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. And this is only the first step with costs basis of new digital asset acquisitions, gross proceeds and adjusted costs basis reporting in the following years.
It’s time for brokers to get ready for the 1099-DA.
So, what are some of the practical issues brokers should understand before they implement these new IRS reporting requirements?
In a recent webinar with S&P Global and Coinbase, Ledgible discussed what Brokers need to know about new 1099-DA regulations. You can watch the webinar on-demand here.
During the webinar, Jessalyn Dean, VP of Tax Information Reporting, Ledgible highlighted, “Brokers will need to implement new data fields to track and indicate whether transaction by transaction is a sale of a qualifying stable coin or its not, some another digital asset, or it’s a sale of an specified NFT or its not or some another digital asset transaction because ultimately when software providers get down to the filtering exercise – these transactions are reportable for this reason, these transactions are not reportable for this reasons, how do you know at the end of the year would you know that set of criteria about that transaction?”
Unlike traditional assets, this data must be captured at the time of transaction or it is next to impossible to get after the completed transaction. Brokers need to add new data fields to track and indicate sales and this must be implemented before the new year. Further, record retention for brokers is seven years from the date the asset is disposed, not from when the asset is acquired.
Three of the biggest factors for brokers to consider when implementing software to track this new digital asset data are:
- Real-Time Availability: Brokers will need to consider the real time availability of up-to-date data and the refresh rate that they are willing to implement. Digital asset prices can fluctuate in seconds rather than minutes.
- Cost Basis Transfers: The proposed regulations don’t fully address how brokers are to facilitate the reporting of cost basis information on a transfer. For a broker-to-broker transfer, a transfer statement with cost basis information is sent within 15-days of the transfer to the receiving brokers. However, with broker-to-non-broker transfer, there currently is no time period set to send a transfer statement to the IRS.
- Time Zones: At what time does a “day” cutoff for purposes of determining when the deposit must be made? Brokers need to interpret the timely tax deposit rules when backup withholding is taken from sales proceeds. While UTC is the time zone for reporting purposes, it may create issues if selling assets over year end where reporting may not accurately reflect the year in which the taxpayer sold the asset.
Beatriz Castenada, Director, Tax Information Reporting, Coinbase shared during the webinar, “Backup withholding considerations are also going to be complicated by the fact that we are not just required to back up withhold on the sale of digital assets for cash like in the securities world but customers can trade digital assets for other digital assets. So, we are going to need to backup withhold a percentage of that sale and then immediately convert that to cash and wire that cash to the IRS. There is an added layer of complexity.”
Additionally, there are other key concepts requiring further IRS guidance or clarification in order for brokers to comply, including:
- Form 8300 Reporting: Historically, when a person received more than $10,000 of digital assets as part of their trade or business reporting has been made to the Financial Crimes Enforcement Network (FinCEN) rather than the IRS. Announcement 2024-4 that informed businesses that they would not need to file Form 8300 for receipt of digital assets until regulations are issued.
- DAO Issues: Decentralized Autonomous Organization (DAO) are not typically formed as legal entities and there are open questions on the tax status. For example, is it a domestic or foreign entity, publicly traded partnership, type of tax filing and information returns would be required, tax withholding obligations and tax elections and audit rules.
- Cost Basis: Certain transactions that are exempt from reporting, such as a sale of a Qualifying Stablecoin to other digital asset and Specified NFTs, but still require cost basis tracking. US dollar value at the time of the transaction is required to be reported and that brokers are not permitted to use volume weighted average pricing.
- Annual Reporting: The final rules mirror cost basis tracking used for other financial products. Cost basis rules like average costs for certain mutual funds and wash sale disallowance rules must be applied in the cases of certain Tokenized Securities.
William Sheridan, Managing Director at S&P Global Market Intelligence, emphasized, “The calculation of withholding is one thing, but building out that remittance process is just as important and setting it up with EFTPS. Folks that are not in the traditional finance space are not as accustomed to remitting tax and setting that up with the IRS and another build to take into consideration,” during the webinar.
And a few other traditional customers considerations for this new class of assets that need to be addressed by brokers.
- Before Sales/Exchange Transaction: Are brokers going to allow customers to make lot relief elections (FIFO, HIFO, other Spec ID) and establishing default fallbacks, viewing unrealized gain/loss positions and available lots and adding “customer-provided information” on transferred-in (non-covered) assets (eg acquisition date and value).
- After Sales/Exchange Transactions: Are brokers going to allow customers to apply wash sale disallowance rules, where applicable (eg tokenized securities), calculate the cost basis to report on Form 1099-DA for sale/exchange disposals and allocate transaction costs 100% to sold/disposed of asset and special lot relief when paid with acquired assets.
There is quite a lot for brokers to consider in preparing for the 1099-DA. Brokers who need to get the software ready for the 1099-DA, contact the Ledgible team here for help from one of Ledgible’s specialists.
The Ledgible platform (https://ledgible.io ) is built from the ground up to streamline digital asset tax information reporting and compliance. Ledgible ensures compliance for digital assets for some of the largest financial institutions in the world, like top 5 US banks, investment firms with $1B+ AUM, and top 10 crypto exchanges. As a SOC 1 & 2 Type 2 Certified platform, Ledgible is the trusted provider of choice for compliance and 1099 generation.
