New IRS Relief Helps Brokers with 1099‑DA Digital Asset Compliance

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In response to industry feedback, the IRS has recently issued additional transition relief, providing you with more time to comply with the new digital asset reporting and backup withholding rules.

In an earlier post, “IRS Releases Draft Of 1099-DA Form: What You Should Know,” we outlined the initial framework of the draft Form 1099-DA, designed to formalize how digital asset transactions must be reported. While that guidance marked a pivotal step in crypto tax regulation, many brokers flagged the short timeline as a significant challenge. The IRS has now responded with a phased approach that eases specific requirements through 2027.

Recap: Initial relief under IRS Notice 2024-56

When the final regulations were introduced in 2024, brokers were expected to begin reporting digital asset sales, providing payee statements, and implementing backup withholding starting January 1, 2025.

To support implementation, the IRS issued Notice 2024-56, which included:

Relief for calendar year 2025:

• No penalties for failing to file Form 1099-DA.
• No penalties for not performing backup withholding.

 Limited relief for calendar year 2026:

• Although they were expected to begin, some leniency was granted for the backup withholding requirements.
  

Still, many industry professionals noted that this transition period wasn’t sufficient to operationalize the changes. That feedback led to Notice 2025-33, which expands the relief timeline.

Key highlights of IRS Notice 2025-33

The IRS has extended transition relief for brokers handling digital asset transactions, offering more time to comply with Form 1099-DA requirements.

Extended backup withholding relief until 2027

Brokers now have until calendar year 2028 to fully implement backup withholding procedures on digital asset transactions. 

For 2027, you won’t be penalized for not performing backup withholding if you receive a match confirmation after submitting your customer’s name and TIN to the IRS TIN Matching Program. 

Protection against value fluctuation of withheld digital assets

If you’re withholding digital assets instead of cash, there’s a risk their value could drop before being sold to satisfy tax liabilities.

With this in mind, the IRS will not penalize you if:

• You don’t withhold the entire backup tax because the value of the digital assets dropped during the transaction.
• You immediately sell the withheld digital assets for cash.

More time to identify a U.S person

You’ll also get additional leeway in 2027 to identify whether customers are U.S. persons. If you’re still in the process of confirming customer status, you won’t face penalties for transactions made on behalf of customers whose U.S. person status hasn’t yet been verified.

What should brokers do now?

Even with this additional transitional relief, the IRS has made it clear that these rules are here to stay. Here’s how to maximize this transition period:

• Integrate the IRS TIN Matching Program into your customer onboarding process.
• Prepare for backup withholding, including a plan to swiftly convert withheld digital assets into cash.
• Review your customer classifications to ensure you correctly identify U.S. persons.

Taking these steps now will help you stay ahead and avoid issues when enforcement begins.

Looking ahead

This extended relief is a welcome opportunity for brokers to catch up—but not a reason to slow down. Even with the more gradual phase-in, the digital asset reporting framework is evolving quickly, and it is evident that compliance is not optional.

TaxBandits is here to support you through this significant transition.

Our e-filing solution is prepared to support Form 1099-DA reporting as soon as it becomes available. In the meantime, we’re closely tracking IRS updates to help you stay prepared for what’s ahead.

Stay tuned as we continue to share the latest developments, tools, and tips to keep your brokerage ahead of the curve.

To learn more about Form 1099-DA:

• https://blog.taxbandits.com/the-irs-released-draft-form-1099-da-key-updates-you-need-to-know/
• https://blog.taxbandits.com/form-1099-da-irs-proposes-new-regulations-for-sales-and-exchanges-of-digital-assets/
• https://www.irs.gov/pub/irs-drop/n-25-33.pdf
• https://www.irs.gov/pub/irs-drop/n-24-56.pdf
• https://www.irs.gov/pub/irs-pdf/f1099da.pdf
• https://www.irs.gov/instructions/i1099da