Hello and welcome to today's webinar, Digital Asset Existing and New Reporting Requirements. I see it's the top of the hour. We're glad you're joining us today. My name is Evette Davis and I'm a Senior Tax Analyst with the Internal Revenue Service, and I will be your moderator for today's webinar, which is slated for approximately 75 minutes. This webinar offers one IRS Continuing Education Credit. Participants earn one IRS CE credit and related Certificate of Completion by attending the live broadcast of the webinar for at least 50 minutes after the official start time and by answering at least three polling questions during the live broadcast. Please note that the polling question example will count as an attendance check towards the polling question response requirement. Before we begin, if there's anyone in the audience that's with the media, please send an email to the address on the slide. Be sure to include your contact information and the news publication you're with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. As a reminder, this webinar will be recorded for future posting. Please note Continuing Education Credit or Certificates of Completion are not offered if you view any version of our webinars after the live broadcast. We hope you won't experience any technology issues, but if you do this Slide shows helpful tips and reminders. We've posted a technical help document you can download from the Materials section on the left side of your screen. It provides the minimum system requirements for viewing this webinar, along with some best practices and quick solutions. If you completed and passed your system check and are still having problems, try one of the following. First, close the screen where you're viewing the webinar and re-launch it. Second, click on Settings on your browser viewing screen and select HLS. You should have received today's PowerPoint in a reminder email, but if not, no worries, you can download it by clicking on the Materials dropdown arrow on the left side of your screen as shown on this slide. To receive our survey at the end of the presentation, you need to have your pop-up blocker disabled. We've also included several technical documents that describe how you can disallow your or disable your pop-up blockers based on the browser you are using on the Materials tab. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, please click the closed captioning drop down arrow located on the left side of your screen. This feature will be available throughout the webinar. If you have a topic specific question today, and we hope you do, please submit it by clicking the Ask Question drop down arrow to reveal the text box. Type your question in the text box and remember to click Send. Now folks, this is very important to remember as well; please do not enter any sensitive or taxpayer specific information. During the presentation, we'll take a few breaks to share knowledge-based questions with you. At those times, a polling style feature will pop-up on your screen with a question and multiple choice answers. Select the response you believe is correct by clicking on the radio button next to your selection and then click Submit. If you do not get the polling question, this may be because you have your pop-up blocker on, so please folks take a moment to disable your pop-up blocker now so you can answer the questions. We've included several technical documents that describe how you can disable pop-up blockers based on the browser you are using. We have documents for Chrome, Firefox, Microsoft Edge and Safari for those Mac users. You can access them by clicking on the Materials drop down arrow on the left side of your screen. We're going to take some time now and test the polling feature. Here's your opportunity to ensure your pop-up blocker is not on so you can receive the polling questions throughout today's presentation. Okay audience, this question will count as an attendance check towards the polling question requirements to earn CE credit. Do you know who your local Stakeholder Liaison is? A, yes; B, no; or C, what is Stakeholder Liaison? Take a moment, click the radio button that corresponds to your answer or, if needed, type your response in the Ask Question text box. I'll give you just a few more seconds to submit your response. But just so that you know Stakeholder Liaison, what we do is assist with issues pertaining to IRS practices, policies and procedures. And if you're a tax professional, you want to know your local stakeholder Liaison because she or he will be your first point of contact for data breaches in your tax practice. Okay, want to make sure you have enough time to make your selection either A, B or C. We're going to stop the polling now. Let's see how the majority of you responded. 55% of you look like say no; you do not know your local Stakeholder Liaison. Remember what I just said about who we are and what we do, so don't worry about it, I'll give you that contact information towards the end of the presentation. We hope you received the polling question and you were able to submit your answer. If not, now is the time to check your pop-up blocker and to make sure you have it turned off. Again, we've included several technical documents that describe how you can disable pop-up blockers based on the browser you are using. Just click the Materials drop down arrow on the left side of your screen to download your browser document. Again, welcome, we're so glad you joined us for today's webinar. Before we move along with our session, let me make sure you're in the right place. Today's webinar is Digital Asset Existing and New Reporting Requirements. This webinar is scheduled for approximately 75 minutes from the top of the hour. Now let me introduce today's speakers. John Murphy is an Internal Revenue Service Program Manager for Digital Assets supporting the Digital Asset Project Office in National Headquarters. He has been with the IRS for 33 years and he's led teams of agents piloting various digital asset work streams. John's work is vital, as he is responsible for developing enterprise-wide training that will educate the workforce on digital assets. Next, Trisha Turner. Trisha is an Internal Revenue Service Senior Advisor for Digital Asset Supporting the Digital Asset Project Office also in National Headquarters. She has been with the IRS for 20 years and has spent the last nine years supporting the service in several digital asset roles. Trisha is a critical partner with domestic and international stakeholders, leveraging resources while sharing knowledge, data and best practices. Finally, we have Seth Wilks. Seth joined the Internal Revenue Service in February of 2024 as the Executive Director, Strategy and Development in the Office of Digital Asset Initiative. The DAI serves as a program office that helps the IRS set a consistent global digital asset strategy, including internal IRS procedures and policies. Seth came to the digital asset world after leading several multinational tax departments. We've got a great group here for you today. So Seth, the floor is yours. Thanks, Evette, and good afternoon everyone. I'm going to go ahead and jump right in. The objectives of our presentation are to explore the purpose and importance of answering the digital asset question on the Form 1040 and other forms. We're going to explore the new regulations and third party reporting requirements. We're also going to review the new Form 1099-DA. And lastly, and maybe most important, we're going to discuss the Revenue Procedure 2024-28 and the Safe harbor provisions for taxpayers. As we noted in our objectives, there are new reporting regulations and third-party reporting requirements. So Trish, before we talk about where we are and where we're going, can you walk us through how we got here in the history of Digital Assets within the IRS? Sure, Seth, and before we get started, it's really important for us to note that virtual currency and digital assets are interchangeable terms with the IRS. The IRS moved away from virtual currency to digital assets as digital assets are an umbrella term which covers things like convertible virtual currencies, NFTs, and other digital assets. As Notice 2014-21 states, digital assets are treated as property for Federal Tax purposes. Digital assets are not treated as currency that could generate foreign currency gain or losses for US Federal tax purposes. The basis of digital assets that a taxpayer receives as payment for goods or services is the fair market value of the digital asset in US Dollars as of the date it was received. Taxpayers are required to determine the fair market value of the digital asset in US Dollars as of the date of the payment or receipt. When a taxpayer successfully mines a digital asset, the fair market value of the digital asset as of the date of receipt is includable in gross income. If a taxpayer's mining of a digital asset constitutes a trade or business and the mining activity is not undertaken by the taxpayer as an employee, the net earnings from self employment resulting from those activities constitute self employment income and are subject to self employment tax. A payment made using digital assets is subject to information reporting to the same extent as any other payment made in property. Payments made using digital assets are subject to backup withholding to the same extent as other payments made in property. Therefore, payers making reportable payments using digital assets must solicit a Taxpayer Identification Number or a TIN from the payee. Failure to timely or correctly report digital asset transactions when required to do so may be subject to information reporting penalties under sections 6721 and 6722. For the first three years, the IRS focused on the question on the Form 1040, but we've expanded it because we are seeing that digital assets touched several different entities, including but not limited to those on the 1040 that flow through from the Schedule D and Form 8949 to report gains and losses, the Schedule C of Form 1040 to report the Business Schedule C income or the Schedule 1 on the 1040. These are also now reported on the Form 1120 for corporations, the Form 1065 for partnerships, the 1120-S for S corporations, the Form 1041 for estates and trusts, and the Form 709 for the gift tax return. Those began in 2023. Now that we've discussed what the reporting requirements are, let's have Seth share some of the examples of taxable transactions. Thanks Trish. On IRS.gov, there are several listed examples of taxable digital asset transactions, but we'll review a few here. So first of all, buying digital assets with cash is not a taxable event, but we're going to go through a few examples where you may have taxable income and we'll talk about both the character as well as whether they may qualify for long-term or short-term capital gains Receiving digital assets as a payment for services rendered, you would report that on your Schedule C for as ordinary income. Now please note, the recognition of ordinary income establishes your cost basis. So when you later dispose off that asset, you would recognize a capital gain or loss if the value of that asset increased or decreased. Lastly, receiving digital assets as a result of mining or staking digital assets. These transactions could be reported on Schedule C if you are running a business or on Schedule 1 under other income. As in the last example, organizing this income establishes your cost basis in the asset. Note the value is measured in USD at the fair market value at the date and time of the receipt and receipt occurs when the asset was received and you have dominion and control over that asset. All right, let's talk about some of the question that's on the 1040 and other forms. So first of all, in 2023 -- the question reads, At the time, at any time during 2023, did you, A, receive as a reward, award or payment for property or services; or, B, sell, exchange, gift or otherwise dispose of a digital asset or financial interest in a digital asset? That's a lot. So let's kind of break that down a little bit and give a few examples about when you would check that box yes and when you would check it as no. So first of all, some of the transactions that we just discussed would likely lead to us checking that box, so we'll go through. So for example, receiving digital assets as payment for property or services, you would check yes. Receiving digital assets as a result of a reward or award would also be a check, yes. Receiving new digital assets resulting from mining, staking, or similar activities also would be checked, yes. Receiving digital assets as a result of a hard fork would also be a reason to check that box, yes. Now, disclosing digital assets in exchange for property services also would be a check, yes. Disposing digital assets for another digital asset, as we mentioned in the last slide, that would be a reason to check, yes. Lastly, selling a digital asset for cash or other fiat currencies would likely be a yes. And then there are other scenarios that we talked about that, for example, if you were giving a gift of a digital asset that would qualify as a disposal of a financial interest, even if it's not necessarily a taxable event to you. So when would you check the box no? If you didn't do any of the last sets, then you're pretty safe to check the box now. If all you did was own digital assets in a wallet or account, but did not engage in any other digital asset transaction during the year, that would be a no. Now, if you purchased but did not sell digital assets, that would likely also be a no. Now, this next example is going to be a little bit of a tricky one. So let's say that I just transferred digital assets from one wallet that I own to another wallet that I also own. That in and of itself would not require you to check a yes, you could check a no. But if you paid a fee to transfer those assets and you paid that fee in a digital asset, that would be a reason to check yes. All right, so this question -- like, as a practitioner, this question should be the start of a conversation with your client. If they answer yes, you need to know what to ask next. Now, John is going to go through certain data elements that you'll need to help your clients accurately report their digital asset activities. However, let's pause for a knowledge check. Evette? All right. Awesome. Thank you, Seth. Yep. Audience, here we are with our first of two polling questions, okay. First one, which of these digital asset activities do not impact taxable income? A, selling digital assets for US Dollars; B holding digital assets; C, sending or receiving digital assets for services; or D, receiving digital assets as a result of mining or staking? Take a moment. Click the radio button that best answers the question. Remember, if you do not receive the polling question, it's okay, please enter only the letter A, B, C, or D that corresponds with your response using the Ask Question text box. Again, remember, your response is time-stamped as well. Audience, you need to answer at least three polling questions and participate in the live broadcast from the official start time for at least 50 minutes to earn one IRS CE Credit. I want to give you a few more seconds to make your selection, or if needed, submit your answer in the Ask Question text box letter A, B or C – A, B, C or D, whichever corresponds with your response. Okay. All right, let's go ahead and let's stop the polling now and let's share the correct answer on the next slide. Folks, the correct response is B, Oh, awesome, holding digital assets, which is the correct answer, since just holding digital assets does not impact taxable income, and I see that 97% of you responded correctly. That is amazing. All right, moving on. Our next polling question contains three yes or no questions. We will give you time between each of the three questions shown on the slide to select your response. So here we go with the first one. For the first polling question 2A, does the taxpayer have to check yes if they transfer digital assets between wallets and incur a transaction fee? Select yes or no. Again, take a moment, click the radio button that best answers this question. If you do not receive the polling question, please enter only yes or no that corresponds with your response in the Ask Question text box. This response is time-stamped. Give you a few more seconds for this one. Okay. All right, let's move on to polling question 2B. Does the taxpayer have to check yes if they're gifting a digital asset? Select yes or no. Take a moment, again, click the radio button that best answers the question. Make sure you if you need to enter yes or no using the ask question text box, this response is as well time stamped. I'll give you a few more seconds to make your selection and submit your answer for question 2B. Okay. All right, last one. The polling question. 2C. Are payment app transactions reportable as digital asset transactions? Select yes or no. Take a moment. Click the radio button that best answers the question. If you do not receive the polling question, it's okay, just enter only yes or no that corresponds with your response using the Ask Question text box. This question 2C is, as well as the others, time stamped. I want to give you a few more seconds to make sure you have enough time to make your selection of yes or no for question 2C. You need to submit your answer using the Ask Question feature. Okay. All right. Hopefully you've had time to answer these three questions. We're going to stop the polling now. Let's share the correct answer for all three questions on the next slide. Folks, the correct responses are as follows. Yes for questions 2A and 2B and no for question 2C. Okay, and let's see what the percentage is for correct response. All right, looks like on 2A 83% of you responded correctly; for 2B, 78% of you responded correctly; and for 2C, 39% of you responded correctly. Okay, so, Seth, it looks like they got 2A. Can you help us out and explain why the answer for 2B is yes and the answer for 2C is no? Can you help us out with that, Seth? Yes. So on 2B, does the taxpayer have to check yes if they're gifting a digital asset? This actually has to do with the fact that when you're gifting a digital asset, you are -- basically you're disposing of a financial interest in that asset. Now I mentioned earlier, that doesn't necessarily mean that gifting an asset is taxable, but you are still disposing of it, and so that's why you would check that box. And then on the third question, are payment app transactions reportable as digital asset transactions? So this would be like your traditional payment app, like if I'm just paying, my friend back because they paid for lunch or something like that, and all we're really transferring are just cash, those would not qualify. So you would just check no, but if you were actually paying back your friend in a digital asset, which a lot of these payment apps do allow you to use digital assets now, then that would be a check the box for yes, but if it's just transferring cash, that would be a no. Awesome, Seth, thank you so much. I think you're going to go ahead and continue, correct? That is correct. Thanks, Evette. So we're going to get into some basis computation examples now. Our team has been on the road quite a bit this year at nationwide tax forums. We understand the complexity ourselves from examinations that we've done and practitioners and the general public share how difficult this process can be. While I have a deep and abiding love for basis computation, I'm going to pass things over to John to present certain details around how to approach these transactions. John? All right, thanks Seth. So I think all of you know, as it comes to any times -- anything dealing with the preparation of tax return, calculating basis and gains and losses, what we need from the taxpayers are the records, records and more records. And as it relates to digital asset transactions, what you guys are going to want to get from them are any downloaded records of all activity from centralized exchange accounts, internal records for any transfers to, from and between accounts, a list of the self hosted wallet addresses, and all related blockchain activity associated with those addresses, such as an interaction with decentralized exchanges, decentralized lending protocols and any non-fungible token marketplaces. You want to get any and all records associated with any staking, mining, validation and any other similar type activities. And if they have any purchase card transactions for debit cards, excuse me, linked to those digital asset accounts, you'll want to get those too. All right, talk about that, the basis of the digital assets generally going to be what we need from them in US dollars, and really the basis depends on the type of transaction. As it relates to the basis for any digital assets that taxpayer receives as payments for goods or services in the fair market value, those fair market values are going to be as of the date and time of receipt. So you can see Publication 551, Basis of Assets for more information on the computational basis when property is received for digital assets or for goods or services, excuse me. All right, next slide please. All right, so let's -- excuse me really quick. Let's talk about the fact that currently there's not an industry standard for providing digital asset transaction records or information to taxpayers. So you're going to expect to see a wide variety of different types of records that a taxpayer might provide to you, different ways in which it's displayed. So, when working to determine the tax basis and capital gain or loss of a given digital asset transaction, it can be helpful to maintain a calculation check sheet of all must have information to complete those transactions. So you can see on our screen, right, we have a calculation transaction, a transaction timestamp, the transaction type, an asset description, the amount transaction, the US dollar value amount at the time of the transaction, transaction fees, and the adjusted basis of the asset sold. So the information in the screenshot at the top of the slide is an example of what might be seen and provided by a taxpayer. Based on information we have, we can identify all elements on the checklist except the US dollar value amount at the time of the transaction and the adjusted basis of the assets sold. So let's work through a calculation together so we can see, hey, how do I come up with the US dollar value of the transaction and the adjusted basis? All right, next slide please. So what do we do know? The most important thing, one of the most important things is we see there's a timestamp on the right hand side, what's highlighted, right. That variable is clearly labeled on the ledger and as such we can identify that the transaction took place on February 20, 2021 at 23:30:04 UTC, right. So basically 11:30 at night, four seconds, right, so when that took place. All right, next slide, we see the type of transaction -- the transaction type, right. So this variable is less easily understood on the ledger that we're viewing as the type is simply defined as buy. However, when we pair this classification with the ETH/BTC pair to the left of it, we can identify that BTC or Bitcoin was sold to buy ETH, Ethereum. Next slide. All right, next slide we show, right, the variable can be seen on the pair. As we talked about right, the transaction involved both Bitcoin and Ethereum. Next slide, if we could. So let's talk about the number of units now. Next slide that we're talking about. So we can see that number of units. Those variables can be seen under the amount and the cost. And as such we can identify that 3.93039 Bitcoin was sold to buy 210 units of ETH. We do know that. Now let's talk about our US dollar value amount. So that variable is less defined on the ledger as the only indication of price is that of a 0.01872 Bitcoin. That's basically worth one ETH at the time of purchase. So to fully understand the price per unit at the time of transaction, US preparers can leverage tools such as CoinGecko to identify a price per unit on any given day. So in this example, the price of Bitcoin on February 20, 2021 was $56,389.82. So we can derive that, we've got that and then one Ethereum is going to roughly be equal to that 56389.92 times the 0.01872, hence roughly we get $1055.40 for one unit of Ethereum. All right, next slide, if we could, let's talk about the US dollar value -- so the US dollar value amount. So based on your research in coming through this calculation thus far, we can identify that the 3.93039 Bitcoin multiplied times the price at the time of the transaction of the $56,389.82 gives us an approximate value of $221,634. And for the 210 ETH times that value of $1,055.40 per unit gives us again the same approximate value of $221,634. So, right, as accountants, preparers, you love seeing the matching, right; credits and debits matching up, right; these prices matching up on transactions. So, all right, next slide, if we could. All right, so let's talk about a transaction fee. So many times you as preparers, right, when taxpayers give you records, you'll see a transaction fee. For any given digital asset transactions, there's a transaction fee or what's called a gas fee, depending on the type of asset utilized and transacted on. So here we see there's a transaction fee and we see that fee is 0.0063. So we multiply that times the unit price for the Bitcoin of $56,389.92. We come up with a fee of $35.53. So again, remember, that's an important part because those fees will play a part in how we come to our adjusted basis. Next slide, if we could. All right, so let's talk about that adjusted basis. So the US Dollar value amount at the time of the transaction is not included within the given ledger. However, after examining previous documents of your clients and leveraging the first asset acquired, first asset disposed, the FIFO methodology, US preparers are able to determine that the 3.93039 Bitcoin was purchased on January 15, 2020 for $225,000. Okay, so that's your adjusted basis. So I do want to highlight -- I made mention of CoinGecko earlier, I do want to highlight that while tools like CoinGecko, excuse me, provide daily values, it's really important to try to get as close as you can to the minute, which is great, or even the second, which is even better for the time of the transactions. So the closer you can get to the actual time transaction to calculate that correct value is going to be best served for your clients. All right, so there are other type of crypto type calculators in the marketplace that can help you get very precise pricing. All right, let's move to our next slide if we could. All right, so let's calculate our capital gain and loss, right. So we've gone through -- we've determined what the fee was, the US dollar value amount. We determined the price per unit and all that jazz. Now ultimately we want to get to, hey, I've got these variable figures -- various figures, excuse me, and now we can determine what's my adjusted basis in the property. So we got to take into account that amount realized that the $221, 634, but then we're going to subtract the transaction fee of the $35.53 to get us to an adjusted amount realized of $221,598.47. So again, that's going to be our adjusted amount realized. All right, so as we -- and you can see on the screen, right, we've come through these different on a transaction checklist, right, we're checking them off, including the ones that were X's now, the US Dollar value amount at the time of transaction and the adjusted basis of the assets sold. So if you recall on the first slide, there was a red X for those two value amounts, but now coming through the calculation now, we figured those out, including the resulting adjusted amount realized. Next slide, if we could. So now let's calculate our capital gain and loss. So following the calculation of the adjusted basis for the assets sold, we're now able to calculate that gain or loss. So what we see is we have an amount realized of $221,598.47, we subtract the adjusted basis of $225,000, which is going to come up with a capital loss of $3,043 -- excuse me, $3,401.53. So in this transaction, this taxpayer suffered a loss, but it sometimes happens. So again, you want to be as precise as possible, whether it's a gain or a loss. But utilizing those different tools, as I mentioned, right, and coming up to as precise as possible will give your client the best outcome or the best factor or figure in calculating their gain and loss. So with that being said, I'll turn things over to Seth to review the new regulations and any Form 1099-DA reporting requirements. Hey, thanks, John. Yeah, I do want to just highlight that was one transaction, right, and that was a lot of effort to go through and kind of identify each of the different components to that transaction. But one of the characteristics in this space and digital assets is that people trade very frequently and oftentimes, let's say, that I may buy one Bitcoin at one time, but then I may dispose of that fractionally many times, and so there are some interesting nuances that become challenging when you're trying to do this by hand. John did mention that there are options out on the market as far as software that you could use. So as a practitioner look at -- it would be good to do some research so that you can help point your clients in the right direction to be able to help automate as much of this as possible. But it is a challenge, but there are definitely some tools that are out there that can help make this easier. All right. So the IRS finalized the 6045 regulations for custodial brokers earlier this year, following our notice of proposed rulemaking that we published back in 2023. One of the fascinating things is that when we issued these rules and really quick, 6045 see 1099 reporting for brokers, so you would stake 1099B for stocks and equities and commodities, 6045 in the digital asset space is going to result into the new form 1099-DA. What was fascinating though, is that we got a lot of comments, about 44,000 comments, in fact, and it just gives you a little context. I think oftentimes when we do new regulations, we may get dozens of comments, and if it's a really spicy topic, we may get hundreds of comments, but we managed to get 44,000 comments. And I actually see this as a really positive thing because what it tells me is that the folks who trade in this space are very interested in participating in this regulatory process. And so I think that we were able to learn a lot from these comments that came in which helped us to create the final broker rules that we published earlier this year that focused on custodial brokers. Now, I do want to tell you, there really are kind of -- we kind of divide the way we look at brokers into two categories in this space. One is custodial, and that looks a lot like the traditional brokers and securities brokers and equities brokers. These are brokers who take custody of those assets, they hold them on your behalf, and then they provide you ways to be able to trade those assets on their platforms. The other category that we look at is what we call non-custodial brokers. And this could be, right now, we haven't published any regulations specifically defining what that broker is, but this is very unique to the digital asset space where as a taxpayer, you could self custody your digital assets in an unhosted wallet, and then you could actually trade those assets directly on the blockchain through these different protocols and decentralized finance. And so it is really interesting that the way we approach the broker rules for custodians was very much closer to how we approach them for traditional brokers. But as we've been writing these rules and considering in the non-custodial space, we've had to take into account a lot of the nuances that exist in this space, so it's been interesting. So let's talk about some of the changes that came about. So I think we've mentioned that back in 2021, the Infrastructure Investment and Jobs Act was passed and in this huge law that was passed, there were about a dozen pages dedicated to digital asset reporting. And some of the things that were included in there were again, broker reporting, so 1099s for brokers. And that would include both the custodial brokers and non-custodial brokers. There are also rules in there that would basically mandate when you're moving an asset from one broker to another, which happens frequently in this space, that those two brokers need to communicate with each other and provide what they call a transfer statement. And there was also another rule in there that said if you purchase a good or service with a digital asset that is over $10,000, that you would -- that the vendor or the person that you're buying from would need to fill out a Form 8300, which basically lets us know that you've purchased something with something digital assets over $10,000. Now, we have issued final regs on some of these things, but these other things like the non-custodial broker rules, transfer statements and the Form 8300 reporting, our plan is to address those in the upcoming year or so. Of course, we have to weigh out all the priorities that are coming our way right now, but we do hope to have those out soon. But I do want to highlight these rules are really intended, especially these 1099 rules, they are intended to help taxpayers better understand what their obligations are to provide better information to them so that when it comes to actually complying and reporting, it's much simpler, right. I don't know how many people remember back when 1099Bs did not include cost basis and then that transition about 14 years ago where they had to start reporting. But those 1099Bs became much more useful because they had more information available. Okay, so regarding Form 1099-DA, there's a few important considerations. So first of all, what is the timeline? Well, starting in January 2025 and going forward, gross proceeds will be reported. And then starting in January 1, 2026, going forward, custodial brokers will report cost basis for certain transactions. And so what does that mean? Well, starting in your filing season 2026, you're going to get a 1099-DA from your client and it's going to have the gross proceeds, but you know that gross proceeds is only half of that equation and you're going to need to get the cost basis. So you're going to need to work with your client to evaluate their records to help them fill in that that gap so that when you're filling out that form 8949 on their personal tax return, you'll be able to help them fill out all of the required information. Now, Form 1099-DA will make clear, as I mentioned earlier, to taxpayers, which transactions are taxable and will help provide them better information, which leads to easier compliance. And while we know those 1099-DAs will be phased in over time, as I mentioned, we hope that you will view it as a conversation starter that will lead to you providing better guidance to your clients. So when you get that 1099-DA and it only has gross proceeds, hopefully you'll know the next questions to ask your clients to be able to fill in that information. Lastly, and I think I've already alluded to this, probably most importantly is the universal or global lot selection methodology will no longer be accepted. What does that mean? Well, it used to be that a lot of taxpayers, when they had Bitcoin or other digital assets in multiple places, they basically treated them as if they were all in one account. So if I was applying a FIFO methodology, I would basically pretend like all my assets were in one place and then dispose of them based off the oldest asset. But in reality, what might have been happening is that I might have disposed of an asset in wallet A that was actually acquired and cost basis is actually sitting over in wallet D. And so what does that mean? We're now moving into this by account or by wallet reporting methodology. And the reason for that is that with brokers coming online and doing 1099-DA reporting, we want to make sure that what the broker is reporting matches what the taxpayer ultimately is reporting as well. And so very important to be able to understand this and the reason this is so important is that this is something that has to happen soon, and we'll get into the details about when that's going to happen. But for now, let's go to another polling question with Evette. Awesome. Thank you, Seth. Okay, audience, here is our third polling question and here we go. What is the earliest date that the Form 1099-DA is required to report cost basis? A, April 1, 2025; B, November 15, 2026; C, October 15, 2025; or D, January 1, 2026. Take a moment and click the radio button that best answers this question. If you do not receive the polling question, please remember to enter only the letter A, B, C or D that corresponds with your response using the Ask Question text box. This response is time-stamped. Okay, I want to make sure that you all have enough time to make your selection or if you have to submit your response using the Ask Question feature, A, B, C or D, okay. Let's stop the polling now and share the correct answer on the next slide. And folks, the correct response is D, and it looks like 80% of you responded correctly. Great job, everyone. Okay, now, Trish, I'm going to come over to you. Thanks, Evette. So, on June 28, 2024, in coordination with the release of the 6045 Broker Regulations, the IRS released Revenue Procedure 2024-28. This revenue procedure provides a safe harbor for taxpayers to transition their digital asset holdings to a by account or by wallet counting methodology as required by the final regulations. Prior to the release of the final regulations, many taxpayers used a universal method for purposes of tracking their basis of digital assets. Under the universal method, taxpayers treated all digital assets held across multiple accounts and wallets as though they were held in one account. The final regulations do not permit the use of universal method and require a wallet by wallet methodology going forward. Taxpayers are required to make their safe harbor allocation by the earlier of their first disposition in 2025 or the date they file their 2025 tax return. The final regulations that require by account or by wallet accounting are applicable to all transactions on or after January 1, 2025. The revenue procedure will permit taxpayers to rely on any reasonable allocation of units with unused basis to a wallet or account that holds the same number of remaining digital asset units based on the taxpayer's records of such unused basis and remaining units. For taxpayers that do not elect to use the safe Harbor Beginning in 2025, their holdings will be subject to by account or by wallet methodology when disposing of their digital assets. Please note that Revenue Procedure 2024-28, Section 4.02 includes detailed information regarding the general requirements for using the safe harbor. In short, each digital asset unit and unit of unused cost basis must be a capital asset in the hands of a taxpayer. Taxpayers must maintain their records and any allocation under this revenue procedure is irrevocable for all purposes of section 1012. Now I'll pass it over to Seth to review the safe harbor scenario we have for you today. Thanks, Trish. Now, we're going to go over an example because right now we've talked a lot about kind of the rules and the theory behind things, but before we can actually get in to see, like the numbers, I think it's really hard to conceptualize. So we're going to get into an example, and in the example, we're going to go over both of the safe harbor methodologies; one is called the smart specific unit allocation method, and the second is the global allocation method. And let's jump into the next slide. And before I go into the details, it's really important to note that this allocation needs to take place starting in the -- for the specific unit allocation, it needs to take place the earlier of your first taxable disposal in 2025, or when you file your 2025 tax return. And for the global unit allocation, that actually would need to be done by January 1, 2025. So we'll go into detail about what that means. So the first step in taking advantage of the safe harbor is to document all of your digital asset holdings and all units of unused basis. In our first example here, we can see that the taxpayer has six Bitcoin held across three different wallets. These wallets held by the taxpayer contain the keys to the remaining digital asset units and the units of unattached basis. The six Bitcoin held by the taxpayer were purchased on four different days with four separate USD values, as shown in the table presented here. It's worth noting that in this example a taxpayer only has one type of digital asset, Bitcoin. But in reality, a taxpayer may have a variety of holdings across different wallets and accounts, so they may have to do this exercise several times based off of the number of assets they have. Now that we have determined the taxpayer's holdings and their cost basis lots, we can select one of our safe harbor allocation methods, which are specific unit allocation or global allocation. All right. First we'll go over an example where the taxpayer uses the specific unit allocation method. This method allows the taxpayer to basically hand pick which cost basis loss they want to allocate to each wallet. One constraint is that the taxpayer cannot allocate more cost basis per unit to a wallet than the number of units that are held by the specific wallet. For example, in wallet one, the taxpayer holds one Bitcoin. So the taxpayer can't allocate the full cost basis from lot two of 17,357 because the amount of Bitcoin in lot two at 1.5 Bitcoin exceeds the amount in wallet one. However, if the taxpayer desired, the taxpayer could split the lot and allocate one Bitcoin from lot two to wallet one, and the remaining cost basis of 0.5 Bitcoins from lot two could be allocated to another wallet. In this example, the taxpayer made simple allocations where the lots were allocated entirely to each wallet rather than splitting the lots into multiple wallets; the 1 BTC acquired in lot one was allocated to wallet one, the 2 BTC acquired in lot three was allocated to wallet two, and the 1.5 BTC acquired in lots two and four were allocated to wallet three. Overall, the specific unit allocation method requires taxpayer to make allocations for each cost basis lot taxpayers should keep detailed records that clearly document the allocations made and the cost basis lots used. All right, and lastly, this table summarizes how each of those allocations are now sitting in each of those wallets. And the most important piece of this is that, as Trish noted, once you've made this allocation and documented your safe harbor position, it is irrevocable, which means that when I later go to dispose of that asset that's sitting in wallet one, I have to use that cost basis that I allocated to it, I cannot make changes to where I allocate other cost basis from the other wallet to that point. So, in that example, I would need to allocate -- I would use cost basis of 11,812 [Phonetic] in that disposal. All right, let's jump into the global. So if I were to kind of describe the difference between the specific unit allocation and the global unit allocation, I think I would say that the specific is like much more detailed and it takes a lot more effort and documentation to do, whereas the global actually allows you to kind of take more -- somewhat like a standing order that you would give to a broker where you basically say, okay, all of my highest cost basis lots are going to go to wallet one or et cetera. But let's go through and take a closer look at how this can work. All right, we'll take a look at the same taxpayer, but instead of using the specific unit allocation, we're going to use the global allocation. The global allocation method allows taxpayers to allocate cost basis lots by reference to characteristics that distinguish those units from all other units of unused basis, such as acquisition date or cost basis. So in our example on the slide, the taxpayers decided to allocate their unused cost basis lots by acquisition date. The oldest assets go to wallet one, then wallet two, and lastly to wallet three. Notice that wallet three is split because there were 0.5 BTC units left after allocating basis to the Bitcoin held and wallet two. This results in the remaining cost basis lots from lot three and the units from lot four being allocated to wallet three. On this slide we have a table summarizing the global allocation that were made in the example. The lots are separated by the wallet that the wallet was allocated to. And as discussed on the previous slide, we can see that the two units acquired in lot three are split between wallets two and three, with 1.5 units going to wallet two and half unit allocated to wallet three. Just like in our specific unit allocation example, when the taxpayer disposes these assets, they will be required to use the basis from the allocation made here as a result of their election to utilize the safe harbor. Now, I can't say why, but pay attention to the cost basis allocated to wallet one right now. You got it. You see what it is? It also happens to be the same cost basis that's allocated in the specific unit allocation. Now, I'm going to pause here, and we're going to move on to our next polling question. Thanks, Seth. I see what you're doing there. All right, folks. Audience, this is our last polling question, and it is a quiz, so just think about what Seth just told you to remember. Here we go. Based on the specific unit allocation method, what is the cost basis of the one Bitcoin in wallet one? Is it A, $33,678; B, $27,392; C, $11,812; or D, $11,571.50? Take a moment and click the radio button that best answers this question that basically gave you the answer. If you do not receive the polling question, please enter only letters A, B, C or D that corresponds with your response using the ask question text box. And remember, folks, yep, your response is time stamped. Remember that you need to answer at least three polling questions and participate in the live broadcast from the official start time for at least 50 minutes to earn that all important one IRS CE credit. Want to make sure you have enough time to make your selection, or if you have to submit your answer in the Ask Question text box, want to make sure you have time for that. Okay, all right, so let's go ahead and stop the polling now and let's share the correct answer on the next slide. And the correct response is C, $11,812.10. All right, Seth, you tried, it looks like 68% of our audience responded correctly. Can you very, very quickly tell them why C is the correct response? Well, I think I can more quickly tell them why they just didn't remember it. Because those hard numbers, you probably weren't expecting to have to remember exact numbers on there. I tried to help out, but congrats to the 66% of you who are listening. No, no, it's -- I mean, look, I think that these are challenging, and I would definitely encourage you to go back and review these slides afterwards because I think it will give you more time to think through how the process works for that allocation and what it means to be able to allocate those unused spaces lots to each wallet. Awesome Seth. Thank you so much, Seth. Okay, Trish, I'm going to pass it over to you. Thanks, Evette. So on September 9, 2024, the IRS released an early draft of the updated Form 1099-DA for reporting digital asset transactions with significant changes aimed at improving compliance. As we mentioned previously, Form 1099-DA will be clear to taxpayers which transactions are taxable and will provide them with better information which leads to easier compliance. From January 1, 2025 onward, gross proceeds are reportable. From January 1, 2026 onward, custodial brokers must report for certain transactions. This form may look familiar as such of the information is similar to what is included on the 1099, such as 1A through 1G which include the code and name of the digital asset as well as the number of units, date acquired and sold, proceeds and cost or other basis. There are some unique data points in this form compared to the Form 1099 B. We highly recommend that you review the form and instructions and we are of course open to taking questions in the Q&A portion of this webinar. We believe that in time, everything a taxpayer needs to report on their tax return and is reported via this form. So we are excited that this will relieve practitioners of the burden of having to do significant work to compute gains or losses on digital asset transactions. I'll turn things back to Seth and he'll now review some key points. Seth? Hey, thanks Trish. All right, first of all, thank you all of you who have taken time in your busy schedule to learn more about digital assets and how you can better work with your clients that have digital asset activity. You know the key points I think we should take away. Number one, taxpayers continue to have a reporting requirement for their digital asset income. This is not new. Now Tax Pro should ensure that taxpayers answer the digital asset question appropriately on all applicable tax forms. Taxpayers should maintain complete records to support basis for their gain/loss calculations and documenting basis is vitally important to taxpayers. Next, as the IRS finalized this year the 6045 regulations, you can expect that you're going to start seeing the new Form 1099-DA coming out in, finally, season 2026 with proceeds only. Again, we hope you see that as a conversation starter that you will be able to then ask additional questions to your client around their activity with digital assets. And lastly, as I mentioned, there are dates coming up very soon in order to take advantage of the Safe Harbor under Revenue Procedure 2024-28, start having conversations with your clients that you know are trading in digital assets right now so that they are prepared. I will add one plug. I am aware that there are multiple software providers out there in this space who are actually helping automate that process to be able to do this safe harbor. And so again, I would recommend doing some research to see what tools are out there and who can potentially help your clients to be able to do that in an automated fashion. So Evette, thank you again for moderating. Let's open it up for Q&A for the last 13 minutes or so. All right, thanks so much. Hello again everybody. I will be moderating the Q&A session, but before we start the Q&A session, I do want to take a moment to thank everyone for attending today's presentation, Digital Asset Existing and New Reporting Requirements. Earlier I mentioned we want to know what questions you have for our presenters. Here is your opportunity, if you haven't input your question, there is still time, so go ahead and click on the drop down arrow next to the Ask Question field, type in your question and click send. Seth is going to be staying on with us to answer your questions. Just one quick thing before we start folks. We may not have time to answer all your questions because there are a lot, but we will answer as many questions as time will allow for. So let's go ahead and get started so we can get to as many of your questions as possible. Okay Seth, so the first question is as follows. Can you explain what mining or staking is? What does that mean? What do they mean? Yeah, so this is a technical process that happens in these different blockchains. So essentially mining or staking is process of validating transactions on the blockchain and it's done in a decentralized fashion. So it's many different computers and people around the world who are solving these different equations and algorithms. And if you happen to be the one to solve that particular block, then you end up getting paid a reward, so they would call that a mining reward or staking reward, depending on what they would call the consensus mechanism. And so essentially it's the way that transactions are validated on the blockchain and then you receive some kind of a digital asset if you are the one to have validated that transaction ultimately. Okay, awesome, awesome. Very good. Thank you so much. Next question. When you receive a digital asset as a self-employed person, what is the basis of the digital asset and is it only the income tax paid or do you also add in self employment tax? Hey, this is a great question and I'll try to give just an example so let's say that I received a digital asset that was worth $100, okay. So first we're going to go through the ordinary income recognition, right. So, let's say that my tax rate -- and I'm not going to do math on the fly, just so you guys know, but let's say that your tax rate is 20% and so you have $100 of ordinary income. And let's just assume you have no deductions, even though I know you will have deductions. But on that $100 dollars, you basically would have an ordinary income tax of roughly $20 if you have a 20% incremental rate, okay. Now if you have self employment tax, you're going to add another roughly 15% to that to cover the size employment tax. So the question though is what is your basis? Well, your basis actually is the $100 in that digital asset. It's not the tax that you paid on that because that $100 is what has now been established because you paid tax on that $100. So when you later sell that -- so let's say it's gone up to $120 in value -- later when you dispose of that, you would recognize a capital gain of $20. And depending on how long you held that asset, it could be short term or long term and you could get beneficial rates on that. So again, you would basically -- you pay taxes on the ordinary income of $100, which would equate into roughly $20, but that would establish your cost basis of $100 in your asset going forward. All right, very good, very good. Thank you so much for that. Next question, will FIFO, first in, first out be mandatory in 2025 to utilize specific ID, do taxpayers need to notify brokers of the specific tax lots being sold prior to making the sale? This seems largely untenable for everyday taxpayers. Seth, what do you say? So first of all, I think whoever asked this question gets the gold star because that is a phenomenal question. Actually, I think I recognize that name. That might have been planted, I don't know. So what's being raised in this question is there was a little bit of a nuance between what was published in the broker reporting regulations and then what was reported in section 1012 regarding how you would calculate your cost basis. And there was a little bit of a disconnect because in those 1012 rules, it basically said that in order to use specific identification, you have to provide an adequate ID to your broker. If those assets are sitting with a custodial broker, you would have to provide adequate identification to the broker. The problem is brokers aren't tracking cost basis until 2026 and so a lot of brokers may not be in a position to accept that information. And so the question that is being asked is, does that mean that a taxpayer is forced into using FIFO, which is the default methodology, instead of being able to use specific id? And while I can't give you an exact answer right now, what I can tell you is we are very aware of that issue and we're considering our options when it comes to guidance. And so we do hope to have something addressed here in the near future. So again, I'm not going -- I can't answer yet because it's not public information, but we are very much aware of this issue and hopefully we'll have something out in the relatively near future. Awesome, Seth. Yeah, our tax professionals are on top of things here. Okay. All right, next question. What does the documentation requirement of Rev Proc 2024-28 do January 1, 2025 look like? Should the documentation be filed with someone, that's Rev Proc 2024-28? Yeah. So I don't believe we gave a specific requirement of what that really needs to look like. What I kind of expect is you're going to basically create a spreadsheet that has all of your positions as of January 1, 2025, and then you're going to kind of have another column similar to what we gave in the examples earlier of where all of your assets happen to be being held, and then you would use some form of a documentation. But really that documentation is meant to be kept by you, just like any other documentation on tax positions that you take so that in the event that you ever are in an exam that that examiner would be able to ask you to produce that information. So really it is just for your records. Probably wouldn't hurt for you to share that with your practitioner or your tax advisor as well. But really it is about you maintaining those records and then having them available if they ever need to be given to an examiner. The other thing I think is important that we didn't talk about is that a broker, once they start tracking cost basis, they do have the ability to use your taxpayer provided information when it comes to selecting which lot you want to sell. So this actually kind of relates a little bit to the last question that was asked, but basically if you wanted to use specific identification when you're disposing of an asset, you would be able to provide a broker some information, for example, for an asset that they don't know the cost basis for. And you could provide them like the acquisition date or the amount of cost basis and then you could say, this is the one that I want to sell. And while they probably won't -- sorry, not probably, they will not report that information on the 1099, they will at least know which asset you want disposed of so that what they report matches what you ultimately, as a taxpayer, report on your individual tax return. So hopefully that helps really to the original question. The documentation is something for you to maintain and to produce in the event that you're ever under an exam and need to provide that to your examiner. Awesome. Okay, Seth, we're going to try to get one more question in here for everybody. So this is what they're asking. How do we help our clients document their basis in digital assets under the Safe Harbor? Is this just something we need to keep on file or what say you, Seth? Let’s see. Sorry. Yes, this is definitely something -- sorry, did we ask the last question or was that the fourth question? Yep. Nope, this is the, the very last question because we don't have any more time. So if you could answer -- do you, are you ready for that one? Is this something that -- So the question, for the safe harbor allocation, using specific id, can you divide a single lot across multiple wallets? And I think in this question specific ID is actually specific unit allocation, so that would be one of the allocation methods under the safe harbor. And the answer is yes. I think our example did demonstrate how you could split, or at least we discussed how you could split a lot into more than one and you can allocate those to different wallets. And then the second part of the question was using global allocation method, can you use methods like highest cost or last in, last out, or would you be confined to only FIFO? And the answer to that is that really as long as the rule says that it just has to be distinguishing characteristic. And so if you did decide that, hey, I'm going to use a highest end first out allocation method and I'm going to say, and I've got three wallets, I'm going to say my highest cost basis, lots go to wallet one, my -- the next lots down go to wallet two, and then ultimately my lowest cost basis assets go to wallet three, that would satisfy the requirements. And so there is a variety of ways that you can look at it. So you could look at cost basis, you could look at the acquisition date. Really it is ultimately about what is reasonable, and what you can document. And then once that documentation is done and the safe harbor is elected, then making sure that it's irrevocable and what you later dispose of, you are disposing only of that cost basis that you've allocated to that wallet. Awesome. Thank you so very much. Okay audience, that is all the time we have for questions. I want to thank Seth, Trisha and John for being here with us today. Thank you, Seth, for answering all those questions. Thank you to all of you for sharing your knowledge with us. Audience we are planning webinars throughout 2025, so to register for an upcoming webinar please visit irs.gov, keyword search webinars and select webinars for tax practitioners or webinars for small businesses. When appropriate, we will offer certificates and CE credits for upcoming webinars. We do invite you to Visit the IRS YouTube page at www.youtube.com/irsvideos. There you can view available recorded versions of our webinars and other key video messaging once posted. Again, continuing education credits or certificates of completion are not offered if you view an archived version of any of our webinars. Another big thank you to our presenters for a great webinar. I also want to thank you, our attendees, for attending today's webinar Digital Asset Existing and New Reporting Requirements. Again, folks, if you attended today's webinar for at least 50 minutes after the official start time and you answered at least three polling questions during the live broadcast, you will receive a Certificate of Completion for one IRS CE credit. Remember, the polling question example will count towards the three minimum question response requirements. It is also important for you to remember or to know that certificates of completion will be emailed to the registered email address of qualifying participants as a PDF attachment. The email will come from the email address seen on this slide, that's cl.sl.web.conference.team@irs.gov. Please take a moment and add this email address to your contacts to ensure you receive the email with the certificate attached. If you qualify for IRS Continuing Education Credit for this webinar and registered with your valid first name, last name and PTIN, as it appears in your IRS PTIN account, your CE credit will be posted in your IRS PTIN account. If you are eligible for continuing education from the California Tax Education Council, your credit will be posted to your CTEC account as well. If you qualify and have not received your certificate and/or credit by January 16th, please email us at the address on this slide. If you're interested in finding your local Stakeholder Liaison, use that same email address listed on the slide and we will gladly send you that information. We would appreciate it if you would just take a moment just to complete a short evaluation before you exit. If you'd like to have more sessions like this one, let us know. If you have thoughts on how we can make them better, please let us know that as well. If you have any requests for future webinar topics or pertinent information you'd like to see in an IRS Fact Sheet on IRS.gov, Tax Tip, FAQs, things of that nature, then please include your suggestion in the comments section of the survey. Click the Survey button on the right side of the screen to begin. If it doesn't come up, again, check to make sure you disabled your pop-up blocker. It has been a pleasure to be here with you and on behalf of the IRS and our presenters, we would like to thank you for attending today's webinar. It's so important for the IRS to stay connected with tax professional communities, individual taxpayers, industry associations, along with federal, state and local government organizations. You make our jobs a lot easier by sharing the information that allows for proper tax reporting. Thanks again for your time and attendance. We hope you found the information helpful. You may exit the webinar at this time.
