IRS introduces draft form 1099-DA: Insights into digital asset transactions

The long-awaited draft Form 1099-DA finally made its debut on the IRS website last Friday, signaling a significant milestone in tax reporting for cryptocurrency transactions. This new tax form is set to revolutionize how brokers in the digital asset sphere report transactions, heralding a new era of transparency and accountability in the crypto landscape.

The anticipation for this form was first sparked last August of the previous year when the IRS released proposed regulations mandating brokers disclose their customers' sales and exchanges of digital assets. Addressing the need for clarity in the realm of digital assets, IRS Commissioner Danny Werfel underscored the importance of these regulations in providing taxpayers, tax professionals, and other stakeholders with clear guidance and reporting standards.

Commissioner Werfel emphasized the broader compliance agenda of the IRS, particularly focusing on ensuring that high-income individuals do not exploit digital assets to evade taxes. By implementing these regulations, the IRS aims to enhance visibility into financial activities, thereby facilitating improved tax compliance across the board.

According to the IRS definition, brokers encompass a range of entities, including digital asset trading platforms, payment processors, and certain hosted wallets. Commencing January 1st, 2025, these brokers are now mandated to produce Form 1099-DA for each transaction and furnish this information to both the IRS and their clients.

This move marks a significant step towards fostering transparency and accountability within the cryptocurrency ecosystem, ensuring that all taxpayers fulfill their obligations under the tax laws.

Additionally, these brokers may, under specific circumstances, be obligated to furnish customers with information on gains or losses and the basis for transactions occurring after January 1st, 2026. This ensures that customers possess the necessary details to complete their tax returns accurately, as stated by the IRS.

Implications for Unhosted Wallets Explored

According to Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker, the draft Form 1099-DA captures essential data points such as acquisition date, sales date, proceeds, and cost basis of crypto assets sold. Chandrasekera notes that this information is crucial for taxpayers to effectively fulfill their crypto tax obligations.

The IRS has notably added an option for "unhosted wallet provider" on the tax form, indicating its intent to classify unhosted wallets within the broker definition, despite reservations expressed by the crypto industry.

Shehan Chandrasekera elaborated on the implications of this development, suggesting that moving forward, individuals may be required to furnish KYC (know your customer) information when establishing unhosted wallets or engaging with platforms via such wallets. This shift could significantly alter user interactions with crypto platforms and potentially reshape the landscape of decentralized finance (DeFi) as it exists presently.

IRS Form 1099-DA Review

Jessalyn Dean, Vice President of Tax Information Reporting at Ledgible, provided a comprehensive analysis of the draft Form 1099-DA, drawing parallels to the familiar layout of Form 1099-B utilized within traditional financial spheres. She highlighted the alignment of most boxes with the proposed regulations issued in August 2023, signifying a consistent approach to reporting requirements.

In her review, Dean noted specific boxes on the form that address critical aspects of tax reporting for digital asset transactions. For instance, Box 1i tackles the concept of "wash sale loss disallowed," particularly pertinent for assets resembling stock or securities. Meanwhile, Box 11d serves as an indicator for sales not recorded on the ledger, acknowledging potential challenges arising from internal record-keeping systems.

One notable observation made by Dean relates to Box 5, which designates non-deductible losses. However, despite its significance, this box lacks explicit guidance on how to handle crypto-related events, leaving brokers with the responsibility to make informed decisions. Nevertheless, Dean recommends brokers inform customers separately, ensuring clarity and transparency in tax reporting processes.

The IRS highlighted that the current draft form may undergo revisions in response to feedback received on the proposed regulations released in August.