On June 28, the Treasury Department and IRS finalized regulations on tax information reporting for digital assets, requiring brokers to report gross proceeds on the sale of digital assets beginning in 2026 for all sales in 2025. These regulations represent a crucial advancement for the industry, easing the tax compliance burden for individuals in the digital asset ecosystem and helping to close the estimated $50 billion crypto tax gap. However, digital asset brokers are likely to face significant challenges in implementing these regulations.
As a result of these regulations, the IRS will receive a massive influx of digital asset tax data beginning in 2026 (pertaining to the 2025 tax year). The novelty of this data, combined with its digitally native nature, provides the IRS with an opportunity to leverage technology as a path to improved taxpayer service, better compliance, and more efficient operations. Simultaneously, the IRS is in the unique position to leverage the learnings and practices developed for processing digital asset tax data as insights for the broader modernization efforts that have been underway for years now.
Modernizing the IRS
In 2019, Congress passed the Taxpayer First Act (TFA) to reorganize the IRS. In addition to improving cybersecurity, enforcement, and the taxpayer experience, the TFA also pushed for the technological modernization of the agency, including efforts around the expansion of electronic filings and the use of modern cloud-based technology. As one might expect, digital filings help achieve a number of key IRS goals:
- First, it reduces the burden on individuals filing tax returns, increasing the likelihood of accurate reporting and broader compliance.
- Second, it increases the speed at which information can be processed and made available to taxpayers in need of assistance, increasing taxpayer service.
- Lastly, it allows for the programmatic identification of easily solvable errors, creating a much earlier (and faster) opportunity to resolve inaccuracies on a tax return.
The emergence of digital assets as a new class with distinct information requirements offers the IRS an opportunity to build a modern system tailored specifically to these assets, unburdened by the challenges of upgrading legacy systems. This presents a pivotal moment for the IRS to innovate by creatively leveraging technology to enhance taxpayer service, improve compliance, and streamline resource allocation for enforcement. The insights gained and strategies developed through this process could also provide a valuable framework for modernizing other IRS systems more effectively.
Zooming Into Digital Assets
Digital assets are unique for a variety of reasons. Cryptocurrencies, nonfungible tokens (NFTs), stablecoins and other digital assets come with hefty nuance, uncertainty, and high transaction volume. The final regulations focused on these nuances to ensure the required data elements reported are tailored to the unique asset type. Stablecoins and certain NFTs, for instance, are to be reported in an aggregate manner only if a minimum threshold ($10,000 for the former and $600 for the latter) is met. Further nuance exists in the fact that there is no set digital asset registry–as is the case for traditional financial instruments such as stocks–and many transactions do not involve U.S. dollars.
Therefore, while the regulations offer unprecedented clarity regarding the type of information the IRS will be receiving—thanks in part to the implementation of the newly released 1099-DA form—the agency will still face a learning curve, especially given the sheer volume of transactions that is par for the course in digital asset markets. In turn, preparation should start sooner rather than later. The IRS must address any technology gaps that exist regarding enforcement while also preparing to scale their efforts to accommodate high levels of volume and to bring digital-first best practices to other areas of the agency. This will likely require upskilling existing employees and seeking out industry partnerships.
Looking Ahead
The digital asset regulations finalized in June are noteworthy. They offer clarity and legitimacy to the space and are expected to generate $28 billion in tax revenue over the next decade. While tax reporting begins in 2025, investors, businesses, and the IRS should all start preparing now.
While there will inevitably be details to work out, the IRS has an exciting opportunity to supercharge its modernization efforts in the months and years ahead. The lessons it learns from digital asset reporting will ideally be scalable, not just in the sense that they can handle large influxes of data, but in that they can be extrapolated to other tax efforts across the agency.
The author, Miles Fuller is Senior Director of Government Solutions at Taxbit.