The IRS just released a proposed regulations draft containing long-awaited details about the information reporting requirements for brokers. Although the new IRS Form 1099-DA for cryptocurrency, NFTs, and other digital assets was first announced back in 2021, very few details had previously been published.
Now, the IRS has released details of who should be considered a digital asset broker (and therefore required to submit Form 1099-DA), what should be reported on this form, and when regulations should kick in. The IRS is accepting public feedback on these proposed regulations through October 30, 2023.
Our experienced crypto tax attorneys have read this 282-page document so you don’t have to! Read on for the most important things to know about Form 1099-DA.
What Is Form 1099-DA?
Form 1099-DA is a new tax form dedicated to digital assets. It will be issued to traders/investors annually by digital asset brokers.
Cryptocurrency is one of the world’s fastest-growing industries, but no tax form is currently dedicated to reporting income or capital gains and losses from crypto.
Most cryptocurrency traders have run into issues using the tax forms provided by crypto exchanges, as they are not suitable for cryptocurrency reporting; the 1099-DA aims to solve that problem. The IRS looks to make crypto tax information more accessible and ensure all cryptocurrency traders are reporting their gains and losses.
Learn more about the tax forms currently issued by crypto exchanges, and the problems with each, in our video below:
Purpose of Form 1099-DA and Broker Requirements
In 2021, President Biden signed the Infrastructure Act into law. The law categorizes crypto exchanges and trading platforms as “brokers,” meaning they are now required to report customer gains and losses to the IRS annually.
The IRS has long targeted cryptocurrency as a top source of unreported income. Surveys indicate that a significant number of crypto investors in the US are not compliant in their tax reporting; the new reporting requirements will greatly increase the IRS’s ability to catch crypto tax evaders.
Who Must File Form 1099-DA?
Anyone who is considered a digital asset broker will need to submit Form 1099-DA to both customers and the IRS.
The IRS’s proposed regulations go into extensive detail about who should be considered a broker. They emphasize entities that are “in a position to know” the identities of the parties involved in digital asset transactions. Their proposal would categorize all of the following as brokers:
- Centralized exchanges (such as Coinbase)
- Decentralized exchanges (such as Uniswap)
- Wallets that allow users to buy, sell, and trade digital assets (such as Metamask)
- Bitcoin ATMs and other physical kiosks
Although the crypto community is likely to push back against decentralized exchanges (DEXes) having to report to the IRS, we anticipate that the IRS will not be flexible on this requirement. DEXes do not currently collect tax information about their customers, but the IRS is likely to argue that they are, in fact, “in a position to know” users’ identities and will enforce Know Your Customer (KYC) requirements.
Notably, the IRS’s proposed regulations do not consider any of the following to be brokers:
- Miners, node operators, or others who are simply maintaining the blockchain
- Hardware wallets that do not directly allow users to buy, sell, and trade digital assets (for example, a wallet that must be connected to an exchange in order to complete any of these transactions)
- Software developers who indirectly facilitate digital asset transactions (for example, by developing code for a company like Coinbase)
- Smart contract developers who receive income from a smart contract they created, but do nothing to maintain or update it
Previously, due to the broad language of the Infrastructure Act, there was a great deal of concern that these parties would be considered brokers and would face reporting requirements that they couldn’t possibly fulfill.
What Will Be Reported on Form 1099-DA?
Form 1099-DA will report information about the sale or disposition of digital assets. The IRS specifies that this includes cryptocurrencies, NFTs, and stablecoins.
Form 1099-DA will report the same information that’s currently reported on Form 1099-B for stocks:
- When you got the digital asset (Acquisition date)
- How much you paid for it (Cost basis)
- When you sold or swapped it (Sale or disposition date)
- How much money you got from selling or swapping it (Sales proceeds)
- Gross proceeds (Total proceeds from that exchange or broker, not taking cost basis into account)
This will apply to sales made after January 1, 2025, so you can expect your first 1099-DA form in January of 2026.
Form 1099-DA Release Date
Taxpayers are expected to receive Form 1099-DA beginning in January 2026.
Originally, this reporting was supposed to begin in 2023, but the deadline has been extended due to logistical hurdles.
Wondering why it’s taking so long? In order to follow the new broker requirements, cryptocurrency exchanges must make many important changes to the way they operate. This includes following Know Your Customer (KYC) protocols, changing the way they handle their assets, enabling the transfer of cost basis between different exchanges, and more.
Need Help Navigating Broker Requirements? Call Gordon Law
At Gordon Law, we’ve helped thousands of clients avoid trouble with the IRS. Don’t wait until the new form is released! Whether you’re a broker or simply a taxpayer, schedule a confidential consultation with one of our attorneys today and find out how to prepare.
We also offer Crypto Audit Defense plans for those who are concerned about their audit risk.
