The IRS and U.S. Department of the Treasury on Friday released long-awaited regulations for digital asset brokers to report users’ taxable transactions on Form 1099-DA. Taxable sales and exchanges of digital assets that take place on or after January 1, 2025, will be reported to the IRS.
Importantly, the new requirements only apply to custodial brokers, such as Coinbase, which hold users’ digital assets. Regulations for non-custodial, or decentralized, brokers, will be released at an unspecified later date.
The implementation of Form 1099-DA—the first tax form created specifically for digital assets—will cause significant changes to the US crypto tax landscape. The IRS aims to make crypto tax reporting easier for investors, but taxpayers should also be aware of skyrocketing audit risks.
As a leading law firm in crypto taxation, Gordon Law has navigated evolving digital asset regulations for 10 years, helping more than 1,000 investors report accurately and save on taxes. Here’s what taxpayers need to know about the new IRS reporting requirements for digital asset brokers.
Watch tax attorney and CPA Andrew Gordon on Yahoo! Finance
What information will the IRS receive about my crypto trades?
The IRS will receive information about taxable sales and exchanges of digital assets that are conducted through custodial brokers on or after January 1, 2025. This includes:
- Cashing out cryptocurrency
- Swapping one type of crypto for another (including converting to stablecoins)
- Purchasing goods and services with crypto
This information will be reported on Form 1099-DA, the first tax form created specifically for digital assets. The form is intended to help taxpayers calculate capital gains from crypto. While this form has not been finalized yet, you can learn about the draft Form 1099-DA here.
The IRS published Notice 2024-57 alongside the new broker regulations. The notice states that until the IRS issues further guidance, brokers will not have to report the following types of transactions on Form 1099-DA:
- Wrapping and unwrapping transactions
- Liquidity provider transactions
- Staking transactions
- Transactions described by digital asset market participants as lending of digital assets
- Transactions described by digital asset market participants as short sales of digital assets
- Notional principal contract transactions
All of these excluded transactions are part of the DeFi ecosystem and present unique challenges when it comes to tax reporting. Learn more about DeFi taxes here.
In addition, Notice 2024-56 outlines transitional penalty relief for brokers who make a good-faith effort to meet the new requirements.
How does this change crypto tax reporting rules?
It’s important to understand that taxpayers’ crypto reporting requirements have not changed. Cryptocurrency income has always been taxable and investors have always been required to report it fully. These new regulations simply make it easier for the IRS to stamp out noncompliance.
If you haven’t reported your crypto taxes in the past—either because you lost money on crypto, because you didn’t understand how to report crypto on your taxes, or because you thought the IRS would never be able to find it—you should contact a cryptocurrency tax attorney right away to discuss your options.
Tax attorney and CPA Andrew Gordon tells Yahoo! Finance, “I would expect that there will be a massive increase in audits, a massive increase in criminal investigations based on this information, and more attempts to decrease this tax gap and collect more money from crypto investors.”
There’s still time to correct your crypto tax mistakes, but the longer you wait, the fewer options you’ll have. Our recent blog post explains how Form 1099-DA will lead to unprecedented levels of enforcement action and how cryptocurrency investors can prepare.
How can I comply with IRS crypto regulations?
To comply with IRS cryptocurrency regulations, make sure you report all crypto income on your tax returns each year. This includes activity that may not be reported on Form 1099-DA, including staking income, DeFi income, and trades that occurred through non-custodial brokers.
Check out our in-depth crypto tax guides for more information:
If you haven’t fully reported crypto in the past, you may need to amend prior tax returns. In cases of intentional noncompliance, consider the Voluntary Disclosure Program.
Need help understanding your risks and your best path forward? Reach out to our experienced cryptocurrency tax lawyers today.
What about my crypto trades before 2025?
Crypto trades before 2025 won’t be tracked on Form 1099-DA, but they still need to be reported accurately. “2024 is the most important tax year for crypto investors to be reporting,” Gordon tells CNBC. If you have accurate data for this year, then reporting crypto activity in 2025 will be significantly easier.
Taxpayers relying on Form 1099-DA will still face significant challenges when it comes to reporting trades that took place prior to 2025. The cost basis of a digital asset is an essential piece of information for calculating crypto taxes. Yet, in many cases it will be impossible for a digital asset broker to report this information on Form 1099-DA.
Historically, the IRS has only accepted 2 methods for calculating cryptocurrency cost basis: First In First Out (FIFO) or Specific ID. However, to ease the transition into this new regulatory era, the IRS is giving taxpayers a little more flexibility. Revenue Procedure 2024-28 outlines how taxpayers can allocate cost basis for their digital asset holdings under the new regulations.
Need help with your crypto taxes? Call Gordon Law today
Gordon Law has focused on cryptocurrency taxes since 2014. We’ve helped thousands of investors understand their tax obligations, maximize their savings, and avoid IRS problems. With more than 1,500 crypto tax reports under our belts (plus several crypto tax audits), we’re here to guide both investors and brokers through these new regulations.
Don’t wait until the IRS targets you—get in touch today for trusted legal counsel. Let us simplify your crypto taxes so you can build a better future with confidence.
