The IRS releases a draft form for reporting digital asset transactions, sparking industry debate and highlighting compliance challenges.
In an important development, the US Internal Revenue Service (IRS) has released a draft version of Form 1099-DA, designated for the reporting of income from digital asset transactions. Set to be implemented in 2025 for use in 2026, this form is a significant step in the IRS’s ongoing efforts to streamline crypto tax compliance.
The new Form 1099-DA, labeled “Digital Asset Proceeds from Broker Transactions,” will require brokers to prepare and send reports for each customer engaged in selling or exchanging digital assets. The scope of who qualifies as a broker is broad, encompassing kiosk operators, digital asset payment processors, hosted and unhosted wallet providers, among others. These brokers will also send a copy of the form to both the customer and the IRS to facilitate verification and compliance checks.
This form is designed to capture detailed information including token codes, wallet addresses, and locations of transactions on the blockchain. In response to a rule proposed in August 2023, the IRS now requires reporting on various types of digital assets such as cryptocurrencies, nonfungible tokens (NFTs), and stablecoins.
Industry Responses to New Reporting Rules
The proposed reporting requirements have sparked significant discussion within the crypto community. The Blockchain Association criticized the rules, pointing out what they believe are fundamental misunderstandings about the nature of digital assets and decentralized technology. On the other hand, Coinbase’s chief legal officer, Paul Grewal, expressed concerns about the potential for excessive surveillance, noting that these rules could lead to the reporting of trivial financial activities, like buying a coffee with digital currency.
Tax experts have also voiced their concerns online. Services like Ledgible, which specialize in crypto tax and accounting, have noted that decentralized finance (DeFi) poses unique challenges under the new rules due to the lack of intermediaries in many transactions. They argue this could place a heavy administrative burden on brokers who manage a high volume of transactions.
Moreover, the requirement for brokers to exchange information about digital asset transfers to accurately determine the cost basis becomes complicated by the absence of current mechanisms for such data sharing. This complexity comes from the difficulty in distinguishing between self-transfers for management purposes and taxable transfers between parties.
Taxpayers who have underreported their crypto income in previous years might find themselves at risk of detection when they file their taxes in 2025. Additionally, users of foreign exchanges that do not formally serve U.S. citizens may avoid submitting the form, yet the IRS could potentially track these offshore activities through asset transfers to U.S. exchanges.
The IRS continues to welcome feedback on the draft form, encouraging stakeholders from across the digital asset landscape to contribute their insights and concerns as they work toward finalizing the reporting requirements.