Backup withholding is the enforcement mechanism behind every 1099. If a payee will not give a payor a correct taxpayer identification number, the payor withholds tax and sends it to the IRS. For crypto, the rule has been on the books since the final broker regulations, but the IRS has delayed it twice.

Here is what the law says, what the relief notices say, and what changes for sales in 2027.

The basic rule under IRC 3406

IRC 3406(a)(1) requires certain payors of reportable payments to deduct and withhold tax if the payee fails to furnish a TIN in the manner required, or if the IRS notifies the payor that the name and TIN combination is incorrect. Notice 2025-33 describes the rate as the fourth lowest rate under IRC 1(c), “currently 24 percent.”

Under IRC 3406(b)(3)(C), a reportable payment includes payments required to be shown on a broker information return under IRC 6045. Digital asset sales reported on Form 1099-DA are in that category.

To avoid it, a U.S. person generally furnishes a TIN on Form W-9 and certifies, under penalties of perjury, that it is correct. Notice 2025-33 calls that a “certified TIN.”

Relief for 2025 and 2026

Notice 2024-56 said backup withholding would not be required on digital asset sales effected by brokers during calendar year 2025. Notice 2025-33 extended that by a year. Its words: backup withholding tax obligations under IRC 3406 and 3403 “will not be required on any digital asset sale effected by a broker during calendar year 2025 or calendar year 2026.”

So for 2025 and 2026, no backup withholding on crypto sales, even if your broker lacks your certified TIN.

What changes in 2027

For sales in 2027, the general rule comes back, with three pieces of relief from Notice 2025-33.

  • Uncertified TINs for preexisting customers. For sales in 2027, brokers may rely on an uncertified TIN from a customer who opened the account before January 1, 2026, if the broker submits the name and TIN to the IRS TIN Matching Program before the sale and gets a match.
  • Preexisting customers with foreign addresses. For 2027 sales, the IRS will not impose information reporting penalties, and will not require backup withholding, for customers with accounts opened before January 1, 2026 who have not been classified by the broker as U.S. persons and whose broker files show a non-U.S. residence address.
  • Crypto-for-crypto trades. For 2027 sales of a digital asset for different digital assets (other than specified NFTs), the broker’s backup withholding liability is limited to what it receives on immediate liquidation of 24 percent of the digital assets you received, even if that is less than 24 percent of their value at the time of the trade.

Notice 2024-56 also said that until further guidance, backup withholding will not be required where the reportable proceeds are a specified NFT, on digital asset for real property sales by real estate reporting persons, or on certain sales effected by processors of digital asset payments.

Who actually gets withheld on

Reading the rules together, the people most likely to see 24 percent disappear from a 2027 sale are:

  • Customers who opened accounts on or after January 1, 2026 and never gave the broker a certified Form W-9.
  • Preexisting customers whose name and TIN do not match IRS records in the TIN Matching Program.
  • Customers whose broker receives an IRS notice that the name and TIN combination is incorrect. Notice 2024-56 describes those as CP2100 and CP2100A notices, and says the broker must send the customer a copy and request a corrected TIN before starting backup withholding.

Why this matters for enforcement

Backup withholding is not a penalty. It is a prepayment. Notice 2025-33 says the broker reports backup withholding on Form 945 and on the Form 1099-DA, and furnishes a statement to the payee, who “may then report this tax as an income tax payment” on the payee’s return. On the 1099-DA, it appears in box 4.

But it has two enforcement effects. First, it forces identification. A broker that would otherwise hold an account with a bad TIN now has a strong reason to fix it, because the alternative is withholding. Second, it all but ensures a matched information return. If tax was withheld under your TIN, the IRS has a 1099-DA under your TIN, and it will expect to see the sale on your return.

If you have been hoping an exchange would not connect your account to your Social Security number, 2027 is when that hope expires.

Foreign customers and the documentation question

Brokers generally do not file Forms 1099-DA for customers they can treat as exempt foreign persons. Notice 2025-33 explains that a broker may do so if it receives valid documentation, such as Form W-8BEN.

There is also a transition rule. Under Treas. Reg. 1.6045-1(g)(4)(vi)(F), for sales effected before January 1, 2027, a broker may treat a customer with an account established before January 1, 2026 as an exempt foreign person if the customer has not been classified as a U.S. person by the broker and the broker’s files show a non-U.S. residence address. Notice 2025-33 extended penalty and backup withholding relief for those customers to 2027 sales.

If you are a U.S. person with a foreign address on file at an exchange, do not mistake that transition rule for an exemption from U.S. tax. Treas. Reg. 1.1-1(b) says that citizens of the United States, wherever resident, and resident aliens are liable for U.S. income tax whether the income comes from sources within or without the United States. A missing 1099-DA is not a missing tax obligation.

Questions to ask your broker before 2027

A short email now can save a 24 percent surprise later. Ask each platform you use three things.

  • Do you have a certified Form W-9 on file for my account, and does it show my current legal name?
  • Has my name and TIN combination been checked through the IRS TIN Matching Program, and did it match?
  • If backup withholding ever applies to a crypto-for-crypto trade, how and when will you liquidate the withheld amount?

Keep the answers. If tax is withheld anyway, they help you sort out whether it was an account data problem or a policy problem.

One more practical point: under Notice 2025-33, when backup withholding applies to a crypto-for-crypto trade in 2027, the broker’s obligation is measured by what it receives on immediate liquidation of 24 percent of the digital assets you received. Ask how that will appear on your Form 1099-DA, so you can match the withheld amount to box 4 and claim it.

How to avoid backup withholding

This part is simple.

  • Give every U.S. broker you use a complete, certified Form W-9 before you sell in 2027.
  • Make sure the name on the account matches the name the IRS has for your TIN. Name changes after marriage or divorce are a classic mismatch.
  • If your broker forwards a CP2100-based request for a corrected TIN, answer it promptly.
  • For entities, make sure the account is in the entity’s name with the entity’s EIN, not a member’s SSN.

If tax was withheld

Claim it. Backup withholding shown in box 4 of a Form 1099-DA is a credit on your income tax return for the year. It is your money, held by the IRS, and it offsets your tax.

Then report the sale correctly, with your basis. A sale with withholding and no basis is still a sale the IRS will match. See transferred-in crypto and zero-basis forms.

The bottom line

The delays were for brokers building systems, not for taxpayers avoiding identification. For sales in 2025 and 2026, there is no crypto backup withholding. For sales in 2027, there is, subject to the relief described in Notice 2025-33. Give your broker a certified W-9 now and this never touches you.

For the full reporting timeline, see the 1099-DA effective dates.