Sovos, Comply Exchange and Ledgible held a Webinar on “Building a 1099 Operating Model for Success” which found that almost half of attendees rank “cost basis tracking and reporting” as their top concern for 1099-DA implementation. This reaction is impactful given that starting January 1st, brokers must track gross proceeds on sales of digital assets for 1099-DA reports to go out in early 2026 per the recent IRS regulations.
On June 28, 2024, the US IRS and Treasury released final digital asset tax reporting regulations. These mandate brokers withhold taxes and report annually on sales or exchanges involving cryptocurrencies, NFTs, tokenized securities, and other digital assets. It also addresses other Form 1099 reporting requirements, such as income from staking rewards, airdrops, and interest.
The traditional methods for tracking financial assets do not work for digital assets. The data must be captured at the time of transaction. It is difficult to get the necessary data after the completed transaction. Additionally, many digital asset holders were not required to provide basic information when signing up. Brokers and wallet holders now have to track down each customer to secure KYC details. And to further differentiate from traditional assets, digital assets can be bought, sold and used globally 24x7x365.
This presents a unique challenge for product managers when adding crypto the mix of financial assets to be ready for the 1099-DA which start in 2025. Given these changes, digital asset service providers must now begin developing an end-to-end operating model that ensures compliance while remaining customer-centric.
The process can seem overwhelming, but here are a few practical steps for starting the process to capture the required data for 1099-DAs.
- Understanding the penalties and timeline. While it’s not all due to start next year, the foundation built to track digital assets can be leveraged for future deadlines for digital asset earnings, staking, interest and more.
- Plan a lengthy timeline to be able to capture customer KYC details as resistance from some in the digital asset community can be expected.
- Use current reports and documents for any overlap in data fields. One intake record to share data with multiple IRS forms.
- Manage data and customer lifecycle on a continual basis.
- Establish a steering committee for stakeholder management and governance.
- Evaluate internal and external resource options for technology and ongoing training/education.
- Create written policy and procedures with workplace instructions.
- Define a budget and who owns it. Lean on software vendors to write the RFPs.
It is up to the agent to assess the tax withhold on payments applied before funds are paid to the customer. If this is not done accurately, the agent is liable.
To listen to experts from Sovos, ComplyExchange, and Ledgible discuss the essential aspects of compliance visit: https://register.gotowebinar.com/register/3884753143250130014?source=Ledgible
