionally, a U.S. digital asset broker 
may treat a customer as an exempt foreign person with respect to a sale 
effected at an office inside the United States under an applicable 
presumption rule as provided in paragraph (g)(4)(vi)(A)(2) of this 
section. A beneficial owner withholding certificate provided by an 
individual must include a certification that the beneficial owner has 
not been, and at the time the certificate is furnished reasonably 
expects not to be, present in the United States for a period 
aggregating 183 days or more during each calendar year to which the 
certificate pertains. See paragraphs (g)(4)(vi)(A) through (D) of this 
section for additional rules applicable to withholding certificates, 
when a broker may rely on a withholding certificate, presumption rules 
that apply in the absence of documentation, and rules for customers 
that are joint account holders. See paragraph (g)(4)(vi)(E) of this 
section for the extent to which a U.S. digital asset broker may treat a 
customer as an exempt foreign person with respect to a payment treated 
as made to a foreign intermediary, flow-through entity or certain U.S. 
branches. See paragraph (g)(4)(vi)(F) of this section for a transition 
rule for preexisting accounts.
    (iii) Rules for CFC digital asset brokers not conducting activities 
as MSBs. This paragraph (g)(4)(iii) applies to CFC digital asset 
brokers that are not conducting activities as MSBs. See paragraph 
(g)(4)(v) of this section for rules applicable to CFC digital asset 
brokers that are conducting activities as MSBs.
    (A) Place of effecting sale. For purposes of this section, a sale 
of a digital asset that is effected by a CFC digital asset broker 
subject to the rules of this paragraph (g)(4)(iii) is considered to be 
effected at an office outside the United States. See Sec.  31.3406(g)-
1(e) of this chapter for an exception to backup withholding on gross 
proceeds from a sale of a digital asset effected at an office outside 
the United States by a CFC digital asset broker unless the broker has 
actual knowledge that the payee is a U. S. person.
    (B) Determination of foreign status. A CFC digital asset broker 
subject to the rules of this paragraph (g)(4)(iii) may treat a customer 
as an exempt foreign person with respect to a sale provided that, prior 
to the payment to such customer of the gross proceeds from the sale, 
the broker has either a beneficial owner withholding certificate 
described in paragraph (g)(4)(ii)(B) of this section

[[Page 59648]]

or the documentary evidence described in Sec.  1.1471-3(c)(5)(i) to 
support the customer's foreign status, pursuant to the requirements of 
paragraph (g)(4)(vi) of this section. Additionally, a CFC digital asset 
broker may treat the customer as an exempt foreign person with respect 
to a sale under an applicable presumption rule as provided in paragraph 
(g)(4)(vi)(A)(2) of this section. See paragraphs (g)(4)(vi)(A) through 
(D) of this section for additional rules applicable to withholding 
certificates and documentary evidence, when a broker may rely on 
documentation, presumption rules that apply in the absence of 
documentation, and rules for customers that are joint account holders. 
See paragraph (g)(4)(vi)(E) of this section for the extent to which a 
CFC digital asset broker subject to the rules of this paragraph 
(g)(4)(iii) may treat a customer as an exempt foreign person with 
respect to a payment treated as made to a foreign intermediary, flow-
through entity or certain U.S. branches. See paragraph (g)(4)(vi)(F) of 
this section for a transition rule for preexisting accounts.
    (iv) Rules for non-U.S. digital asset brokers not conducting 
activities as MSBs. This section applies to non-U.S. digital asset 
brokers that are not conducting activities as MSBs. See paragraph 
(g)(4)(v) of this section for rules applicable to non-U.S. digital 
asset brokers that are conducting activities as MSBs.
    (A) Sale outside the United States. For purposes of this section 
and except as provided in paragraph (g)(4)(iv)(B) of this section, a 
digital asset sale that is effected by a non-U.S. digital asset broker 
subject to the rules of this paragraph (g)(4)(iv) is considered to be 
effected at an office outside the United States.
    (B) Sale treated as effected at an office inside the United States 
as a result of U.S. indicia. For purposes of this section, a sale that 
is otherwise considered to be effected at an office outside the United 
States under paragraph (g)(4)(iv)(A) of this section by a non-U.S. 
digital asset broker must nevertheless be considered to be effected by 
that broker at an office inside the United States if, before the sale 
is effected, the broker collects documentation or has other information 
that is part of the broker's account information for the customer 
(including information collected with respect to the customer pursuant 
to the broker's compliance with applicable AML program requirements 
that show any of the following indicia (referred to in this paragraph 
(g)(4) as U.S. indicia)):
    (1) A customer's communication with the broker using a device (such 
as a computer, smart phone, router, or server) that the broker has 
associated with an internet Protocol (IP) address or other electronic 
address indicating a location within the United States;
    (2) A permanent residence address (as defined in Sec.  1.1441-
1(c)(38)) in the U.S. or a U.S. mailing address for the customer, a 
current U.S. telephone number and no non-U.S. telephone number for the 
customer, or the broker's classification of the customer as a U.S. 
person in its records;
    (3) Cash paid to the customer by a transfer of funds into an 
account maintained by the customer in the United States, or cash 
deposited with the broker by a transfer of funds from such an account, 
or if the customer's account is linked to a bank or financial account 
maintained within the United States. For purposes of the preceding 
sentence, an account maintained by the customer in the United States 
includes an account at a bank or financial institution maintained 
within the United States but does not include an international account 
as defined in Sec.  1.6049-5(e)(4);
    (4) One or more digital asset deposits into the customer's account 
at the broker were transferred from, or one or more digital asset 
withdrawals from the customer's account were transferred to, a digital 
asset broker that the broker knows or has reason to know to be 
organized within the United States, or the customer's account is linked 
to a digital asset broker that the broker knows or has reason to know 
to be organized within the United States; or
    (5) An unambiguous indication of a U.S. place of birth for the 
customer.
    (C) Consequences of treatment as sale effected at an office inside 
the United States. If a non-U.S. digital asset broker subject to the 
rules of this paragraph (g)(4)(iv) is required to treat a sale as 
effected at an office inside the United States pursuant to paragraph 
(g)(4)(iv)(B) of this section, the broker is required to report the 
sale to the extent required by paragraph (c) of this section unless the 
broker determines the customer is an exempt foreign person. See, 
however, Sec.  31.3406(g)-1(e) of this chapter for an exception to 
backup withholding on gross proceeds from a sale of a digital asset 
effected by a non-U.S. digital asset broker that is not conducting 
activities as an MSB unless the broker has actual knowledge that the 
payee is a U.S. person. The broker can treat the customer as an exempt 
foreign person if it obtains documentation permitted under paragraph 
(g)(4)(iv)(D) of this section and applies the rules of paragraphs 
(g)(4)(vi)(A) through (D) of this section with respect to the 
documentation, or when the broker may treat the customer as an exempt 
foreign person under an applicable presumption rule as provided in 
paragraph (g)(4)(vi)(A)(2) of this section. In applying paragraph 
(g)(4)(vi)(B) (relating to reliance on beneficial owner withholding 
certificates) or (C) of this section (relating to reliance on 
documentary evidence), however, the broker is not required to treat 
documentation as incorrect or unreliable solely as a result of the U.S. 
indicia that required the broker to obtain such documentation with 
respect to a customer. See paragraph (g)(4)(vi)(E) of this section for 
the extent to which a non-U.S. digital asset broker subject to the 
rules of this paragraph (g)(4)(iv) may treat a customer as an exempt 
foreign person with respect to a payment treated as made to a foreign 
intermediary, flow-through entity or certain U.S. branches. See 
paragraph (g)(4)(vi)(F) of this section for a transition rule for 
preexisting accounts.
    (D) Type of documentation that may be obtained where there are U.S. 
indicia--(1) Collection of U.S. indicia other than U.S. place of birth. 
A non-U.S. digital asset broker subject to the rules of this paragraph 
(g)(4)(iv) that is considered to effect a sale at an office inside the 
United States under paragraph (g)(4)(iv)(B) of this section due to the 
collection of a document or possession of other information showing any 
of the U.S. indicia that is described in paragraphs (g)(4)(iv)(B)(1) 
through (4) of this section may treat the customer as an exempt foreign 
person provided that, prior to the payment to such customer, the broker 
has either a valid beneficial owner withholding certificate described 
in paragraph (g)(4)(ii)(B) of this section for the customer, or both--
    (i) The documentary evidence described in Sec.  1.1471-3(c)(5)(i) 
to support the customer's foreign status; and
    (ii) A written representation from the customer stating that: ``I, 
the account owner represent and warrant that I am not a U.S. person for 
purposes of U.S. Federal income tax and that I am not acting for, or on 
behalf of, a U.S. person. I understand that a false statement or 
misrepresentation of tax status by a U.S. person could lead to 
penalties under U.S. law. If my tax status changes and I become a U.S. 
citizen or a resident, I agree to notify [insert broker's name] within 
30 days.''
    (2) Collection of information showing U.S. place of birth. A non-
U.S. digital asset broker subject to the rules of this paragraph 
(g)(4)(iv) that is considered to

[[Page 59649]]

effect a sale at an office inside the United States due to the 
collection of a document or possession of information showing the U.S. 
indicia that is described in paragraph (g)(4)(iv)(B)(5) of this section 
with respect to a customer may treat the customer as an exempt foreign 
person if it obtains documentary evidence described in Sec.  1.1471-
3(c)(5)(i)(B) evidencing the customer's citizenship in a country other 
than the United States and either--
    (i) A copy of the customer's Certificate of Loss of Nationality of 
the United States; or
    (ii) A valid beneficial owner withholding certificate described in 
paragraph (g)(4)(ii)(B) of this section for the customer and a 
reasonable written explanation of the customer's renunciation of U.S. 
citizenship or the reason the customer did not obtain U.S. citizenship 
at birth.
    (v) Rules for CFC digital asset brokers and non-U.S. digital asset 
brokers conducting activities as MSBs. A CFC digital asset broker or a 
non-U.S. digital asset broker that is conducting activities as an MSB 
as described in paragraph (g)(4)(i)(D) of this section with respect to 
a sale of a digital asset must apply the rules in paragraph (g)(4)(ii) 
of this section to that sale as if that broker were a U.S. digital 
asset broker to determine the location where the sale is effected and 
the foreign status of the customer.
    (vi) Rules applicable to brokers that obtain or are required to 
obtain documentation for a customer and presumption rules--(A) In 
general. Paragraph (g)(4)(vi)(A)(1) of this section describes rules 
applicable to documentation permitted to be used under this paragraph 
(g)(4) to determine whether a customer may be treated as an exempt 
foreign person. Paragraph (g)(4)(vi)(A)(2) of this section provides 
presumption rules that apply if the broker does not have documentation 
on which the broker may rely to determine a customer's status. 
Paragraph (g)(4)(vi)(A)(3) of this section provides a grace period for 
obtaining documentation in circumstances where there are indicia that a 
customer is a foreign person. Paragraph (g)(4)(vi)(A)(4) of this 
section provides rules relating to blocked income. Paragraph 
(g)(4)(vi)(B) of this section provides rules relating to reliance on 
beneficial ownership withholding certificates to determine whether a 
customer is an exempt foreign person. Paragraph (g)(4)(vi)(C) of this 
section provides rules relating to reliance on documentary evidence to 
determine whether a customer is an exempt foreign person. Paragraph 
(g)(4)(vi)(D) of this section provides rules relating to customers that 
are joint account holders. Paragraph (g)(4)(vi)(E) of this section 
provides special rules for a customer that is a foreign intermediary, a 
flow-through entity, or certain U.S. branches. Paragraph (g)(4)(vi)(F) 
of this section provides a transition rule for obtaining documentation 
to treat a customer as an exempt foreign person.
    (1) Documentation of foreign status. A broker may treat a customer 
as an exempt foreign person when the broker obtains valid documentation 
permitted to support a customer's foreign status as described in 
paragraph (g)(4)(ii), (iii) or (iv) of this section that the broker can 
reliably associate (within the meaning of Sec.  1.1441-1(b)(2)(vii)(A)) 
with a payment of gross proceeds, provided that the broker is not 
required to treat the documentation as unreliable or incorrect under 
paragraph (g)(4)(vi)(B) or (C) of this section. For rules regarding the 
validity period of a withholding certificate or documentary evidence, 
retention of documentation, electronic transmission of documentation, 
information required to be provided on a withholding certificate, who 
may sign a withholding certificate, when a substitute withholding 
certificate may be accepted, and general reliance rules on 
documentation (including when a prior version of a withholding 
certificate may be relied upon), the provisions of Sec. Sec.  1.1441-
1(e)(4)(i) through (ix) and 1.6049-5(c)(1)(ii) apply, with the 
following modifications--
    (i) The provisions in Sec.  1.1441-1(e)(4)(i) through (ix) apply by 
substituting the terms ``broker'' and ``customer'' for the terms 
``withholding agent'' and ``payee,'' respectively, and disregarding the 
fact that the provisions under Sec.  1.1441-1 apply only to amounts 
subject to withholding under chapter 3 of the Code;
    (ii) The provisions of Sec.  1.6049-5(c)(1)(ii) (relating to 
general requirements for when a payor may rely upon and must maintain 
documentary evidence with respect to a payee) apply by substituting the 
terms ``broker'' and ``customer'' for the terms ``payor'' and 
``payee,'' respectively;
    (iii) To apply Sec.  1.1441-1(e)(4)(viii) (reliance rules for 
documentation), the reference to Sec.  1.1441-7(b)(4) through (6) is 
replaced by the provisions of paragraph (g)(4)(vi)(B) or (C) of this 
section, as applicable, and the reference to Sec.  1.1441-6(c)(2) is 
disregarded; and
    (iv) To apply Sec.  1.1441-1(e)(4)(viii) (reliance rules for 
documentation) and (ix) (certificates to be furnished to a withholding 
agent for each obligation unless an exception applies), the provisions 
applicable to a financial institution apply to a broker described in 
this paragraph (g)(4) whether or not it is a financial institution.
    (2) Presumption rules. If a broker is not permitted to treat a 
customer as an exempt foreign person under paragraph (g)(4)(vi)(A)(1) 
of this section because the broker has not collected the documentation 
permitted to be collected under this paragraph (g)(4) or is not 
permitted to rely on the documentation it has collected, the broker may 
determine the classification of a customer (as an individual, entity, 
etc.) by applying the presumption rules of Sec.  1.1441-1(b)(3)(ii), 
except that references in Sec.  1.1441-1(b)(3)(ii)(B) to exempt 
recipient categories under section 6049 are replaced by the exempt 
recipient categories in paragraph (c)(3)(i) of this section. With 
respect to a customer that the broker has classified as an individual, 
a broker that is a U.S. digital asset broker or that is a CFC digital 
asset broker or a non-U.S. digital asset broker that in each case is 
conducting activities as an MSB must treat the customer as a U.S. 
person. A broker that is a CFC digital asset broker or a non-U.S. 
digital asset broker that in each case is not conducting activities as 
an MSB is required to treat a customer that it has classified as an 
individual as a U.S. person only when the broker has documentation or 
other information that is part of the broker's account information for 
the customer (including information collected with respect to the 
customer pursuant to the broker's compliance with applicable AML 
program requirements) or a withholding certificate that show any of the 
U.S. indicia described in paragraphs (g)(4)(iv)(B)(1) through (5) of 
this section. With respect to a customer that the broker has classified 
as an entity, the broker may determine the status of the customer as 
U.S. or foreign by applying Sec. Sec.  1.1441-1(b)(3)(iii)(A) and 
1.1441-5(d) and (e)(6), except that Sec.  1.1441-1(b)(3)(iii)(A)(1)(iv) 
does not apply. Notwithstanding the preceding provisions of this 
paragraph (g)(4)(vi)(A)(2), a broker may not treat a customer as a 
foreign person under this paragraph (g)(4)(vi)(A)(2) if the broker has 
actual knowledge that the customer is a U.S. person. For presumption 
rules to treat a payment as made to an intermediary or flow-through 
entity and whether the payment is also treated as made to an exempt 
foreign person, see paragraph (g)(4)(vi)(E) of this section.
    (3) Grace period to collect valid documentation in the case of 
indicia of a foreign customer. If a broker has not obtained valid 
documentation that it can reliably associate with a payment of gross 
proceeds to a customer to treat the customer as an exempt foreign 
person,

[[Page 59650]]

or if the broker is unable to rely upon documentation under the rules 
described in paragraph (g)(4)(vi)(A)(1) of this section or is required 
to treat documentation obtained for a customer as unreliable or 
incorrect (after applying paragraphs (g)(4)(vi)(B) and (C) of this 
section), the broker may apply the grace period described in Sec.  
1.6049-5(d)(2)(ii) (generally allowing in certain circumstances a payor 
to treat an account as owned by a foreign person for a 90 day period). 
In applying Sec.  1.6049-5(d)(2)(ii), references to ``securities 
described in Sec.  1.1441-6(c)(2)'' are replaced with ``digital 
assets.''
    (4) Blocked income. A broker may apply the provisions in paragraph 
(g)(1)(iii) of this section to treat a customer as an exempt foreign 
person when the proceeds are blocked income as described in Sec.  
1.1441-2(e)(3).
    (B) Reliance on beneficial ownership withholding certificates to 
determine foreign status. For purposes of determining whether a 
customer may be treated as an exempt foreign person under this section, 
except as otherwise provided in this paragraph (g)(4)(vi)(B), a broker 
may rely on a beneficial owner withholding certificate described in 
paragraph (g)(4)(ii)(B) of this section unless the broker has actual 
knowledge or reason to know that the certificate is unreliable or 
incorrect. Reason to know is limited to when the broker has in its 
account opening files or other files pertaining to the account (account 
information), including documentation collected for purposes of an AML 
program or the beneficial owner withholding certificate, any of the 
U.S. indicia set forth in paragraphs (g)(4)(iv)(B)(1) through (5) of 
this section. A broker will not be considered to have reason to know 
that a certificate is unreliable or incorrect based on documentation 
collected for an AML program until the date that is 30 days after the 
account is opened. A broker may rely, however, on a beneficial owner 
withholding certificate notwithstanding the presence of any of the U.S. 
indicia set forth in paragraphs (g)(4)(iv)(B)(1) through (5) of this 
section on the withholding certificate or in the account information 
for a customer in the following circumstances:
    (1) With respect to any of the U.S. indicia described in paragraphs 
(g)(4)(iv)(B)(1) through (4) of this section, the broker has in its 
possession for a customer who is an individual documentary evidence 
establishing foreign status (as described in Sec.  1.1471-3(c)(5)(i)) 
that does not contain a U.S. address and the customer provides the 
broker with a reasonable explanation (as defined in Sec.  1.1441-
7(b)(12)) from the customer, in writing, supporting the claim of 
foreign status. Notwithstanding the preceding sentence, in a case in 
which the broker classified an individual customer as a U.S. person in 
its account information, the broker may treat the customer as an exempt 
foreign person only if it has in its possession documentary evidence 
described in Sec.  1.1471-3(c)(5)(i)(B) evidencing citizenship in a 
country other than the United States. In the case of a customer that is 
an entity, the broker may treat the customer as an exempt foreign 
person if it has in its possession documentation establishing foreign 
status that substantiates that the entity is actually organized or 
created under the laws of a foreign country. Additionally, regardless 
of whether the customer is an individual or an entity, a broker may 
rely on a beneficial owner withholding certificate for purposes of this 
paragraph (g)(4)(vi)(B)(1) when--
    (i) The broker is a non-U.S. person;
    (ii) The broker is required to report the payment made to the 
customer annually on a tax information statement that is filed with the 
tax authority of the country where the customer is resident as part of 
that country's resident reporting requirements; and
    (iii) That country has a tax information exchange agreement or 
income tax treaty in effect with the United States.
    (2) With respect to the U.S. indicia described in paragraph 
(g)(4)(iv)(B)(5) of this section, the broker has in its possession 
documentary evidence described in Sec.  1.1471-3(c)(5)(i)(B) evidencing 
citizenship in a country other than the United States and the broker 
has in its possession either a copy of the customer's Certificate of 
Loss of Nationality of the United States or a reasonable written 
explanation of the customer's renunciation of U.S. citizenship or the 
reason the customer did not obtain U.S. citizenship at birth.
    (C) Reliance on documentary evidence to determine foreign status. 
For purposes of treating a customer as an exempt foreign person under 
this section, except as otherwise provided in this paragraph 
(g)(4)(vi)(C), a broker may rely on documentary evidence described in 
Sec.  1.1471-3(c)(5)(i) (when the broker is otherwise permitted to do 
so under paragraph (g)(4)(iii)(B) or (g)(4)(iv)(B) of this section) 
unless the broker has actual knowledge or reason to know that the 
documentary evidence is unreliable or incorrect. Reason to know is 
limited to when the broker has in its account opening files or other 
files pertaining to the account, including documentation collected for 
purposes of an AML program, any of the U.S. indicia set forth in 
paragraphs (g)(4)(iv)(B)(1) through (5) of this section. A broker will 
not be considered to have reason to know that documentary evidence is 
unreliable or incorrect based on documentation collected for an AML 
program until the date that is 30 days after the account is opened. A 
broker may rely, however, on documentary evidence notwithstanding the 
presence of any of U.S. indicia set forth in paragraphs 
(g)(4)(iv)(B)(1) through (5) of this section on the documentary 
evidence or in the account information for a customer in the following 
circumstances:
    (1) With respect to any of the U.S. indicia described in paragraphs 
(g)(4)(iv)(B)(1) through (4) of this section, the broker has in its 
possession for a customer who is an individual additional documentary 
evidence establishing foreign status (as described in Sec.  1.1471-
3(c)(5)(i)) that does not contain a U.S. address and the customer 
provides the broker with a reasonable explanation (as defined in Sec.  
1.1441-7(b)(12)), in writing, supporting the claim of foreign status. 
In the case of a customer that is an entity, the broker may treat the 
customer as an exempt foreign person if the broker has in its 
possession documentation establishing foreign status that substantiates 
that the entity is actually organized or created under the laws of a 
foreign country. In lieu of the documentary evidence or documentation 
described in this paragraph (g)(4)(vi)(C)(1), a broker may treat a 
customer (regardless of whether an individual or entity) as an exempt 
foreign person if--
    (i) The broker has in its possession a beneficial owner withholding 
certificate described in paragraph (g)(4)(ii)(B) of this section for 
the customer that contains a permanent residence address (as defined in 
Sec.  1.1441-1(c)(38)) outside the United States and a mailing address 
outside the United States (or if a mailing address is inside the United 
States the customer provides a reasonable explanation in writing or 
additional documentary evidence sufficient to establish the customer's 
foreign status); or
    (ii) The broker is a non-U.S. person and the conditions specified 
in paragraphs (g)(4)(vi)(B)(1)(ii) and (iii) of this section are 
satisfied.
    (2) With respect to the U.S. indicia described in paragraph 
(g)(4)(iv)(B)(5) of this section, the broker has in its possession 
documentary evidence described in Sec.  1.1471-3(c)(5)(i)(B) evidencing 
citizenship in a country other than the United States and either--

[[Page 59651]]

    (i) A copy of the customer's Certificate of Loss of Nationality of 
the United States; or
    (ii) A valid beneficial owner withholding certificate described in 
paragraph (g)(4)(ii)(B) of this section for the customer and a 
reasonable written explanation of the customer's renunciation of U.S. 
citizenship or the reason the customer did not obtain U.S. citizenship 
at birth.
    (D) Joint owners. In the case of amounts paid to customers that are 
joint account holders for which a certificate or documentation is 
required as a condition for being exempt from reporting under this 
paragraph (g)(4), such amounts are presumed made to U.S. payees who are 
not exempt recipients (as defined in paragraph (c)(3)(i)(B) of this 
section) when the conditions of paragraph (g)(3)(i) of this section are 
met.
    (E) Special rules for customer that is a foreign intermediary, a 
flow-through entity, or certain U.S. branches--(1) Foreign 
intermediaries. For purposes of this paragraph (g)(4), a broker may 
determine the status of a customer as a foreign intermediary (as 
defined in Sec.  1.1441-1(c)(13)) by reliably associating (under Sec.  
1.1441-1(b)(2)(vii)) a payment of gross proceeds with a valid foreign 
intermediary withholding certificate described in Sec.  1.1441-
1(e)(3)(ii) or (iii), without regard to whether the withholding 
certificate contains a withholding statement and withholding 
certificates or other documentation for each account holder. A broker 
that is a U.S. digital asset broker and a non-U.S. digital asset broker 
or a CFC digital asset broker that in each case is conducting 
activities as an MSB, that does not have a valid foreign intermediary 
withholding certificate or a valid beneficial owner withholding 
certificate described in paragraph (g)(4)(ii)(B) of this section for 
the customer applies the presumption rules in Sec.  1.1441-
1(b)(3)(ii)(B) (which would presume that the entity is not an 
intermediary). A broker that is a non-U.S. digital asset broker or a 
CFC digital asset broker that in each case is not conducting activities 
as an MSB may alternatively determine the status of a customer as an 
intermediary by presuming that the entity is an intermediary to the 
extent permitted by Sec.  1.1441-1(b)(3)(ii)(C) (providing rules 
treating certain payees as not beneficial owners), without regard to 
the requirement in Sec.  1.1441-1(b)(3)(ii)(C) that any documentation 
be furnished with respect to an offshore obligation, and applying Sec.  
1.1441-1(b)(3)(ii)(C) by substituting the references to exempt 
recipient categories under section 6049 with the exempt recipient 
categories in paragraph (c)(3)(i) of this section. See Sec.  1.1441-
1(b)(3)(iii) for presumption rules relating to the U.S. or foreign 
status of a customer that is presumed to be an intermediary. In the 
case of a payment of gross proceeds from a sale of a digital asset that 
a broker treats as made to a foreign intermediary under this paragraph 
(g)(4)(vi)(E)(1), the broker must treat the foreign intermediary as an 
exempt foreign person except to the extent required by paragraph 
(g)(3)(iv) of this section (rules for when a broker is required to 
treat a payment as made to a U.S. person that is not an exempt 
recipient under paragraph (c)(3) of this section and for reporting that 
may be required by the foreign intermediary).
    (2) Foreign flow-through entities. For purposes of this paragraph 
(g)(4), a broker may determine the status of a customer as a foreign 
flow-through entity (as defined in Sec.  1.1441-1(c)(23)) by reliably 
associating (under Sec.  1.1441-1(b)(2)(vii)) a payment of gross 
proceeds with a valid foreign flow-through withholding certificate 
described in Sec.  1.1441-5(c)(3)(iii) (relating to nonwithholding 
foreign partnerships) or (e)(5)(iii) (relating to foreign simple trusts 
and foreign grantor trusts that are nonwithholding foreign trusts), 
without regard to whether the withholding certificate contains a 
withholding statement and withholding certificates or other 
documentation for each partner. A broker may alternatively determine 
the status of a customer as a foreign flow-through entity based on the 
presumption rules in Sec. Sec.  1.1441-1(b)(3)(ii)(B) (relating to 
entity classification) and 1.1441-5(d) (relating to partnership status 
as U.S. or foreign) and (e)(6) (relating to the status of trusts and 
estates as U.S. or foreign). In the case of a payment of gross proceeds 
from a sale of a digital asset that a broker treats as made to a 
foreign flow-through entity under this paragraph (g)(4)(vi)(E)(2), the 
broker must treat the foreign flow-through entity as an exempt foreign 
person except to the extent required by Sec.  1.6049-5(d)(3)(ii) (rules 
for when a broker is required to treat a payment as made to a U.S. 
person other than an exempt recipient (substituting ``exempt recipient 
under Sec.  1.6045-1(c)(3)'' for ``exempt recipient described in Sec.  
1.6049-4(c)'')).
    (3) U.S. branches that are not beneficial owners. For purposes of 
this paragraph (g)(4), a broker may determine the status of a customer 
as a U.S. branch (as described in Sec.  1.1441-1(b)(2)(iv)) that is not 
a beneficial owner (as defined in Sec.  1.1441-1(c)(6)) of a payment of 
gross proceeds by reliably associating (under Sec.  1.1441-
1(b)(2)(vii)) the payment with a valid U.S. branch withholding 
certificate described in Sec.  1.1441-1(e)(3)(v) without regard to 
whether the withholding certificate contains a withholding statement 
and withholding certificates or other documentation for each person for 
whom the branch receives the payment. If a U.S. branch certifies on a 
U.S. branch withholding certificate described in the preceding sentence 
that it agrees to be treated as a U.S. person under Sec.  1.1441-
1(b)(2)(iv)(A), the broker provided the certificate must treat the U.S. 
branch as an exempt foreign person. If a U.S. branch does not certify 
as described in the preceding sentence on its U.S. branch withholding 
certificate, the broker provided the certificate must treat the U.S. 
branch as an exempt foreign person except to the extent required by 
paragraph (g)(3)(iv) of this section (rules for when a broker is 
required to treat a payment as made to a U.S. person that is not an 
exempt recipient under paragraph (c)(3) of this section and for 
reporting that may be required by the U.S. branch). In a case in which 
a broker cannot reliably associate a payment of gross proceeds made to 
a U.S. branch with a U.S. branch withholding certificate described in 
Sec.  1.1441-1(e)(3)(v) or a valid beneficial owner withholding 
certificate described in paragraph (g)(4)(ii)(B) of this section, see 
paragraph (g)(4)(vi)(E)(1) of this section for determining the status 
of the U.S. branch as a beneficial owner or intermediary.
    (F) Transition rule for obtaining documentation to treat a customer 
as an exempt foreign person. Notwithstanding the rules of this 
paragraph (g)(4) for determining the status of a customer as an exempt 
foreign person, for a sale of a digital asset effected before January 
1, 2026, that was held in an account established for the customer by a 
broker before January 1, 2025, the broker may treat the customer as an 
exempt foreign person provided that the customer has not previously 
been classified as a U.S. person by the broker, and the information 
that the broker has in the account opening files or other files 
pertaining to the account, including documentation collected for 
purposes of an AML program, includes a residence address for the 
customer that is not a U.S. address.
    (vii) Barter exchange. No return of information is required by a 
barter exchange under the rules of paragraphs (e) and (f) of this 
section with respect to a client or a member that the barter exchange 
may treat as an exempt foreign person pursuant to the procedures

[[Page 59652]]

described in paragraph (g)(4) of this section.
* * * * *
    (6) Examples. The application of the provisions of paragraph (g)(4) 
of this section with respect to sales of digital assets may be 
illustrated by the following examples. All events and transactions in 
the following examples occur after the applicability date set forth in 
paragraph (q) of this section.
    (i) Example 1: Foreign digital asset broker conducting activities 
as an MSB--(A) Facts. Foreign corporation (FKS) owns and operates 
several digital asset kiosks physically located within the United 
States. FKS is not a controlled foreign corporation within the meaning 
of Sec.  1.6049-5(c)(5)(i)(C). In addition to the digital asset kiosks 
located in the United States, FKS owns and operates an online digital 
asset trading platform and provides digital asset hosted wallet 
services for online customers who want to purchase, hold, and exchange 
various digital assets for cash or other digital assets. FKS does not 
own or operate kiosks located outside of the United States. FKS is 
registered as a money service business (MSB) with the Department of the 
Treasury.
    (1) Customer L: No withholding certificate. L, an individual who is 
a non-U.S. resident visiting the United States, utilizes one of FKS's 
digital asset kiosks located in the United States in order to effect a 
sale of digital asset DE for cash. L has not previously done business 
with FKS and does not hold digital assets in an online account with 
FKS. L represents to FKS that L is a foreign individual. FKS requests a 
beneficial owner withholding certificate from L as part of FKS's 
procedures for effecting transactions with customers that use FKS's 
digital asset kiosks located in the United States. L does not provide 
FKS with a valid beneficial owner withholding certificate described in 
paragraph (g)(4)(ii)(B) of this section. FKS executes the sale of L's 
DE on behalf of L and pays the gross proceeds to L.
    (2) Customer L: Withholding certificate. The facts are the same as 
in paragraph (g)(6)(i)(A)(1) of this section, except that prior to the 
payment of sale proceeds, L provides FKS with a beneficial owner 
withholding certificate described in paragraph (g)(4)(ii)(B) of this 
section that FKS may treat as valid under Sec.  1.1441-1(e)(2)(ii) and 
that satisfies the requirements of paragraph (g)(4)(vi) of this 
section.
    (3) Customer J. J is an individual that opened an account with FKS 
to use FKS's online digital asset trading platform. As part of 
performing FKS's account opening procedures FKS collected from J a copy 
of a driver's license issued by country Y and a valid beneficial owner 
withholding certificate described in paragraph (g)(4)(ii)(B) of this 
section. Shortly after opening J's account, FKS obtains information 
showing that J's communications to FKS come from an IP address located 
within the United States that becomes part of FKS's account file for J. 
After obtaining the information described in the preceding sentence, 
FKS effects a sale of digital asset DE for cash on behalf of J, and 
credits the gross proceeds to J's account with FKS.
    (B) Broker's status and requirements. FKS is a non-U.S. digital 
asset broker under paragraph (g)(4)(i)(C) of this section because it is 
a non-U.S. payor under Sec.  1.6049-5(c)(5) that effects sales of 
digital assets on behalf of customers. Because FKS is registered as an 
MSB with the Department of the Treasury, FKS is conducting activities 
as an MSB under paragraph (g)(4)(i)(D) of this section with respect to 
its sales of digital assets. As a result, FKS is subject to the 
requirements of a U.S. digital asset broker under paragraph (g)(4)(ii) 
of this section with respect to those sales rather than the 
requirements of a non-U.S. digital asset broker under paragraph 
(g)(4)(iv) of this section (which apply to a non-U.S. digital asset 
broker not conducting activities as an MSB). Moreover, FKS is subject 
to the requirements of paragraph (g)(4)(ii) of this section with 
respect to all sales of digital assets it effects for its customers 
because FKS does not own or operate any digital asset kiosks physically 
located outside of the United States. See paragraphs (g)(4)(i)(D) and 
(E) of this section.
    (C) Broker's obligation to report--(1) Customer L: No withholding 
certificate. Because FKS must apply the requirements of paragraph 
(g)(4)(ii) of this section with respect to L's sale, FKS must make an 
information return for the sale under section 6045 unless FKS can treat 
L as an exempt recipient under paragraph (c)(3) of this section (which 
applies to only certain specified entities) or as an exempt foreign 
person. Because FKS has not collected documentation for L on which FKS 
may rely to treat L as an exempt foreign person, FKS must apply the 
presumption rules in paragraph (g)(4)(vi)(A)(2) of this section. FKS 
presumes that L is an individual because L appears to be an individual 
based on L's name in the customer file. As an individual, L cannot be 
treated as an exempt recipient under paragraph (c)(3) of this section. 
Because FKS has classified L as an individual and FKS is a non-U.S. 
digital asset broker conducting activities as an MSB that is subject to 
the rules in paragraph (g)(4)(ii) of this section with respect to L's 
sale, FKS must treat L as a U.S. person under the presumption rule 
applicable to individuals described in paragraph (g)(4)(vi)(A)(2) of 
this section. Thus, FKS may not treat L as an exempt foreign person 
with respect to L's sale of digital asset DE and must make an 
information return for the sale under section 6045. See paragraph (r) 
of this section for cross references to requirements for backup 
withholding under section 3406 that may apply to a sale required to be 
reported under section 6045. In connection with applying the 
requirements for backup withholding, because sales of DE effected by 
FKS for L are considered effected at an office inside the United States 
under paragraph (g)(4)(ii)(B) of this section, FKS may not apply the 
exception to backup withholding provided in Sec.  31.3406(g)-1(e) of 
this chapter to the sale effected on behalf of L.
    (2) Customer L: Withholding certificate. As provided in paragraph 
(g)(4)(ii)(B) of this section, FKS may treat L as an exempt foreign 
person because FKS has a valid withholding certificate for L described 
in paragraph (g)(4)(ii)(B) of this section that satisfies the 
requirements of paragraph (g)(4)(vi) of this section. Accordingly, FKS 
is not required to make an information return under section 6045 with 
respect to L's sale.
    (3) Customer J. As described in paragraph (g)(6)(i)(B) of this 
section, FKS must apply the requirements of paragraph (g)(4)(ii) of 
this section with respect to J's sale. Although FKS collected a valid 
beneficial owner withholding certificate with respect to J in 
accordance with paragraph (g)(4)(ii)(B) of this section, FKS has reason 
to know that the withholding certificate is incorrect or unreliable 
because FKS has U.S. indicia described in paragraph (g)(4)(iv)(B)(1) of 
this section in J's account file. FKS may continue to rely on the 
withholding certificate if FKS obtains from J documentary evidence 
establishing foreign status (as described in Sec.  1.1471-3(c)(5)(i)) 
that does not contain a U.S. address and a reasonable explanation (as 
defined in Sec.  1.1441-7(b)(12)) from J, in writing, supporting the 
claim of foreign status. Alternatively, FKS may rely on the withholding 
certificate if FKS reports J to country Y and the conditions specified 
in paragraphs (g)(4)(vi)(B)(1)(ii) and (iii) of this section are 
satisfied. FKS has a driver's license

[[Page 59653]]

for J issued by country Y but does not have the reasonable explanation. 
FKS does not report J to country Y or satisfy the other conditions in 
paragraphs (g)(4)(vi)(B)(1)(ii) and (iii) of this section. Therefore, 
FKS may not rely on the beneficial owner withholding certificate to 
treat J as an exempt foreign person. However, FKS may rely on the grace 
period described in paragraph (g)(4)(vi)(A)(3) of this section (which 
in turn references the requirements of Sec.  1.6049-5(d)(2)(ii)) to 
treat J as an exempt foreign person for a 90-day period because FKS has 
a withholding certificate for J that is no longer reliable (other than 
because the validity period has expired), provided that the remaining 
balance of J's account with FKS is equal to or greater than the 
statutory backup withholding rate applied to the amount of gross 
proceeds credited to the account. See Sec.  1.6049-5(d)(2)(ii). The 90-
day grace period begins on the date that the withholding certificate 
may no longer be relied upon because of the communications from a U.S. 
IP address. If the sale is effected after the end of the grace period, 
FKS must apply the presumption rules in paragraph (g)(4)(vi)(A)(2) of 
this section. FKS may presume that J is an individual because FKS has a 
driver's license for J. As an individual, J cannot be treated as an 
exempt recipient under paragraph (c)(3) of this section. FKS must treat 
J as a U.S. person under the presumption rules applicable to 
individuals in paragraph (g)(4)(vi)(A)(2) of this section. Thus, FKS 
may not treat J as an exempt foreign person with respect to J's sale of 
digital asset DE and must make an information return for the sale under 
section 6045. See paragraph (r) of this section for cross references to 
requirements for backup withholding under section 3406 that may apply 
to a sale required to be reported under section 6045. In connection 
with applying the requirements for backup withholding, because sales of 
DE effected by FKS for J are considered effected at an office inside 
the United States under paragraph (g)(4)(ii)(B) of this section, FKS 
may not apply the exception to backup withholding provided in Sec.  
31.3406(g)-1(e) of this chapter to the sale effected on behalf of J.
    (ii) Example 2: Foreign digital asset broker registered as MSB 
effecting sales at digital asset kiosks located outside the United 
States--(A) Facts. The facts are the same as in paragraph (g)(6)(i)(A) 
of this section (the facts in Example 1), except that FKS also effects 
sales of digital assets for customers through digital asset kiosks 
physically located in country Y that FKS owns and operates. FKS is not 
required to implement an AML program, file reports, or otherwise comply 
with requirements for MSBs under the Bank Secrecy Act with respect to 
sales effected at digital asset kiosks physically located in country Y 
that FKS owns and operates.
    (1) Customer C. C, an individual, utilizes a digital asset kiosk 
operated by FKS in country Y to sell C's digital asset DE for cash. C 
does not have any interaction with other parts of FKS's business (such 
as FKS's online digital asset trading platform or hosted wallet 
service). As part of FKS's documentation procedures, including the 
performance of local country AML program requirements, FKS collects 
from C a copy of C's driver's license issued by country Y and a copy of 
C's passport issued by country Y. FKS does not have in its account file 
for C any document or other information with respect to C showing any 
of the U.S. indicia described in paragraphs (g)(4)(iv)(B)(1) through 
(5) of this section.
    (2) Customer K. K, an individual, utilizes a digital asset kiosk 
operated by FKS in country Y to sell K's digital asset DE for cash. As 
part of FKS's documentation procedures, including the performance of 
local country AML program requirements, FKS collects from K an address 
in country Y, a copy of K's driver's license issued by country Y, and a 
copy of K's U.S. passport that indicates a place of birth for K in the 
United States.
    (B) Broker's status and requirements. As indicated in paragraph 
(g)(6)(i)(B) of this section (Example 1), FKS is a non-U.S. digital 
asset broker under paragraph (g)(4)(i)(C) of this section that is 
conducting activities as an MSB under paragraph (g)(4)(i)(D) of this 
section. As a result, FKS is subject to the requirements of paragraph 
(g)(4)(ii) of this section except with respect to sales it effects 
through foreign kiosks that are described in paragraph (g)(4)(i)(E) of 
this section since FKS is not required under the Bank Secrecy Act to 
implement an AML program, file reports, or otherwise comply with 
requirements for MSBs under the Bank Secrecy Act with respect to sales 
effected at the kiosks. Accordingly, FKS is subject to the requirements 
of a non-U.S. digital asset broker under paragraph (g)(4)(iv) of this 
section with respect to sales that it effects through its foreign 
kiosks.
    (C) Broker's obligation to report--(1) Customer C. Because FKS is 
subject to the requirements of paragraph (g)(4)(iv) of this section 
with respect to C's sale at FKS's foreign kiosk and because none of the 
documents or other information in FKS's account file for C include any 
of the U.S. indicia described in paragraphs (g)(4)(iv)(B)(1) through 
(5) of this section, FKS may treat the sale of digital asset DE on 
behalf of C as effected at an office outside the United States under 
paragraph (g)(4)(iv)(A) of this section. Accordingly, FKS is not 
considered a broker under paragraph (a)(1) of this section with respect 
to the sale, and FKS is therefore not required to make an information 
return under section 6045 with respect to C's sale. The result would be 
the same regardless of whether FKS collected documentation for C, 
provided that information in the account file does not show U.S. 
indicia.
    (2) Customer K. FKS is subject to the requirements of paragraph 
(g)(4)(iv) of this section with respect to K's sale at FKS's foreign 
kiosk. FKS collected an unambiguous indication of a U.S. place of birth 
for K (that is, K's U.S. passport showing a U.S. place of birth) in 
performing its documentation procedures. Accordingly, FKS has U.S. 
indicia described in paragraph (g)(4)(iv)(B)(5) of this section as part 
of its account information for K and must treat K's sale of DE as 
effected inside the United States under paragraph (g)(4)(iv)(B) of this 
section. As a result, FKS is treated as a broker under paragraph (a)(1) 
of this section with respect to K's sale and must apply the 
requirements of paragraph (g)(4)(iv)(C) of this section to determine 
whether it must report K's sale under section 6045. Under paragraph 
(g)(4)(iv)(D)(2) of this section, FKS may treat K as an exempt foreign 
person if FKS collects, prior to making the payment to K, documentary 
evidence described in Sec.  1.1471-3(c)(5)(i)(B) evidencing K's 
citizenship in a country other than the United States and either a copy 
of K's Certificate of Loss of Nationality of the United States, or both 
a valid beneficial owner withholding certificate described in paragraph 
(g)(4)(ii)(B) of this section for K and a reasonable written 
explanation of K's renunciation of U.S. citizenship or the reason K did 
not obtain U.S. citizenship at birth. FKS does not have the documentary 
evidence described in the preceding sentence for K. FKS must therefore 
apply the presumption rules in paragraph (g)(4)(vi)(A)(2) of this 
section to determine whether it may treat K as an exempt foreign 
person. FKS may presume that K is an individual because FKS has a 
driver's license for K. As an individual, K cannot be treated as an 
exempt recipient under paragraph (c)(3) of this section. FKS must treat 
K as a U.S. person under the presumption

[[Page 59654]]

rules applicable to individuals in paragraph (g)(4)(vi)(A)(2) of this 
section because FKS has U.S. indicia associated with K's account 
information. Therefore, FKS must make an information return under 
section 6045 with respect to K's sale. However, FKS has no obligation 
to backup withhold on the proceeds from the sale based on the exemption 
under Sec.  31.3406(g)-1(e) of this chapter, unless FKS has actual 
knowledge that K is a U.S. person that is not an exempt recipient under 
paragraph (c)(3) of this section.
    (iii) Example 3: CFC digital asset broker that is not conducting 
activities as an MSB--(A) Facts. Corporation G (GFC) is a controlled 
foreign corporation under Sec.  1.6049-5(c)(5)(i)(C) that operates a 
business as an online digital asset broker. Several of GFC's customers 
have online accounts with GFC through which they effect sales of 
digital assets. GFC does not register as an MSB with the Department of 
the Treasury.
    (B) Broker's status and requirements. Because GFC is a controlled 
foreign corporation under Sec.  1.6049-5(c)(5)(i)(C) that effects sales 
of digital assets on behalf of customers, GFC is a CFC digital asset 
broker as defined in paragraph (g)(4)(i)(B) of this section. Because 
GFC does not register as an MSB with the Department of the Treasury, 
GFC is not conducting activities as an MSB under paragraph (g)(4)(i)(D) 
of this section. As a result, GFC is subject to the requirements of a 
CFC digital asset broker under paragraph (g)(4)(iii) of this section 
with respect to sales of digital assets it effects for its customers.
    (C) Broker's obligation to report. Because GFC is subject to the 
requirements of a CFC digital asset broker under paragraph (g)(4)(iii) 
of this section, GFC must make an information return for the sales it 
effects for its customers under section 6045 unless GFC can treat a 
customer as an exempt recipient under paragraph (c)(3) of this section 
or an exempt foreign person. Under paragraph (g)(4)(iii)(B) of this 
section, GFC may treat a customer (other than a foreign intermediary, 
foreign flow-through entity, or certain U.S. branches) as an exempt 
foreign person by obtaining with respect to the customer either a valid 
beneficial owner withholding certificate described in paragraph 
(g)(4)(ii)(B) of this section or the documentary evidence described in 
Sec.  1.1471-3(c)(5)(i) supporting the customer's foreign status and 
upon which GFC may rely, pursuant to the requirements of paragraph 
(g)(4)(vi) of this section. If GFC does not obtain the withholding 
certificate or documentary evidence described in the preceding sentence 
prior to a customer's sale, GFC may be permitted under a presumption 
rule as provided in paragraph (g)(4)(vi)(A)(2) of this section to treat 
a customer as an exempt foreign person (unless GFC has actual knowledge 
that the customer is a U.S. person). GFC may, instead of applying the 
earlier-described provisions of this paragraph (g)(6)(iii)(C), treat a 
customer as a foreign intermediary, foreign flow-through entity, or 
certain U.S. branches and an exempt foreign person when it is permitted 
to do under paragraph (g)(4)(vi)(E) of this section. As GFC's sales are 
considered effected at an office outside of the United States under 
paragraph (g)(4)(iii)(A) of this section, GFC has no obligation to 
backup withhold on the proceeds from a reportable sale based on the 
exemption under Sec.  31.3406(g)-1(e) of this chapter, unless GFC has 
actual knowledge that customer is a U.S. person that is not an exempt 
recipient under paragraph (c)(3) of this section.
* * * * *
    (j) Time and place for filing; cross-references to penalty and 
magnetic media filing requirements. Forms 1096 and 1099 required under 
this section shall be filed after the last calendar day of the 
reporting period elected by the broker or barter exchange and on or 
before February 28 of the following calendar year with the appropriate 
Internal Revenue Service Center, the address of which is listed in the 
instructions for Form 1096. For a digital asset sale effected prior to 
January 1, 2025, for which a broker chooses under paragraph 
(d)(2)(iii)(B) of this section to file an information return, Form 1096 
and the Form 1099-B, ``Proceeds From Broker and Barter Exchange 
Transactions,'' or if available the form prescribed by the Secretary 
pursuant to paragraph (d)(2)(i)(B) of this section, must be filed on or 
before February 28 of the calendar year following the year of that 
sale. See paragraph (l) of this section for the requirement to file 
certain returns on magnetic media. For provisions relating to the 
penalty provided for the failure to file timely a correct information 
return under section 6045(a), see Sec.  301.6721-1 of this chapter. See 
Sec.  301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.
* * * * *
    (m) * * *
    (1) In general. This paragraph (m) provides rules for a broker to 
determine and report the information required under this section for an 
option that is a covered security under paragraph (a)(15)(i)(E) or (H) 
of this section.
    (2) * * *
    (ii) * * *
    (C) Notwithstanding paragraph (m)(2)(i) of this section, if an 
option is an option on a digital asset or an option on derivatives with 
a digital asset as an underlying property, paragraph (m) of this 
section applies to the option if it is granted or acquired on or after 
January 1, 2023.
* * * * *
    (q) Applicability date. Except as otherwise provided in this 
paragraph (q) or paragraphs (m)(2)(ii) and (n)(12)(ii) of this section, 
this section applies on or after January 6, 2017. (For rules that apply 
after June 30, 2014, and before January 6, 2017, see Sec.  1.6045-1 in 
effect and contained in 26 CFR part 1, as revised April 1, 2016.) For 
sales of digital assets, this section applies on or after January 1, 
2025. For assets that are commodities pursuant to the Commodity Futures 
Trading Commission's certification procedures described in 17 CFR 40.2, 
this section applies to sales of such commodities on or after January 
1, 2025, without regard to the date such certification procedures were 
undertaken.
    (r) Cross-references. For provisions relating to backup withholding 
for reportable transactions under this section, see Sec.  
31.3406(b)(3)-2 of this chapter for rules treating gross proceeds as 
reportable payments, Sec.  31.3406(d)-1 of this chapter for rules with 
respect to backup withholding obligations, and Sec.  31.3406(h)-3 of 
this chapter for the prescribed form for the certification of 
information required under this section.
0
Par. 7. Section 1.6045-4 is amended by:
0
1. Revising the section heading and paragraph (b)(1);
0
2. Removing the period at the end of paragraph (c)(2)(i) and adding a 
semicolon in its place;
0
3. Removing the word ``or'' at the end of paragraph (c)(2)(ii);
0
4. Removing the period at the end of paragraph (c)(2)(iii) and adding 
``; or'' in its place;
0
5. Adding paragraph (c)(2)(iv);
0
6. Revising paragraph (d)(2)(ii)(A);
0
7. In paragraphs (e)(3)(iii)(A) and (B), adding the language ``or 
digital asset'' after the language ``cash'', wherever it appears;
0
8. Revising paragraphs (h)(1)(v)(A) and (B);
0
9. Redesignating paragraphs (h)(1)(vii) and (viii) as paragraphs 
(h)(1)(viii) and (ix), respectively, and adding new paragraph 
(h)(1)(vii);
0
10. Adding paragraph (h)(2)(iii);

[[Page 59655]]

0
11. Revising paragraphs (i)(1) and (2), (i)(3)(ii), and (o);
0
12. In paragraph (r), redesignating Examples 1 through 9 as paragraphs 
(r)(1) through (9), respectively;
0
13. In newly designated paragraph (r)(3), removing ``section (b)(1)'' 
and adding ``paragraph (b)(1)'' in its place;
0
14. Removing and reserving newly designated paragraph (r)(5);
0
15. Revising newly designated paragraph (r)(7);
0
16. In newly designated paragraph (r)(8), removing ``example (6)'' and 
adding ``paragraph (r)(6) of this section (the facts in Example 6)'' in 
its place;
0
17. In newly designated paragraph (r)(9), removing ``example (8)'' and 
adding ``paragraph (r)(8) of this section (the facts in Example 8)'' in 
its place;
0
18. Adding paragraph (r)(10); and
0
19. In paragraph (s), adding a sentence to the end of the paragraph.
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (1) In general. A transaction is a ``real estate transaction'' 
under this section if the transaction consists in whole or in part of 
the sale or exchange of reportable real estate (as defined in paragraph 
(b)(2) of this section) for money, indebtedness, property other than 
money, or services. The term sale or exchange shall include any 
transaction properly treated as a sale or exchange for Federal income 
tax purposes, whether or not the transaction is currently taxable. 
Thus, for example, a sale or exchange of a principal residence is a 
real estate transaction under this section even though the transferor 
may be entitled to the special exclusion of gain up to $250,000 (or 
$500,000 in the case of married persons filing jointly) from the sale 
or exchange of a principal residence provided by section 121 of the 
Code.
* * * * *
    (c) * * *
    (2) * * *
    (iv) A principal residence (including stock in a cooperative 
housing corporation) provided the reporting person obtain from the 
transferor a written certification consistent with guidance that the 
Secretary has designated or may designate by publication in the Federal 
Register or in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) 
of this chapter). If a residence has more than one owner, a real estate 
reporting person must either obtain a certification from each owner 
(whether married or not) or file an information return and furnish a 
payee statement for any owner that does not make the certification. The 
certification must be retained by the reporting person for four years 
after the year of the sale or exchange of the residence to which the 
certification applies. A reporting person who relies on a certification 
made in compliance with this paragraph (c)(2)(iv) will not be liable 
for penalties under section 6721 of the Code for failure to file an 
information return, or under section 6722 of the Code for failure to 
furnish a payee statement to the transferor, unless the reporting 
person has actual knowledge or reason to know that any assurance is 
incorrect.
    (d) * * *
    (2) * * *
    (ii) * * *
    (A) The United States or a State, the District of Columbia, the 
Commonwealth of Puerto Rico, Guam, the Commonwealth of Northern Mariana 
Islands, the U.S. Virgin Islands, or American Samoa, a political 
subdivision of any of the foregoing, or any wholly owned agency or 
instrumentality of any one or more of the foregoing; or
* * * * *
    (h) * * *
    (1) * * *
    (v) * * *
    (A) Received (or will, or may, receive) property (other than cash, 
consideration treated as cash, and digital assets in computing gross 
proceeds) or services as part of the consideration for the transaction; 
or
    (B) May receive property (other than cash and digital assets) or 
services in satisfaction of an obligation having a stated principal 
amount; or
* * * * *
    (vii) In the case of a payment made to the transferor using digital 
assets, the name and number of units of the digital asset, the date and 
time the payment was made, the transaction identification as defined in 
Sec.  1.6045-1(a)(26) and the digital asset address (or addresses) as 
defined in Sec.  1.6045-1(a)(20) into which the digital assets are 
transferred;
* * * * *
    (2) * * *
    (iii) Digital assets. For purposes of this section, a digital asset 
has the meaning set forth in Sec.  1.6045-1(a)(19).
    (i) * * *
    (1) In general. Except as otherwise provided in this paragraph (i), 
the term gross proceeds means the total cash received, including cash 
received from a digital asset payment processor as described in Sec.  
1.6045-1(a)(22)(i), consideration treated as cash received, and the 
value of any digital asset received by or on behalf of the transferor 
in connection with the real estate transaction.
    (i) Consideration treated as cash. For purposes of this paragraph 
(i), consideration treated as cash received by or on behalf of the 
transferor in connection with the real estate transaction includes the 
following amounts:
    (A) The stated principal amount of any obligation to pay cash to or 
for the benefit of the transferor in the future (including any 
obligation having a stated principal amount that may be satisfied by 
the delivery of property (other than cash) or services);
    (B) The amount of any liability of the transferor assumed by the 
transferee as part of the consideration for the transfer or of any 
liability to which the real estate acquired is subject (whether or not 
the transferor is personally liable for the debt); and
    (C) In the case of a contingent payment transaction, as defined in 
paragraph (i)(3)(ii) of this section, the maximum determinable 
proceeds, as defined in paragraph (i)(3)(iii) of this section.
    (ii) Digital assets received. For purposes of this paragraph (i), 
the value of any digital asset received means the fair market value in 
U.S. dollars of the digital asset actually received. Additionally, if 
the consideration received by the transferor includes an obligation to 
pay a digital asset to, or for the benefit of, the transferor in the 
future, the value of any digital asset received includes the fair 
market value, as of the date and time the obligation is entered into, 
of the digital assets to be paid as stated principal under such 
obligation. The fair market value of any digital asset received must be 
determined based on the valuation rules provided in Sec.  1.6045-
1(d)(5)(ii).
    (iii) Other property. Gross proceeds does not include the value of 
any property (other than cash, consideration treated as cash, and 
digital assets) or services received by, or on behalf of, the 
transferor in connection with the real estate transaction. See 
paragraph (h)(1)(v) of this section for the information that must be 
included on the Form 1099 required by this section in cases in which 
the transferor receives (or will, or may, receive) property (other than 
cash, consideration treated as cash, and digital assets) or services as 
part of the consideration for the transfer.
    (2) Treatment of sales commissions and similar expenses. In 
computing gross proceeds, the total cash, consideration treated as 
cash, and digital assets received by or on behalf of the transferor 
shall not be reduced by expenses borne by the transferor (such

[[Page 59656]]

as sales commissions, amounts paid or withheld from consideration 
received to effect the digital asset transfer as described in Sec.  
1.1001-7(b)(2), expenses of advertising the real estate, expenses of 
preparing the deed, and the cost of legal services in connection with 
the transfer).
    (3) * * *
    (ii) Contingent payment transaction. For purposes of this section, 
the term contingent payment transaction means a real estate transaction 
with respect to which the receipt, by or on behalf of the transferor, 
of cash, consideration treated as cash under paragraph (i)(1)(i)(A) of 
this section, or digital assets under paragraph (i)(1)(ii) of this 
section is subject to a contingency.
* * * * *
    (o) No separate charge. A reporting person may not separately 
charge any person involved in a real estate transaction for complying 
with any requirements of this section. A reporting person may, however, 
take into account its cost of complying with such requirements in 
establishing its fees (other than in charging a separate fee for 
complying with such requirements) to any customer for performing 
services in the case of a real estate transaction.
* * * * *
    (r) * * *
    (7) Example 7: Gross proceeds (contingencies). The facts are the 
same as in paragraph (r)(6) of this section (the facts in Example 6), 
except that the agreement does not provide for adequate stated 
interest. The result is the same as in paragraph (r)(6) (the results in 
Example 6).
* * * * *
    (10) Example 10: Gross proceeds (exchange involving digital 
assets)--(i) Facts. K, an individual, agrees to pay 140 units of 
digital asset DE with a fair market value of $280,000 to J, an 
unmarried individual who is not an exempt transferor, in exchange for 
Whiteacre, which has a fair market value of $280,000. No liabilities 
are involved in the transaction. P is the reporting person with respect 
to both sides of the transaction.
    (ii) Analysis. With respect to the payment by K of 140 units of 
digital asset DE to J, P must report gross proceeds received by J of 
$280,000 (140 units of DE). Additionally, to the extent K is not an 
exempt recipient under Sec.  1.6045-1(c) or an exempt foreign person 
under Sec.  1.6045-1(g), P is required to report gross proceeds paid to 
K, with respect to K's sale of 140 units of digital asset DE, in the 
amount of $280,000 pursuant to Sec.  1.6045-1.
    (s) * * * The amendments to paragraphs (b)(1), (c)(2)(iv), 
(d)(2)(ii), (e)(3)(iii), (h)(1)(v) through (ix), (h)(2)(iii), (i)(1) 
and (2), (i)(3)(ii), (o), and (r) of this section apply to real estate 
transactions with dates of closing occurring on or after January 1, 
2025.
0
Par. 8. Section 1.6045A-1 is amended by:
0
1. In paragraph (a)(1)(i), removing the language ``paragraphs 
(a)(1)(ii) through (v) of this section,'' and adding the language 
``paragraphs (a)(1)(ii) through (vi) of this section,'' in its place; 
and
0
2. Adding paragraph (a)(1)(vi).
    The addition reads as follows:


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

    (a) * * *
    (1) * * *
    (vi) Exception for transfers of specified securities that are 
digital assets. No transfer statement required under paragraph 
(a)(1)(i) of this section is required with respect to a specified 
security that is also a digital asset as defined in Sec.  1.6045-
1(a)(19). A transferor that chooses to provide a transfer statement 
reporting some or all of the information described in paragraph (b) of 
this section is not subject to penalties under section 6722 of the Code 
for failure to report this information correctly.
* * * * *
0
Par. 9. Section 1.6045B-1 is amended by revising paragraph (a)(1) 
introductory text and adding paragraph (a)(6) to read as follows:


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

    (a) * * *
    (1) * * * Except as provided in paragraphs (a)(3) through (6) of 
this section, an issuer of a specified security within the meaning of 
Sec.  1.6045-1(a)(14)(i) through (iv) that takes an organizational 
action that affects the basis of the security must file an issuer 
return setting forth the following information and any other 
information specified in the return form and instructions:
* * * * *
    (6) Exception for specified securities that are digital assets. No 
reporting is required under this paragraph (a) with respect to a 
specified security that is also a digital asset as defined in Sec.  
1.6045-1(a)(19). An issuer that chooses to provide the reporting and 
furnish statements described in this section is not subject to 
penalties under section 6721 or 6722 of the Code for failure to report 
this information correctly.
* * * * *
0
Par. 10. Section 1.6050W-1 is amended by:
0
1. Adding a sentence to the end of paragraph (a)(2);
0
2. Adding paragraph (c)(5); and
0
3. Revising paragraph (j).
    The additions and revision read as follows:


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

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

[[Page 59657]]

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

[[Page 59658]]

also file an information return under paragraph (a)(1) of this section 
with respect to the amount paid to J even though CRX is a third party 
settlement organization.
* * * * *
    (j) Applicability date. Except with respect to payments made using 
digital assets, the rules in this section apply to returns for calendar 
years beginning after December 31, 2010. For payments made using 
digital assets, this section applies on or after January 1, 2025.

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

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

    Authority: 26 U.S.C. 7805.
* * * * *
0
Par. 12. Section 31.3406(b)(3)-2 is amended by revising the section 
heading to read as follows:


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

* * * * *
0
Par. 13. Section 31.3406(g)-1 is amended by revising paragraphs (e) and 
(f) to read as follows:


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

* * * * *
    (e) Certain reportable payments made outside the United States by 
foreign persons, foreign offices of United States banks and brokers, 
and others. For reportable payments made after June 30, 2014, other 
than gross proceeds from sales of digital assets (as defined in Sec.  
1.6045-1(a)(19) of this chapter), a payor or broker is not required to 
backup withhold under section 3406 of the Code on a reportable payment 
that is paid and received outside the United States (as defined in 
Sec.  1.6049-4(f)(16) of this chapter) with respect to an offshore 
obligation (as defined in Sec.  1.6049-5(c)(1) of this chapter) or on 
the gross proceeds from a sale effected at an office outside the United 
States as described in Sec.  1.6045-1(g)(3)(iii) of this chapter 
(without regard to whether the sale is considered effected inside the 
United States under Sec.  1.6045-1(g)(3)(iii)(B) of this chapter). For 
a reportable payment made on or after January 1, 2025, from a sale of a 
digital asset, a payor or broker is not required to backup withhold 
under section 3406 on a sale of a digital asset that is either effected 
by a CFC digital asset broker (as defined in Sec.  1.6045-1(g)(4)(i)(B) 
of this chapter) that is not conducting activities as a money services 
business (as described in Sec.  1.6045-1(g)(4)(i)(D) of this chapter) 
with respect to the sale or by a non-U.S. digital asset broker (as 
defined in Sec.  1.6045-1(g)(4)(i)(C) of this chapter) that is not 
conducting activities as a money services business with respect to the 
sale. The exceptions to backup withholding described in the preceding 
two sentences of this paragraph (e) do not apply when a payor or broker 
has actual knowledge that the payee is a United States person. Further, 
no backup withholding is required on a reportable payment of an amount 
already withheld upon by a participating FFI (as defined in Sec.  
1.1471-1(b)(91) of this chapter) or another payor in accordance with 
the withholding provisions under chapter 3 or 4 of the Code and the 
regulations under those chapters even if the payee is a known U.S. 
person. For example, a participating FFI is not required to backup 
withhold on a reportable payment allocable to its chapter 4 withholding 
rate pool (as defined in Sec.  1.6049-4(f)(5) of this chapter) of 
recalcitrant account holders (as described in Sec.  1.6049-4(f)(11) of 
this chapter), if withholding was applied to the payment (either by the 
participating FFI or another payor) pursuant to Sec.  1.1471-4(b) or 
Sec.  1.1471-2(a) of this chapter. For rules applicable to notional 
principal contracts, see Sec.  1.6041-1(d)(5) of this chapter. For 
rules applicable to reportable payments made before July 1, 2014, see 
Sec.  31.3406(g)-1(e) in effect and contained in 26 CFR part 1 revised 
April 1, 2013.
    (f) Applicability date. Except with respect to sales of digital 
assets, this section applies on or after January 6, 2017. (For payments 
made after June 30, 2014, and before January 6, 2017, see Sec.  
31.3406(g)-1 in effect and contained in 26 CFR part 1 revised April 1, 
2016.) For sales of digital assets, this section applies on or after 
January 1, 2025.
0
Par. 14. Section 31.3406(g)-2 is amended by adding a sentence to the 
end of paragraphs (e) and (h) to read as follows:


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

* * * * *
    (e) * * * Notwithstanding the previous sentence, a real estate 
reporting person must withhold under section 3406 of the Code and 
pursuant to the rules under Sec.  31.3406(b)(3)-2 on a reportable 
payment made in a real estate transaction with respect to a purchaser 
that exchanges digital assets for real estate to the extent that the 
exchange is treated as a sale of digital assets subject to reporting 
under Sec.  1.6045-1 of this chapter.
* * * * *
    (h) * * * For sales of digital assets, this section applies on or 
after January 1, 2025.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 15. The authority citation for part 301 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805.
* * * * *
0
Par. 16. Section 301.6721-1 is amended by revising paragraph 
(g)(3)(iii) and adding a sentence to the end of paragraph (h) to read 
as follows:


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

* * * * *
    (g) * * *
    (3) * * *
    (iii) Section 6045(a) or (d) (relating to returns of brokers, 
generally reported on Form 1099-B, ``Proceeds From Broker and Barter 
Exchange Transactions,'' for broker transactions not involving digital 
assets; the form prescribed by the Secretary pursuant to Sec.  1.6045-
1(d)(2)(i)(B) of this chapter for broker transactions involving digital 
assets; Form 1099-S, ``Proceeds From Real Estate Transactions,'' for 
gross proceeds from the sale or exchange of real estate; and Form 1099-
MISC, ``Miscellaneous Income,'' for certain substitute payments and 
payments to attorneys);
* * * * *
    (h) * * * Paragraph (g)(3)(iii) of this section applies to returns 
required to be filed on or after January 1, 2026.
0
Par. 17. Section 301.6722-1 is amended by revising paragraphs 
(d)(2)(viii) and (e) to read as follows:


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

* * * * *
    (d) * * *
    (2) * * *
    (viii) Section 6045(a) or (d) (relating to returns of brokers, 
generally reported on Form 1099-B, ``Proceeds From Broker and Barter 
Exchange Transactions,'' for broker transactions not involving digital 
assets; the form prescribed by the Secretary pursuant to Sec.  1.6045-
1(d)(2)(i)(B) of this chapter for broker transactions involving digital 
assets; Form 1099-S, ``Proceeds From Real Estate Transactions,'' for 
gross proceeds from the sale or exchange of real estate; and Form 1099-
MISC, ``Miscellaneous Income,'' for certain substitute payments and 
payments to attorneys);
* * * * *

[[Page 59659]]

    (e) Applicability date. The reference in paragraph (d)(3) of this 
section to Form 8805 shall apply to partnership taxable years beginning 
after April 29, 2008. Paragraph (d)(2)(viii) of this section applies to 
payee statements required to be furnished on or after January 1, 2026.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-17565 Filed 8-25-23; 8:45 am]
BILLING CODE 4830-01-P