As regulation expands for cryptocurrency, specifically around tax information reporting, or 1099 generation, there's a new form coming that you might see in the near future: the 1099-DA, standing for 1099 Digital Assets.
This form is expected to provide solid guidance for exchanges and trading platforms to provide tax information to individual investors. Currently, you might get a 1099-B for your crypto trading activities, which is similar, but this form was originally made for other assets and it's not tailored to the intricacies that crypto presents.
In the US, 1099s are used to report income that comes outside of W-2 employment. There are a plethora of 1099 forms for different situations, with some of the most common being 1099-MISC, 1099-K, and 1099-B.
Assuming you don't just work a W-2 job or if you're an active investor, you've probably received a 1099 in your history. The 1099-DA is simply going to be a new form that helps you better categorize and handle digital assets.
What exactly is Form 1099-DA?
As of right now (Fall 2022) there's little guidance on what exactly the 1099-DA form is going to look like. Investors and financial professionals are waiting on the IRS to unveil a new version of the 1099 form for tax information reporting purposes. All we know at this time is that it will be custom tailored to represent digital asset trading information. One likely change to the form is that it may remove the necessity to provide cost basis information to investors.
Calculating cost basis in crypto is one scenario that former 1099s, like the 1099-B, often do improperly. Because crypto assets are generally transferred between exchanges and wallets, 1099 forms for just one of those exchanges usually include incorrect cost-basis reporting information as it doesn't capture all of the transfer transactions. That's why tools like Ledgible exist, which has automated transaction tracing, allowing investors and tax professionals to properly calculate cost basis and pay as little taxes as possible.
Why do we know the 1099-DA is coming?
We know that the IRS is working on a 1099-DA form primarily because of the infrastructure bill passed by President Biden in 2021. The Infrastructure bill contained wording that required exchanges and trading platforms to report capital gains and losses to the IRS through forms such as 1099s starting in the 2023 tax year. Because no current form for digital assets exists, financial institutions and experts started speculating that a 1099-DA form was being developed by the IRS – and further communications from the agency have signalled that this is exactly what's happening.
Why a specific digital asset 1099 is needed
As we mentioned before, the 1099-DA is needed to address the current flaws in existing 1099 reporting procedure and how they apply to digital assets, specifically surrounding cost basis calculation, which factors into determining an investor's capital gain or loss.
Capital gains and/or losses are currently calculated by subtracting cost basis, or the sum total of your expenses to acquire an asset, from the gross proceeds from the sale of said asset.
This works okay if you only trade on one platform, but due to the transactional nature of crypto, and by proxy it's transferability throughout the ecosystem, each one of these transfers essentially poses a failure point for proper cost-basis calculation.
Every time crypto is transferred to wallets or between exchanges, current 1099 regulation will calculate this as a sale and thus calculate a taxable gain or loss. However, in reality the asset was never sold, it was just moved between exchanges or storage locations, in actuality never triggering a taxable event.
This core problem is what the 1099-DA will ideally address.