The IRS Form 1099-DA is set to be required starting January 1, 2025 for all digital asset brokers.
Introduction
The IRS has created the first tax form meant just for crypto and digital assets. This form, Form 1099-DA, will change how cryptocurrencies are reported both to the IRS and to individuals, shifting a lot of the reporting duties from taxpayers to brokers. More details on this are coming up.
Background
In April 2024, the IRS shared the initial draft of Form 1099-DA, with further requirements for custodial brokers announced in July 2024 and a revised draft in August 2024. This form and the associated reporting rules will bring more transparency and detailed reporting to the crypto space than ever before. For the first time, transactions involving cryptocurrencies will be reported similarly to how traditional assets like stocks and securities are reported. Starting with the 2025 tax year, the IRS will receive a massive amount of information about taxpayer’s crypto activities.
Key Points
- This form is meant to standardize reporting guidelines for digital assets, requiring all brokers to submit a 1099-DA to both the IRS and the taxpayer. According to the IRS, a broker is defined as any entity that “regularly provides services effectuating transfers of digital assets on behalf of another person.” This includes exchanges, wallet providers that enable trades and transfers, and could potentially even include crypto ATMs. This raises many questions for wallet providers and crypto ATMs that don’t do KYC checks. There’s a chance that brokers who fail to gather the necessary information from taxpayers to complete the 1099-DA could be found non-compliant and might face legal issues if they continue working with U.S. taxpayers.
- Confusion exists about whether noncustodial wallets will count as brokers under these reporting rules. In the final requirements Rule published by the IRS in July 2024, the IRS specifies that a facilitative service includes any service that directly or indirectly effectuates a sale of digital assets. This could mean that certain unhosted wallets may be subject to these 1099-DA reporting requirements. However, unhosted wallet providers have been removed from the clear definition of broker, adding to the uncertainty we hope the IRS will clarify.n2. The 1099-DA will show proceeds, cost basis, and gain/loss details for each transaction** made through the platform, along with other relevant details. More on cost basis later.n3. There’s a new section regarding wash sales**. Instructions explain: Shows the amount of nondeductible loss in a wash sale transaction involving digital assets that are also stock or securities for tax purposes. This statement is confusing because we know the IRS currently classifies crypto as property. This suggests that new regulations will likely be introduced to clearly disallow wash sales for cryptocurrency. Previously, we shared that the wash sale loophole remains open for crypto in 2024, but it’s expected to close by 2025. This wording in the 1099-DA reinforces those expectations.n4. Noncovered Assets will be clearly identified and documented.** Noncovered assets are those for which the broker did not provide custodial services or were obtained before 2026. If this is indicated, certain fields on the form may be left blank, including the cost basis. It’s crucial to understand this, as proceeds could appear as 100% capital gains without accurate cost basis reported. This will lead to taxpayers paying more tax than they might actually owe. Taxpayers must not rely on 1099-DAs with absent cost basis information for calculating taxes owed.
- Brokers need to confirm they are using data provided by the customer. There’s a section where the broker will indicate if they relied on customer data, like cost basis. How this data is submitted can vary by broker. For instance, a platform might allow users to enter their own cost basis for assets, which would then be reflected on the 1099-DA. If that happens, this section will be affirmed.
- Both stablecoins and NFT transactions can be grouped together (but separately), as long as the total proceeds are under $10,000 each year. All other digital asset transactions will need to be reported on their own.
Implications For Taxpayers
Taxpayers should expect to receive 1099-DAs from various exchanges and wallet providers. The forms will also be sent directly to the IRS. However, for assets bought before 2025 and assets transferred into an exchange or wallet provider, cost basis information may be inaccurate or missing. Hence, it is critical for taxpayers to keep precise records of their cost basis and report their transactions using Form 8949 (the 1099-DA forms don’t replace the need to report on Form 8949 and Schedule D).
Comments
While the 1099-DA will streamline reporting data, it will not resolve all issues facing taxpayers. There are different cost basis accounting methods available. The default for the 1099-DA will be First-In-First-Out (FIFO), but individual taxpayers can choose Specific Identification (if they meet certain criteria), allowing them to opt for methods like Highest-In-First-Out (HIFO). This might create discrepancies between what’s reported on the 1099-DA and what’s declared on their 8949. Thus, while the 1099-DA aims to enhance transparency in crypto trading, it won’t ensure entirely accurate tax reporting for all taxpayers.
Furthermore, it’s vital that taxpayers do not solely depend on the 1099-DAs, especially when moving assets between wallets and exchanges. When an exchange gets an asset from an outside source, it may assign a blank or $0 cost basis to that asset on the 1099-DA. If this blank data reaches a traditional CPA or a tax software like TurboTax, it could lead to an incorrect assessment of 100% capital gain. Thus, taxpayers should determine the correct cost basis on the assets they transfer and accurately report it on their 8949. By keeping detailed records of all crypto transactions, they can create a solid paper trail to back their numbers and ensure they’re optimizing their tax obligations while staying compliant.
TLDR
As of January 1, 2025, brokers involved with digital assets, including exchanges and some wallet providers, must gather and submit taxpayer transaction data to the IRS using Form 1099-DA. This form will detail proceeds, cost basis, and gains or losses, though missing cost basis data (for non-covered assets) may affect tax obligations. Taxpayers should maintain their own records to ensure accurate tax reporting.