IRS Provides Additional Year of Penalty Relief for Digital Asset Transaction Reporting

(Parker Tax Publishing July 2025)

The IRS extended and modified the transition relief provided in Notice 2024-56 for brokers who are required to file Form 1099-DA, Digital Asset Proceeds From Broker Transactions, to report digital asset sales and exchanges by customers. The transition relief provided in Notice 2024-56 is extended through 2026, and limited transition relief is also provided from backup withholding tax liability for 2027. Notice 2025-33.

Background

In July of 2024, the IRS published final regulations in T.D. 10000 (final regulations) to require brokers to file information returns on Forms 1099-DA, Digital Asset Proceeds from Broker Transactions, and furnish payee statements reporting gross proceeds for sales of digital assets effected on or after January 1, 2025 and, in certain circumstances, adjusted basis on sales of digital assets effected for customers for sales of digital assets effected on or after January 1, 2026.

In Notice 2024-56, the IRS provided transitional relief for brokers who are otherwise required to file information returns under Code Sec. 6045 and backup withhold under Code Sec. 3406 with respect to sales of digital assets effected by the brokers for their customers. In addition to penalty relief for certain brokers that fail to file Forms 1099-DA and furnish payee statements with respect to certain sales of digital assets, Notice 2024-56 provides temporary transitional relief from the obligation to backup withhold under Code Sec. 3406 and pay such amounts to the IRS under Code Sec. 3403 with respect to certain sales of digital assets. Specifically, Section 3.01 of Notice 2024-56 provides that backup withholding will not be required on sales of digital assets effected by the broker on behalf of customers during calendar year 2025.

For digital asset sales effected by the broker before January 1, 2027, Section 3.02 of Notice 2024-56 permits brokers to use alternative procedures to obtain taxpayer identification numbers (TINs) from customers that opened accounts with the broker prior to January 1, 2026 (preexisting customers) if the broker submits the payee's name and TIN combination to the IRS TIN Matching Program and receives a response that the name and TIN combination furnished by the payee matches the name and TIN combination for that payee in IRS records.

For sales of digital assets in exchange for different digital assets effected on behalf of customers before January 1, 2027, Section 3.06 of Notice 2024-56 limits the amount of backup withholding tax that brokers must withhold and pay as a tax to the IRS to the amount that the broker receives upon the immediate liquidation of 24 percent of the customer's received digital assets, notwithstanding that such amount may be less than the value of 24 percent of the customer's received digital assets determined at the time of the transaction giving rise to the backup withholding obligation.

Section 3.06 of Notice 2024-56 also provides penalty relief from information reporting penalties and relief from penalties under Code Sec. 6651 and Code Sec. 6656 with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer's received digital assets.

Observation: The relief provided in Section 3.02 of Notice 2024-56 applies only to customers with certified TINs, which are generally U.S. persons. To provide additional time for brokers to collect the necessary documentation to treat preexisting customers as exempt foreign persons with respect to digital asset sales effected prior to January 1, 2027, Reg. Sec. 1.6045-1(g)(4)(vi)(F) permits a broker to treat a customer with an account established prior to January 1, 2026, as an exempt foreign person if the customer has not been previously classified as a U.S. person by the broker and the information the broker has for the customer in its files includes a residence address that is not a U.S. address.

Notice 2025-33

According to the IRS, digital asset brokers are in the process of building and implementing systems and procedures that will enable them to comply with the Code Sec. 6045 information reporting obligations for digital asset sales set forth in the final regulations. These brokers are also building and implementing systems and procedures that will enable them to comply with associated backup withholding tax obligations for customers who do not supply certified TINs or otherwise do not provide documentation establishing they are exempt from backup withholding. The IRS understands that, notwithstanding the transitional relief provided in Notice 2024-56, digital asset brokers may need additional time to build and implement backup withholding systems prior to the application of the backup withholding rules for transactions on or after January 1, 2026, as required after the application of Notice 2024-56. Accordingly, the IRS is extending for one additional year the backup withholding relief provided by Section 3.01 of Notice 2024-56 with respect to sales of digital assets. Therefore, backup withholding obligations under Code Sec. 3406 and Code Sec. 3403 will not be required on any digital asset sale effected by a broker during calendar year 2025 or calendar year 2026.

The IRS also stated that some brokers may need additional time to obtain certified TINs from preexisting customers. Accordingly, the IRS is extending the relief provided by Section 3.02 of Notice 2024-56 to permit brokers to rely on uncertified TINs of payees that are preexisting customers if the broker, prior to effecting the digital asset sale transaction for the customer, submits the payee's name and TIN combination to the IRS TIN Matching Program and receives a response that the submitted name and TIN combination matches the name and TIN combination for that payee in the IRS's records. This alternative TIN collection relief is permitted for digital asset sales effected in calendar year 2027 on behalf of payees that are preexisting customers.

In addition, the IRS is aware that some brokers may need additional time to obtain documentation necessary to treat customers with an account established prior to January 1, 2026, as exempt foreign persons. Accordingly, to provide this additional time, the IRS will not impose penalties under Code Sec. 6721 and Code Sec. 6722 on brokers that fail to file information returns and furnish payee statements with respect to sales of digital assets effected during calendar year 2027 for any customer with an account established prior to January 1, 2026, if the customer has not been previously classified as a U.S. person by the broker and the information the broker has in its files for the customer includes a residence address that is not a U.S. address. Additionally, backup withholding under Code Sec. 3406 will not be required on any digital asset sale effected by brokers during calendar year 2027 for these customers. Finally, the IRS will not impose penalties on brokers that would otherwise be required to file Form 945, Annual Return of Withheld Federal Income Tax, with respect to the backup withholding tax due with respect to digital asset sales effected during calendar year 2027 for these customers.

In the case of a sale of a digital asset for different digital assets other than specified nonfungible tokens (specified NFTs), as defined in Reg. Sec. 1.6045-1(d)(10)(iv)(A) through (C), the IRS states that brokers may need additional time to implement new backup withholding procedures because the value of the digital assets received in such sales can change between the time of the transaction and the time the received digital assets are liquidated into U.S. dollars for depositing with the IRS. Accordingly, to provide brokers additional time to develop appropriate procedures, the IRS is extending the relief provided by Section 3.06 of Notice 2024-56 to limit the amount that the broker must pay as backup withholding tax for reportable digital asset sales effected in calendar year 2027 to the amount that the broker receives upon the immediate liquidation of 24 percent of the customer's received digital assets, notwithstanding that such amount may be less than 24 percent of customer's received digital assets at the time of the transaction giving rise to the backup withholding obligation. This relief also includes the penalty relief from information reporting penalties and relief from penalties under Code Sec. 6651 and Code Sec. 6656 with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer's received digital assets. Finally, the IRS will not impose penalties on brokers that are required to file Form 945 with respect to the backup withholding tax due with respect to digital asset sales, provided the broker pays and reports the amount of backup withholding tax that is withheld and deposited with the IRS.

For a discussion of the reporting requirements for digital asset transactions, see Parker Tax ¶119,620.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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