IRS Provides Sneak Peek of Form 1099-DA for Digital Assets

The IRS on Friday posted on its website the highly anticipated draft Form 1099-DA, a new tax form that cryptocurrency brokers will begin using next year to report digital asset transactions.

The tax agency teased the forthcoming tax form last August when it issued proposed regulations that would require brokers to report sales and exchanges of digital assets by customers.

“These proposed regulations are designed to help end confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals, and others,” IRS Commissioner Danny Werfel said in a statement on Aug. 25, 2023. “A key part of this effort fits in with the larger IRS compliance focus on wealthy taxpayers. We need to make sure digital assets are not used to hide taxable income, and the proposed regulations are designed to provide a clearer line of sight into activities by high-income people as well as others using them. We want to make sure everyone pays what they owe under the tax laws, and our research and experience demonstrate that third-party reporting improves compliance.”

Brokers—defined by the IRS as “digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets”—will be required to generate Form 1099-DA for each sale transaction and submit that information to the IRS and to their customers starting on Jan. 1, 2025.

Source: Internal Revenue Service

“For sales or exchanges of digital assets that take place on or after Jan. 1, 2025, the proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to customers,” the IRS said last August. “Brokers, in certain circumstances, would also be required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements, so that customers have the information they need to prepare their tax returns.”

Draft form 1099-DA captures unsurprising data points, such as date acquired, date sold, proceeds, and cost basis of crypto assets sold—information that is needed and helpful for the taxpayer to complete their crypto tax filings, Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker, said in a post on X.

The IRS also has included “unhosted wallet provider” as a check box on the tax form. He said that this further signals the agency’s intention to include unhosted wallets under the broker definition despite concerns from the crypto industry.

“What does this mean to you? Going forward, you will likely have to provide KYC [know your customer] information before creating an unhosted wallet and/or when interacting with platforms via unhosted wallets,” Chandrasekera wrote on X. “This could drastically change how users interact with crypto platforms. The will change DeFi [decentralized finance] as we know it today.”

After reviewing draft Form 1099-DA, Jessalyn Dean, vice president of tax information reporting at Ledgible, posted her first impressions on LinkedIn:

They have packed a lot of lines and boxes into this form.

As expected, the look and feel is similar to the Form 1099-B for reporting sales of traditional financial products (e.g. equities).

Most of the boxes line up as expected with the required information as listed in the proposed regulations from August 2023.

The inclusion of a “wash sale loss disallowed” Box 1i does not mean that crypto is subject to wash sale rules. It is included for purposes of digital assets that are also stock or securities already subject to wash sale rules (e.g. certain tokenized equities).

A Box 11d is included to indicate that a sale is not recorded on the distributed ledger. This is necessary because very often digital asset addresses or transaction IDs cannot be provided because transations occurred within internal record keeping systems.

Box 5 is for a broker to indicate that a loss is non-deductible due to a “reportable change in control or capital structure” and references Form 8949 and Schedule D Instructions. However, neither of those instructions give any guidance on what kind of events in crypto and digital assets could apply in these circumstances. They defer to the broker to simply figure it out in the dark with the further statement that “The broker should advise you of any losses on a separate statement.”

The IRS noted that this early draft form release may change based on decisions made in response to comments received on the proposed regulations issued last August. Public comments can be submitted to the IRS about draft or final forms, instructions, or publications at IRS.gov/FormsComments. Include “NTF” followed by the form or publication number (for example, “NTF1099-DA”) in the body of the message to route your message properly, the agency said.