In Notice 2025-33, the IRS extends the transitional relief initially provided in Notice 2024-56 for brokers that must file Form 1099-DA, Digital Asset Proceeds From Broker Transactions, to report certain digital asset sale and exchange transactions under IRC Section 6045 and to backup withhold under IRC Section 3406. Notice 2025-33 also provides penalty relief for sales effected for certain customers that have not been previously classified by the broker as US persons.

Notice 2025-33 is effective for digital asset sales conducted on or after January 1, 2025.

Background

On July 9, 2024, the Treasury Department and IRS published final regulations (TD 10000) on the information reporting of sales of digital assets. At the same time, the IRS released Notice 2024-56, providing transitional relief for digital asset brokers from penalties related to information reporting and backup withholding tax liability for transactions effected during 2025 (see Tax Alert 2024-1385).

Extended relief

The IRS said in Notice 2025-33 that digital asset brokers may need additional time to comply with the new requirements. Therefore, the IRS extended and modified the transitional relief.

As result, a sale of a digital asset effected by a broker in 2025 or 2026 is not subject to backup withholding under IRC Sections 3403 or 3406 (or related penalties). In addition, a sale of a digital asset effected by a broker in 2027 is not subject to backup withholding (or related penalties) if the payee (1) opened its account with the broker before January 1, 2026, and (2) the broker submits the payee's name and TIN combination to the IRS TIN matching program and receives a response that the name and TIN combination matches the IRS's records.

In addition, Notice 2025-33 extends the transitional relief for the amount of backup withholding required to be deposited and reported for digital asset sales effected before January 1, 2028. As in Notice 2024-56, backup withholding is limited to what the broker receives upon liquidation of 24% of the customer's received digital assets, even if that is less than 24% of the fair market value of the customer's received digital assets at the time of the transaction giving rise to backup withholding, as long as the liquidation immediately follows the transaction giving rise to the backup withholding.

Furthermore, Notice 2025-33 allows brokers to treat certain pre-existing customers as exempt foreign persons for sales made in calendar year 2027, as long as (1) the account was established before January 1, 2026, (2) these customers have not been classified as US persons, and (3) the broker possesses a residence address for the customer outside the United States.

Implications

Digital asset brokers should understand that the extension of backup withholding relief does not change the start date for reporting. Sales during 2025 will be reportable in early 2026, and cost basis tracking will begin for purchases on January 1, 2026.

In addition, the scope of backup withholding relief for pre-existing accounts has not changed. Only accounts opened before January 1, 2026, can use the pre-existing account relief for TIN matching and foreign-owned accounts.