Digital Asset Cost Basis Reporting and Backup Withholding: What Investors Need to Know

Planning ahead for new digital asset tax reporting rules

The regulatory landscape for digital assets continues to evolve, and significant tax reporting changes are on the horizon. Beginning in 2026, digital asset transactions will be subject to cost basis reporting requirements that closely mirror those long applied to traditional securities. At the same time, investors should be aware of heightened backup withholding risks if their information is incomplete or inaccurate.

Cost basis reporting begins in 2026

Final Treasury regulations issued in July 2024 require brokers to report cost basis for digital asset sales and dispositions occurring on or after January 1, 2026. This marks a major shift toward aligning cryptocurrency tax reporting with the rules governing stocks, bonds, and other investment property.

Importantly, 2025 remains a transition year. Brokers will report gross proceeds for 2025 transactions, but they will not be required to include cost basis information on IRS forms for that year. Cost basis reporting will apply only to transactions executed in 2026 and beyond.

While brokers are actively updating systems to comply with the new requirements, these processes may not be fully operational when the rules first take effect. Investors should anticipate growing pains, including reporting delays and corrected tax forms as brokers refine their procedures.

The importance of investor recordkeeping

Despite the move toward broker-reported cost basis, investors should not rely exclusively on third-party reporting, especially in the early years.

Crypto investors are strongly advised to maintain their own detailed records, including:

• Acquisition dates
• Purchase prices and transaction fees
• Wallets or accounts used
• Transfers between wallets or platforms
• The source of each digital asset (purchase, gift, mining, staking, etc.)

This is particularly important for individuals who acquired digital assets over many years or across multiple exchanges and wallets.

Asset identification and the end of “universal wallets”

As with other forms of property, taxpayers generally have flexibility in identifying which units of a digital asset are sold, an election that can significantly impact taxable gains or losses.

However, the final regulations eliminated the concept of so-called “universal wallets.” Investors can no longer aggregate holdings across multiple wallets or accounts when identifying assets sold. Instead, they must be able to physically trace a specific digital asset from acquisition to disposition within a particular wallet or account.

For sophisticated investors with complex digital asset structures, this requirement raises the bar for documentation and reporting discipline.

Expect corrected forms in the early years

Because 2026 will be the first year of mandatory cost basis reporting for digital assets, investors should expect some degree of reporting inconsistency. Corrected Forms 1099 are likely as brokers reconcile data gaps, system limitations, and customer-provided information.

This increases the importance of reviewing broker-issued tax documents carefully and reconciling them against your own records before filing.

Backup withholding: A hidden risk for crypto investors

In addition to cost basis reporting, investors should pay close attention to backup withholding requirements. Backup withholding applies when a broker does not have a valid taxpayer identification number (TIN) on file or when the information provided does not match IRS records.

The current backup withholding rate is 24% of gross proceeds.

Unlike traditional cash transactions, satisfying backup withholding for digital assets may require brokers to sell or liquidate a portion of the crypto itself to generate U.S. dollars for remittance to the IRS. This introduces several complications:

• Brokers must have contractual authority to dispose of a portion of the asset
• Market volatility may affect the value of the asset sold
• Some brokers may choose not to assume this risk

As a result, investors who fail to provide updated or accurate documentation, such as a Form W-9, may find their accounts restricted. In some cases, brokers may block trading activity or deny account access until the issue is resolved.

What digital asset investors should do now

With these changes approaching, proactive planning is essential. Investors should consider taking the following steps:

• Review all crypto accounts to ensure taxpayer information is accurate and current
• Respond promptly to broker requests for W-9 updates or verification
• Consolidate and organize historical transaction records
• Confirm wallet-level tracking capabilities
• Coordinate with tax and wealth advisors to model future tax outcomes

The IRS is clearly signaling that digital assets are entering a new era of tax compliance. While these changes increase transparency and reporting consistency, they also introduce new risks for investors who are unprepared.

Thoughtful recordkeeping, timely documentation, and coordinated tax planning will be critical for navigating cost basis reporting and backup withholding in the years ahead.

Questions on tax compliance for your digital asset investments? Contact your Keiter Opportunity Advisor.