This article addresses the critical updates provided by Notice 2025-33, which significantly impacts digital asset brokers and their compliance obligations under Internal Revenue Code sections 6045, 3406, and related penalty provisions. This notice extends and modifies previously granted transitional relief, offering much-needed breathing room for the evolving digital asset landscape.

Purpose and Context of the Notice

Notice 2025-33 aims to extend for an additional year the transitional relief initially provided in sections 3.01, 3.02, and 3.06 of Notice 2024-56. The core purpose of this extension is to provide transitional relief from penalties related to information reporting obligations under section 6045, as well as relief from liability for backup withholding tax under section 3406 and associated penalties for brokers who fail to pay this tax on certain digital asset sales. Additionally, the notice offers further transitional relief from penalties for brokers handling digital asset sales for specific customers not previously classified as U.S. persons.

The Treasury Department and the IRS acknowledge that digital asset brokers are actively engaged in building and implementing complex systems and procedures to comply with the section 6045 information reporting requirements for digital asset sales outlined in the final regulations. These systems are also crucial for managing associated backup withholding tax obligations, particularly for customers who do not provide certified Taxpayer Identification Numbers (TINs) or other documentation establishing an exemption from backup withholding. The agencies understand that despite the relief already provided by Notice 2024-56, brokers require additional time to fully establish and implement these backup withholding systems before the rules comprehensively apply to transactions on or after January 1, 2026. Furthermore, the IRS recognizes that brokers may need more time to obtain certified TINs from their existing customer base and to collect the necessary documentation to classify certain preexisting customers as exempt foreign persons. This ongoing development process, coupled with the unique challenges of valuing and liquidating digital assets for withholding purposes, underpins the necessity of this extended relief.

IRS Analysis of Relevant Tax Law

Understanding the relief necessitates a brief review of the foundational tax code sections relevant to digital asset reporting and withholding.

Information Reporting Under Section 6045

Section 6045(a) broadly mandates that every person operating as a broker must file a return with the IRS. This return must include the name and address of each customer, details regarding gross proceeds, and any other information required by the Secretary of the Treasury or their delegate. Crucially, final regulations, published as Treasury Decision 10000 on July 9, 2024, require brokers to file information returns on Form 1099-DA and furnish payee statements reporting gross proceeds for digital asset sales executed on or after January 1, 2025. For sales on or after January 1, 2026, these regulations also mandate the reporting of adjusted basis in certain circumstances.

It is important to note the exception for exempt foreign persons; under section 1.6045-1(g)(1), no information return is required for sales effected for such individuals. A broker may treat a customer as an exempt foreign person if they possess valid documentation, such as Form W-8BEN, demonstrating the customer’s foreign status.

Penalties for Non-Compliance

The Internal Revenue Code imposes significant penalties for failures related to information reporting and payee statements.

Section 6721 levies a penalty for the failure to file an information return by the due date or for failing to include all required information, or for including incorrect information. For this purpose, information returns include those required by section 6045(a) or (d).
Section 6722 imposes a penalty for the failure to furnish a payee statement by the required date, or for failing to include all required information, or for including incorrect information. Payee statements, in this context, are those required by section 6045(b) or (d).
However, both sections 6721 and 6722 provide relief: no penalty is imposed if the failure can be shown to be due to reasonable cause and not willful neglect.

Backup Withholding Under Sections 3403 and 3406

Section 3406(a)(1) mandates that certain payors of reportable payments deduct and withhold tax from the payment, currently at 24%, if the payee fails to provide their TIN in the required manner or if the IRS notifies the payor that the provided name and TIN combination is incorrect. Payments required to be shown on an information return filed by a broker under section 6045 are considered reportable payments for backup withholding purposes. Generally, payees who are not exempt foreign persons must furnish a certified TIN to the broker on Form W-9.

A broker obligated to file Form 1099-DA for a digital asset transaction must also report the amount of backup withholding to the IRS on Form 945 (Annual Return of Withheld Federal Income Tax) and Form 1099-DA, and provide a statement to the payee. The implications for a broker failing to backup withhold and pay the tax are substantial. Under section 3403, the broker is liable for the payment of the backup withholding tax that should have been withheld. Furthermore, civil penalties under sections 6651 (failure to pay) and 6656 (failure to deposit) may apply, unless the failure is attributable to reasonable cause and not willful neglect.

TIN Matching Program

The Commissioner of Internal Revenue is authorized to establish TIN matching programs (IRS TIN Matching Programs). It’s notable that details received through an IRS TIN Matching Program do not constitute an IRS notification regarding an incorrect name and TIN combination for purposes of imposing backup withholding under section 3406(a)(1)(B). Also, a payor’s decision not to participate in such a program will not be used by the IRS as a basis to assert a lack of reasonable cause under section 6724(a) for failures under sections 6721 or 6722. The IRS has established such programs, allowing payors to verify name and TIN combinations against IRS records prior to filing information returns.

Prior Transitional Relief (Notice 2024-56)

Notice 2024-56 previously provided transitional relief for brokers concerning section 6045 information reporting and section 3406 backup withholding for digital asset sales. This included penalty relief for failing to file Forms 1099-DA and furnish payee statements, and temporary relief from the backup withholding obligation itself and payment liability under section 3403 for certain sales. Specifically, for calendar year 2025, backup withholding was not required on digital asset sales.

For digital asset sales effected before January 1, 2027, section 3.02 of Notice 2024-56 permitted brokers to use alternative procedures to obtain TINs from customers with accounts opened prior to January 1, 2026 (preexisting customers). This relied on submitting the payee’s name and TIN to the IRS TIN Matching Program and receiving a match. Furthermore, for digital asset-for-digital asset sales before January 1, 2027, section 3.06 of Notice 2024-56 limited the backup withholding tax to the amount received upon the immediate liquidation of 24% of the customer’s received digital assets, even if this was less than the value at the time of the transaction. This also provided penalty relief for value decreases between the transaction and liquidation. Lastly, for sales prior to January 1, 2027, preexisting customers could be treated as exempt foreign persons if not previously classified as U.S. persons and their residence address in broker files was not a U.S. address. This prior relief primarily applied to customers with certified TINs, generally U.S. persons.

Extended Relief Provided by Notice 2025-33

Notice 2025-33 extends critical transitional relief, providing brokers with additional time to comply with complex reporting and withholding requirements for digital assets.

Backup Withholding Relief for Calendar Year 2026 Sales

Recognizing the ongoing challenges in system development, the IRS is extending the backup withholding relief initially granted for 2025. Consequently, backup withholding tax obligations under sections 3406 and 3403 will not be required on any digital asset sale effected by a broker during calendar year 2025 or calendar year 2026. This provides a full additional year of relief from the obligation to withhold and remit backup withholding tax for these transactions.

Alternative TIN Collection Procedures for Calendar Year 2027 Sales

The Treasury Department and the IRS understand that some brokers may still require more time to obtain certified TINs from their preexisting customers. As such, the relief provided by section 3.02 of Notice 2024-56 is extended. This allows brokers to rely on uncertified TINs of preexisting customers for digital asset sales effected in calendar year 2027. The key condition for this alternative TIN collection relief is that the broker must, prior to effecting the digital asset sale transaction, submit the payee’s name and TIN combination to the IRS TIN Matching Program and receive a confirmation that the submitted information matches the IRS records.

Treatment of Preexisting Customers as Exempt Foreign Persons for Calendar Year 2027 Sales

Further extending relief, the IRS acknowledges that brokers may need more time beyond what was previously provided to obtain documentation necessary to treat certain customers with accounts established before January 1, 2026, as exempt foreign persons. For digital asset sales effected during calendar year 2027, the IRS will not impose penalties under sections 6721 and 6722 on brokers who fail to file information returns and furnish payee statements for these specific customers. This relief applies if the customer’s account was established prior to January 1, 2026, the customer has not been previously classified as a U.S. person by the broker, and the broker’s files include a residence address that is not a U.S. address. Importantly, for these qualifying customers, backup withholding under section 3406 will also not be required for digital asset sales effected during calendar year 2027. Additionally, the IRS will not impose penalties on brokers who would otherwise be required to file Form 945 for backup withholding tax due on these specific digital asset sales in calendar year 2027.

Amount of Backup Withholding for Calendar Year 2027 Sales of Digital Assets for Digital Assets

For sales where one digital asset is exchanged for another (excluding specified nonfungible tokens), brokers face unique challenges due to the fluctuating value of digital assets between the transaction time and the time of liquidation for U.S. dollar deposits. To provide additional time for brokers to develop appropriate procedures for these scenarios, Notice 2025-33 extends the relief from section 3.06 of Notice 2024-56. For reportable digital asset sales effected in calendar year 2027, the amount the broker must pay as backup withholding tax is limited to the amount received upon the immediate liquidation of 24 percent of the customer’s received digital assets. This applies even if this liquidated amount is less than 24 percent of the value of the received digital assets at the time the backup withholding obligation arose. This relief also extends to penalty relief from information reporting penalties and penalties under sections 6651 and 6656 for any decrease in the value of received digital assets between the transaction time and the liquidation time. Provided the broker pays and reports the amount of backup withholding tax withheld and deposited in accordance with this section, the IRS will not impose penalties related to Form 945 filings for these amounts.

Effective Date

This Notice is effective for digital asset sales effected on or after January 1, 2025. It explicitly modifies Notice 2024-56.

In conclusion, Notice 2025-33 offers crucial additional time and penalty relief for digital asset brokers as they navigate the complexities of new information reporting and backup withholding requirements. Tax professionals should carefully review these extensions to ensure their clients are fully compliant with the evolving regulatory landscape, leveraging the provided relief periods for system implementation and data collection.

Prepared with assistance from NotebookLM.