IRS provides additional transition relief for certain digital asset brokers

The IRS extended and modified transition relief for digital asset brokers who must report certain digital asset sales and exchanges by customers on Form 1099-DA, Digital Asset Proceeds From Broker Transactions after hearing from brokers that they need more time to comply.

In Notice 2025-33, issued Thursday, the IRS extended the transition relief from backup withholding tax liability and associated penalties for any broker that does not withhold and pay the backup withholding tax for any digital asset sale or exchange transaction occurring in 2026.

The notice also:

• extends the limited transition relief from backup withholding tax liability for an additional year. Brokers will not be required to backup withhold for any digital asset sale or exchange transactions occurring in 2027 for a customer (payee). But the broker must submit that payee’s name and tax identification number (TIN) to the IRS’s TIN Matching Program and receive a response that the name and TIN combination matches IRS records.

• provides relief that failure to withhold and pay the full backup withholding tax due, if the failure is due to a decrease in the value of withheld digital assets in a sale of digital assets in return for different digital assets in 2027, and the broker immediately liquidates the withheld digital assets for cash.

• provides additional transition relief for brokers for sales of digital assets occurring during calendar year 2027 for certain customers who have not been previously classified by the broker as U.S. persons. 

The changes follow final regulations that the IRS announced in June 2024 requiring brokers to report digital asset sale and exchange transactions on Form 1099-DA, furnish payee statements, and backup withhold on certain transactions beginning Jan. 1, 2025.

Also in June 2024, the IRS provided transition relief from penalties related to information reporting and backup withholding tax liability required by these final regulations for transactions occurring in 2025 in Notice 2024-56. That notice provided limited transition relief from backup withholding tax liability for transactions occurring in 2026.

The IRS said it considered comments about the need for more reporting time before it issued the additional transitional relief Thursday.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.