On June 28, 2024, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued final broker reporting regulations that mandate broker reporting for centralized exchanges and hosted wallet providers, providing extensive rules under which transactions in digital assets will be reported.
T.D. 10000 (the Final Regulations) provide that stablecoin transactions are subject to broker reporting but set a de minimis threshold of $10,000 per taxpayer for stablecoin reporting and an alternative aggregate reporting framework. Treasury and the IRS also confirmed that non-fungible tokens (NFTs) are generally subject to broker reporting—and also provided a de minimis framework. Further, closed-loop system networks are now generally exempted from broker reporting, except to the extent that tokens are transferable outside of the closed system. And the Final Regulations included details on the overlap with real estate and with existing securities broker reporting rules.
On the same day the final rules were published, the U.S. Supreme Court overturned the Chevron doctrine in Loper Bright v. Raimondo. This decision calls into question whether federal agencies have any legal force to expand decentralized finance (DeFi) regulations. It is unlikely that the current regulations would apply to a person who doesn’t fall within the definition of “broker” and whose actions are not “effectuating” the transfer under the ordinary usage of those terms. Of course, participants in the DeFi industry don’t fit within these terms.
As the rules stand now, there are no finalized regulations with respect to “non-custodial industry participants.” This catch-all term includes decentralized finance platforms, unhosted wallet providers, layer 2s, and certain other blockchain service providers. That said, Treasury and the IRS explicitly stated in the Preamble that they intend to issue Final Regulations in the coming months to apply to DeFi and other non-custodial industry participants. The Preamble states, “The Treasury Department and the IRS do not agree that non-custodial industry participants should not be treated as brokers . . . .” It continued: “The Treasury Department and the IRS continue to study this area and, after full consideration of all comments received, intend to expeditiously issue separate final regulations describing information reporting rules for non-custodial industry participants.”
Fenwick submitted a comment letter on the proposed regulations and testified before Treasury and the IRS regarding the same. Fenwick emphasized, among other things, that as a legal matter the expansion of the regulations to DeFi would go far beyond Congress’ mandate and that as a policy matter the regulations would stifle American innovation and drive the digital asset industry to move offshore. One would hope that comments such as these influenced Treasury and the IRS, at least for now, to delay application of the regulations to DeFi.
The IRS also issued two notices (Notice 2024-56 and Notice 2024-57) and a Revenue Procedure (Rev. Proc. 2024-28).
Notice 2024-56 provides transitional penalty relief for brokers who fail to report sales of digital assets that are affected in 2025 and required to be filed in 2026. Notice 2024-57 provides additional relief from penalties for failure to report certain types of digital assets transactions until additional regulations are finalized, including wrapping and unwrapping tokens, liquidity provider transfers, staking transactions, digital asset lending, short sales, and notional principal contracts. And Rev. Proc 2024-28 provides a safe harbor on which taxpayers may rely to allocate unused basis of digital assets held within each wallet or account of the taxpayer as of January 1, 2025.
Most of the rules in the Final Regulations are applicable starting January 1, 2025, but certain provisions are not effective until January 1, 2026.