The IRS has been increasingly keen on bringing digital asset reporting in line with traditional financial instruments—much to the industry’s ire. At the heart of this effort is Form 1099-DA, which aims to provide the agency with the information it needs to close the tax gap and improve enforcement in the rapidly growing crypto market.
Let’s dive into the history behind Form 1099-DA, the final rules and regulations, and what the form’s initial draft looks like before its launch in 2025.
A Brief History
The IRS has a straightforward process for collecting capital gains taxes on stocks. When you buy or sell, your broker calculates your cost basis and any profits. At the end of the year, you receive a Form 1099 containing your capital gains or losses; you carry over those amounts to Form 8949, and then you carry the sum over to Form 1040.
While the IRS requires those buying and selling crypto to report their capital gains, crypto exchanges, and wallets aren’t required to furnish a 1099 unless customers had over $20,000 in gross payments or more than 200 transactions in a calendar year. And even then, the existing 1099 forms don’t capture the nuances of crypto trades.
That’s a problem because the IRS believes cryptocurrencies play a significant role in the $600 billion annual tax gap—or the amount of unpaid taxes owed to the government.
Form 1099-DA is the IRS’ attempt to bring crypto assets into the fold by capturing cost basis and other data at the source. With more detailed cost basis data in hand, the agency hopes that its agents will be able to have an easier time identifying tax evasion.
The Treasury and IRS made their initial proposal in August 2023, causing quite a commotion due to their ambiguous definition of a “broker” required to furnish the forms. In particular, if applied to “decentralized exchanges” (DEXs) or “decentralized finance” (DeFi), the requirement could shut down large swaths of the U.S. crypto industry.
Final 1099-DA Regulations
The Treasury and IRS issued final regulations for reporting crypto transactions in June 2024, which were a little lighter than the initial guidance.
Some of the highlights included:
- The effective date of reporting sales remained January 1, 2025, but the effective date of cost-basis reporting will be on or after January 1, 2026.
- The definition of a broker was temporarily limited to U.S. custodial digital asset trading platforms, digital asset-hosted wallet providers, digital asset kiosk owners, and digital asset issues that regularly offer to redeem those digital assets.
- The definition of digital assets remains broad, though de minimis thresholds and optional aggregate reporting for certain stablecoins and non-fungible tokens (NFTs).
The biggest issue continues to be the cost basis. While brokers don’t have to report cost basis until January 1, 2026, at the earliest, the data is critical for the IRS and difficult to ascertain for brokers. Without the data, the IRS has a hard time computing capital gains. However, brokers have no easy way of retrieving the information when transfers are involved.
The final regulations contain no guidance regarding broker-to-broker reporting for transfers of digital assets. So, in the current state of the regulations, cost-basis reporting is limited to sales of digital assets that were acquired, held until sale, and then sold by the customer within the same custodial broker.
Updates to Form 1099-DA
The latest updates to Form 1099-DA itself came in August 2024. The following month, the agency updated the form again with draft instructions. The new draft reflects the final regulations for custodial broker reporting and the transitional relief described in various IRS notices—bringing it closer to (if not matching) the final form.
Draft 1099-DA form. Source: IRS
The latest draft contains several updates:
- Brokers do not need to specify their broker type (e.g., hosted wallet providers, digital asset payment processors, etc.).
- You do not require a free-form explanation if the recipient has no tax identification number (TIN).
- Brokers must report both the code for and name of the digital asset, similar to Box 1a of Form 1099-B.
- Brokers must check Box 8 if they rely on customer-provided acquisition information. This could enable accurate reporting when customers transfer assets into the account and then sell them.
- Brokers only need to report if they did or did not provide custodial services to indicate if digital assets should be treated as securities.
- Box 12 requires brokers to indicate when they transferred a digital asset into the account, along with the date of the transfer.
- Box 7 requires brokers to indicate if sale proceeds were only in cash, simplifying the previous version requiring a detailed explanation for non-cash proceeds.
- The new draft no longer requires reporting the time of the digital asset transaction or the wallet address, which many brokers and taxpayers cited as a security concern.
Ultimately, Form 1099-DA shares similarities with its traditional counterparts, particularly Form 1099-B used for securities transactions. Both forms aim to report capital gains and losses to the IRS, helping ensure accurate tax reporting. However, they tailored the Form 1099-DA explicitly to the unique aspects of digital assets.
Preparing to Comply
The good news for taxpayers is that brokers do the heavy lifting when furnishing Form 1099-DA. Your only job is to take the numbers, plug them into your Form 8949, and carry over the totals to your Form 1040.
But there’s a caveat!
If you use multiple wallets and exchanges, the cost basis information that your broker reports on Form 1099-DA may not be accurate. Even if they check a box saying they transferred an asset, the IRS may take a greater interest in your return if they suspect you’re trying to hide the true cost basis.
Either way, it’s a good idea to track your own cost basis information separately to ensure that it’s correct and create a paper trail in the event of an audit. Fortunately, that’s easier than ever using ZenLedger’s platform!
ZenLedger makes it easy to import transactions into one centralized location. Source: ZenLedger
Our platform aggregates transactions across your wallets and exchanges, computes your capital gains and losses, and generates the tax forms you must file. That way, you can cross-reference your numbers with those you see on your Form 1099-DAs to ensure you’re not overpaying or underpaying your taxes.
You can also leverage our tax loss harvesting capabilities to find ways to save. Currently, the IRS permits you to realize tax losses as long as you don’t have an economic interest in the same security 30 days before or after the transactions. This can help you save money on your yearly taxes by offsetting capital gains and up to $3,000 in ordinary income.
The Bottom Line
The IRS and other regulators are playing catch-up with the crypto industry. Form 1099-DA represents a significant step in the agency’s effort to bring digital asset reporting in line with traditional financial instruments. But, while the form aims to simplify tax reporting, it also introduces new challenges, particularly regarding cost basis reporting.
Over the coming months, we will likely see further refinements to Form 1099-DA and related crypto reporting requirements. Staying proactive and maintaining detailed records with tools like ZenLedger will be essential for crypto investors navigating this new tax landscape.
Get started with ZenLedger today for free!
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
