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Welcome to Form 1099-DA from the IRS

The IRS has finally released the final regulations on how brokers have to report the of sales and exchanges of digital assets.  The new regulations apply to broker transactions starting in 2025, for Forms 1099-DA, Digital Asset Proceeds from Broker Transactions that will be issued in January of 2026.

However, the IRS also knows that the first year of a new form, mistakes will be made.  So, they issued Notice 2024-56 and Notice 2024-57 to provide general transition relief from reporting penalties and backup withholding for brokers who do not timely file or furnish information returns for transactions occurring during 2025, provided they’ve made a good faith effort to comply with reporting requirements. In addition, longer transition relief is provided for some types of transactions and the final regulations concerning basis reporting generally apply to transactions occurring on or after Jan. 1, 2026.  After all, for just about every IRS rule, there seems to be an exception to the rule - just to be fair. 8-)

So, what exactly are digital assets?  Here are the standard definitions:

These are referred to as Digital Asset Types.

Digital asset – general definition. Any digital representation of value that is recorded on a cryptographically secured distributed ledger, such as blockchain.

Virtual currency. A type of digital asset, virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Although it can be used in similar ways to money, it does not have legal tender status in the U.S.

Cryptocurrency. A type of virtual currency that uses cryptographic techniques to secure transactions and control the creation of new units. You've probably heard of Bitcoin and Ethereum.

Non-fungible tokens (NFTs). A unique digital identifier recorded on a blockchain and used to certify the authenticity and ownership of a specific digital asset and the rights associated with it. NFTs are generally associated with digital art and other collectibles.

Stablecoins. A type of digital asset that is pegged to a traditional or fiat currency (the U.S. dollar, e.g.) such that an equivalent amount of the fiat currency is held in reserve for each stablecoin issued. This process is meant to help the stablecoin maintain its value.

Closed loop assets. These are digital assets that exist only within a closed system and that can’t be used or exchanged outside of the system or exchanged for currency. They function only within the specific platform, such as certain online gaming platforms. The final regulations on basis reporting and on gross proceeds do not apply to closed loop assets.

Dual classification assets. Generally, assets that can be classified under two different categories, one of which is a traditional security, such as a stock or bond, and the other of which is a digital asset. A dual classification asset is traded on a distributed ledger and is subject to digital asset reporting.

The following are know as Digital Asset Mechanics.

Distributed ledger. A distributed ledger records digital asset transfers across many computers, allowing multiple individuals and businesses in the network to share and synchronize the ledger.   

Blockchain. A common type of distributed ledger that records transactions across nodes, or computer networks, in such a way that each transaction is recorded in a block and unchangeable once it is added. Each block contains a cryptographic hash of the block before it, a timestamp, and other transaction data to ensure security and prevent alterations.

Digital wallet. A software application that allows an individual to securely store, manage, send, and receive digital assets such as cryptocurrency held in the wallet.

Hosted Wallet. A hosted wallet is managed by a third-party service provider (a cryptocurrency exchange, e.g.) The host or provider has custody of the user’s private keys to the wallet, which can help if the user forgets their credentials.

Unhosted wallet. In contrast, an unhosted wallet is a noncustodial (aka self-custody) wallet, giving the user full control of their private keys. The user has greater control but also full responsibility for maintaining their credentials. 

Private keys. Unique cryptographic codes that are used both to prove ownership and authorize blockchain transactions. They are more complex and secure than regular passwords.

Digital asset address. A unique set of alphanumeric characters generated by the wallet into which the digital asset will be transferred. It may be referred to as a “quick response” or QR code.

Mining and staking. Mining refers to the process of validating and recording transactions on a distributed ledger, such as blockchain. The miner who solves the “puzzle” gets to add a new block to the blockchain and is rewarded with cryptocurrency. Alternatively, individuals who are willing to stake the cryptocurrency they hold may be chosen to add new blocks to the blockchain.

Then we have the terms used in Digital Asset Management.

Custodial vs. non-custodial industry participants. Custodial participants hold and manage assets on their clients’ behalf. In contrast, non-custodial participants provide platforms or tools for their clients, such as non-custodial digital asset trading platforms, but do not have custody of or manage assets and do not provide reporting or other services.

Processors of digital asset payments (PDAPs). Entities that process payment transactions in connection with digital assets, including exchanges of digital assets for other digital assets, cash, or other property. PDAPs are responsible for reporting digital asset transactions on Form 1099-DA.

Digital asset middleman. Any person who provides facilitative services with respect to a sale of digital assets.

While knowing all of these terms may not make you a guru in the digital asset world, it might give you a better idea of what they all are talking about.