IRS Releases Draft Digital Asset Tax Reporting Instructions for Form 1099-DA

The IRS has recently issued draft instructions for Form 1099-DA, focusing on tax reporting requirements for brokers, such as crypto exchanges. Below are the key highlights from the draft instructions, providing an overview of what brokers and taxpayers can expect.

Read the overview from Jessalyn Dean, VP of Tax Information Reporting here.

Key Highlights:

1. Plain Language Reminder The IRS draft instructions are written in plain language for ease of understanding. However, it is important to remember that these instructions are not the final legal authority. The underlying tax law takes precedence over the form instructions.
2. Optional Cost Basis Reporting The draft provides guidance on optional reporting for cost basis in cases where it’s not required. This includes non-covered disposals of assets acquired before 2026. Brokers can opt to provide this information, even when it’s not mandatory.
3. Composite Substitute Reporting The IRS will allow composite substitute reporting, offering taxpayers a simplified, brokerage-style tax statement. This means multiple Forms 1099 (like 1099-DA, 1099-B, 1099-INT, and 1099-DIV) can be included in one document for easier reporting. Unfortunately, Form 1099-MISC, which reports staking rewards, is excluded from the composite, so taxpayers will still receive that separately.
4. Confusion Around Spot Crypto ETFs Reporting for spot crypto ETFs remains a point of confusion. According to the draft, there are two layers of reportable transactions—the ETF’s underlying activity (classified as a WHFIT in technical tax terms) and the sale of the ETF interest itself. Form 1099-B instructions suggest reporting these transactions on Form 1099-DA, but the 1099-DA instructions provide mixed guidance, stating that reporting can occur on either Form 1099-B or 1099-DA. The industry hopes for clarification from the IRS to confirm the desired approach of optionality.
5. Digital Asset Coding Standards The IRS has adopted digital asset naming and coding standards from the Digital Token Identifier Foundation (DTIF). However, the DTIF website requires users to register and log in to access the necessary codes, creating friction for taxpayers and CPAs. A more user-friendly link exists, allowing access to the search registry without logging in, but the IRS chose to use the login-required version in the instructions.
6. State Reporting Considerations It remains to be seen how states will handle Form 1099-DA data, either through the Combined Fed/State filing program or a direct state filing process. Many states that require direct filing currently use the IRS Pub. 1220 format. However, since Form 1099-DA is expected to be filed via the IRS’s IRIS system, not FIRE, it may never follow the Pub. 1220 format, potentially leading to varying state requirements. This could present significant challenges for software providers and filers alike.

These draft instructions represent an important step toward clarity for brokers and taxpayers dealing with digital assets. However, there are still some ambiguities that the IRS will need to address before the instructions are finalized.

For those interested in reviewing the full draft instructions, you can access them directly here.