The U.S. IRS has released an updated draft of Form 1099-DA for reporting sales and exchanges of digital assets. While this version reflects some critical updates following the final regulations published on June 28, 2024, there are still a few gaps and uncertainties to address.
Read Ledgible VP of Tax Information Reporting's Comments here.
What’s New in the 2nd Draft Form 1099-DA
In April 2024, we at Ledgible first reported on the initial draft of Form 1099-DA. If you missed our analysis, you can check it out here.
Now, let’s dive into the significant changes in this second draft:
- Removal of the "Explanation if no recipient TIN" Box: The ambiguous free form box "Explanation if no recipient TIN" is removed.
- Elimination of the "Broker Type" Box: The box to indicate "Broker type" is removed.
- Simplification of Non-Cash Proceeds Reporting: Boxes 7a, 7b, and 8 from the 1st draft around non-cash proceeds are simplified into a single Box 7, removing the need to indicate the type of non-cash proceeds received in the sale.
- New Purpose for Box 8: Box 8 is repurposed for the broker to indicate that they relied on customer provided information in preparing the Form 1099-DA, as expected from the final regulations. It is likely that IRS agents during examination would leverage this information in determining if the taxpayer is eligible for penalty relief.
- Continued Presence of Box 10: Box 10 unfortunately remains, where the broker has to give a reason why a sale is non-covered for which cost basis is not reported. This goes beyond what is required on Form 1099-B reporting and the 3 options available are not comprehensive enough (e.g. it misses instances where the broker did not receive a transfer statement from another broker).
- Repurposing of Boxes 11a, 11b, and 11c: Boxes 11a and 11b are repurposed for aggregate reporting of Qualifying Stablecoins and Specified NFTs, as expected from the final regulations. Box 11c is repurposed for the broker to indicate the amount of gross proceeds related to primary sales of NFTs, as expected from the final regulations. This is so that the IRS and the taxpayer have a better sense of gross proceeds that are ordinary income from a trade or business rather than sales of capital assets.
- Removal of Certain Boxes: Certain boxes related to changes in the final regulations are removed, as expected, such as the time of acquisition, time of sale, digital asset address, and sale transaction ID.
Unresolved Issues and What to Watch For
- Box 5 Mystery: Box 5 remains a mystery, pending the broker instructions to the Form. See our original analysis for more details.
- Public Comments Still Open: The public can still submit further comments on the Form, details on making submissions are on the cover page of the Form.
- Awaiting Broker Instructions: We are still waiting for the publishing of the instructions for the broker which is a critical component for implementation. These instructions should also provide insights into areas of the final regulations that are ambiguous.
Looking Ahead
The pressure is now on the IRS to finalize Form 1099-DA and publish the accompanying broker instructions. Brokers and their software providers need ample time to develop and test their systems to ensure compliance in time for reporting. Stay tuned as we continue to monitor and analyze developments in this critical area of digital asset tax reporting.
