Key takeaways
- Form 1099-DA is a proposed IRS tax form that doesn’t exist yet
- The “DA” in Form 1099-DA stands for “digital assets”
- Form 1099-DA may become mandatory as early as 2025
What have you heard about the proposed IRS Form 1099-DA? The Internal Revenue Service and U.S. Treasury in 2023 formally proposed regulations for reporting the sales and exchanges of digital assets, which would occur using this new tax form. Brokers of digital assets would generate Form 1099-DA for distribution to the IRS and individuals—but not until at least January 2025.
If you’ve ever received a 1099 tax form, then you already know something about the proposed Form 1099-DA. Let’s explore everything you need to know about Form 1099-DA and how it’s implementation is likely to impact the entire crypto and web3 ecosystem.
What is Form 1099-DA?
Form 1099-DA is a proposed new tax form that digital asset brokers would be required to generate to report digital asset distributions. Brokers—defined by the IRS as “digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets”—would be required to distribute Form 1099-DA to both the IRS and the company or individual who engaged in the digital asset disposition. Reportable real estate transactions involving cryptocurrency would also require Form 1099-DA to be generated.
Form 1099-DA is proposed to become mandatory for sales and exchanges of digital assets that occur on or after January 1, 2025—although the U.S. Department of the Treasury and the IRS in early 2024 have yet to release any final version of the new tax reporting requirements. Form 1099-DA only becomes mandatory for brokers after the new regulations are approved and take effect.
Because the proposed regulations aren’t final yet, Form 1099-DA is still hypothetical. Once finalized and approved, the proposed regulations are likely to specify everything that’s relevant to the implementation of Form 1099-DA for digital assets:
- Transaction reporting requirements
- Computation rules for gains and losses
- Cost basis determination rules
- Backup withholding rules
The proposed rules for Form 1099-DA do not explicitly mention a minimum transaction reporting limit, although digital assets are clearly defined. Digital assets, according to the digital asset tax reporting rules proposed on August 29, 2023, are “digital representations of value that use cryptography to secure transactions that are digitally recorded using distributed ledger technology on a distributed ledger, such as a blockchain or similar technology. Digital assets do not exist in physical form.”
You’re likely in the future to receive a Form 1099-DA if you sell or exchange cryptocurrencies—like Bitcoin and Ethereum—or non-fungible tokens. You may also receive Form 1099-DA if your employer pays or otherwise distributes digital assets to you.
How would Form 1099-DA work?
The generation and distribution of Form 1099-DA by brokers wouldn’t likely commence until the year following the tax year that Form 1099-DA becomes mandatory for digital asset transactions. Let’s explore how the reporting process would potentially work:
1. Broker prepares Form 1099-DA: The broker facilitating digital asset transactions would complete the form for each business entity or individual who used the broker’s platform to sell or exchange a digital asset. Form 1099-DA would likely require the dealer to report the gross proceeds from each transaction and possibly include information on the cost basis and associated capital gain or loss.
2. Broker distributes Form 1099-DA: After the close of the tax year, the broker would send a completed Form 1099-DA to both the individual or enterprise and the IRS. The broker may distribute the form electronically, via physical mail, or use both of these delivery methods.
3. Digital asset sellers use Form 1099-DA for reporting: Every business entity and individual receiving Form 1099-DA would be required to use that form at tax time to report digital asset transactions to the IRS. Capital gains or losses reported on Form 109–DA would likely impact your taxable income.
4. IRS uses Form 1099-DA to verify reporting accuracy: Having received a copy of every Form 1099-DA issued by brokers, the IRS would likely use this form to verify that taxpayers are fully and accurately reporting their digital asset income. The IRS would be empowered to leverage Form 1099-DA to increase compliance with federal income reporting requirements.
Why is Form 1099-DA necessary?
The introduction of Form 1099-DA by the U.S. Department of Treasury and the IRS is a response to the growing significance of digital assets in the modern economy. The standardization of digital assets reporting is vital to ensure that both taxpayers and the IRS have the same information pertaining to crypto and NFT transactions.
"These proposed regulations are designed to help end confusion involving digital assets and provide clear information and reporting certainty for taxpayers, tax professionals and others," said IRS Commissioner Danny Werfel in an August 2023 press release. “We want to make sure everyone pays what they owe under the tax laws, and our research and experience demonstrate that third-party reporting improves compliance.”
The IRS has an obvious interest in receiving more and better information about taxpayers’ digital asset transactions. Individuals may benefit, too, from the proposed Form 1099-DA. By providing a clear and organized record of digital assets exchanged or sold, Form 1099-DA is likely to simplify the burden of accurate tax information reporting. Increased clarity may help taxpayers to avoid potential reporting discrepancies or misunderstandings regarding their tax obligations related to digital assets.
Pros and cons of Form 1099-DA
The proposed Form 1099-DA is perceived by many as increasingly necessary, as adoption of digital assets continues—but that doesn’t make Form 1099-DA uncontroversial. Let’s explore the most important benefits and drawbacks, including why many cryptocurrency advocates are staunchly opposed to mandated digital asset reporting.
Pros of Form 1099-DA
- Supports organized record-keeping: Requiring brokers to complete Form 1099-DA for every digital asset transaction is likely to improve the record-keeping practices of digital asset brokers.
- Standardizes reporting on digital assets: Implementing requirements for Form 1099-DA is also likely to standardize how digital asset transactions are reported—both to individuals (or companies) and the IRS.
- Improves tax information reporting accuracy: Receiving Form 1099-DA from a digital asset broker would help taxpayers to accurately report their crypto capital gains and losses for tax purposes.
- Enhances compliance with tax laws: Because Form 1099-DA would be distributed to both taxpayers and the IRS, anyone receiving Form 1099-DA would be highly incentivized at tax time to report their digital asset income.
- Aids financial planning and analysis: Businesses and individual taxpayers may also leverage the information contained in Form 1099-DA to support financial planning and analysis of past digital asset transactions.
Cons of Form 1099-DA
- Compliance may be exceptionally challenging: Brokers may be challenged to comply with the detailed record-keeping and reporting requirements associated with Form 1099-DA. Decentralized finance (DeFi) platforms, which support peer-to-peer transactions with no intermediary, are likely to be especially challenged to satisfy the Form 1099-DA reporting requirements.
- Creates transaction privacy concerns: Requiring digital asset brokers to document and report transactions may compromise the privacy of digital asset holders. Form 1099-DA would likely disrupt the ability of DeFi users to transact pseudonymously.
- Increases brokers’ administrative burdens: Form 1099-DA and its associated reporting requirements would significantly increase the administrative burden of digital asset brokers, who may process a very high volume of crypto transactions annually.
- May create uncertainty for taxpayers: New tax information reporting requirements generally create uncertainty for taxpayers, who are obligated to learn how to use the new tax form.
- Boosts taxpayer risk of incurring penalties: Form 1099-DA would enable the IRS to more easily assess penalties against U.S. taxpayers who incorrectly report their incomes from digital assets.
How to learn more about Form 1099-DA
Form 1099-DA doesn’t yet exist—but that doesn’t mean you can’t learn more about it.
Start by reading the proposed rule, titled Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions, that—if approved—would establish the basis for Form 1099-DA to be implemented. Familiarize yourself with Form 8949, which is what U.S. taxpayers currently use to report capital gains and losses on capital assets including cryptocurrency. Explore Form 1099-B, especially if you’ve received one from a cryptocurrency exchange to help you file your taxes.
And if you’re not yet knowledgeable about decentralized finance, then starting learning about this innovative sector of the financial industry today. If or when Form 1099-DA becomes mandatory, you’ll be well equipped to navigate any changes in the regulatory landscape for digital assets.
