The Internal Revenue Service previewed a
The form is the result of the bipartisan Infrastructure and Investment Jobs Act that President Biden signed into law in 2021, which classifies crypto exchanges and trading platforms as brokers and
Crypto brokers were supposed to start tracking the transactions last year. Under the proposed regulations, a broker providing custodial services for digital asset would be required to provide adjusted basis reporting for sales of digital assets effected on or after Jan. 1, 2026, if the digital asset is acquired and continuously held by that broker in the customer's account on or after Jan. 1, 2023.
The preview coincides with an eagerly anticipated "Bitcoin halving" event that's expected to drive up the value of that particular cryptocurrency.
"To celebrate Bitcoin Halving Day, the IRS has gifted the digital asset community with a draft IRS Form 1099-DA — the form that 'brokers' are supposed to begin using in 2025 to report digital asset transactions to customers," said Tony Tuths, a principal and leader of the alternative investments and digital asset tax practice at KPMG, in a statement. "While we are still waiting on final regulations to see who qualifies as a broker and for an exact timeline for reporting, the draft form is telling. The 'Broker type' box lists brokers such as Unhosted Wallet Provider, Digital Asset Payment Processor and Kiosk Operator. This may indicate that Treasury is not backing down from its expansive scope definition of 'broker,' which will drag DeFi and wallet providers into reporting. Also noteworthy is Box 10b (noncovered security), still suggesting that cost basis was to be tracked from Jan. 1, 2023 (which it's likely not everyone has been doing)."
Crypto companies have spent heavily on lobbying lawmakers and regulators in Washington before and after the infrastructure law was passed to limit their exposure to the reporting requirements in an effort to narrowly define the meaning of the term "broker." The inclusion of those specific categories on the form provides some clarity on who will be expected to issue the forms, and which crypto investors can expect to receive them.
The requirements are part of an effort by the IRS to stem tax evasion by crypto investors. In recent years, the IRS has added a question to the top of the Form 1040 asking taxpayers about whether they have received, sold, exchanged or otherwise disposed of a digital asset, or a financial interest in a digital asset. But many crypto holders continue to ignore the question or are unsure of what amount should be reported. The new reporting form from crypto brokers such as exchanges would give investors a specific answer, and the knowledge that the form was also being sent to the IRS would add an extra inducement to comply.
Other boxes shown on the draft form provide some hints about how the final regulations will apply.
"The inclusion of a "wash sale loss disallowed" Box 1i does not mean that crypto is subject to wash sale rules," said Jessalyn Dean, vice president of tax information reporting at Ledgible, a crypto tax and accounting software company, in an
Dean
Wash sale rules can be a concern for crypto investors. If investors repurchase their crypto assets soon after selling them, that could mean the wash sale rule, which is intended to prevent investors from claiming tax losses on assets they continue to own, comes into play.
A checkbox on the draft form in Box 11d says, "Check if sale is not recorded on the distributed ledger."
"This is necessary because very often digital asset addresses or transaction IDs cannot be provided because transactions occurred within internal record-keeping systems," Dean explained.
Another checkbox on the form may leave some brokers confused about what to do.
"Box 5 is for a broker to indicate that a loss is non-deductible due to a 'reportable change in control or capital structure' and references Form 8949 and Schedule D Instructions," Dean wrote. "However, neither of those instructions give any guidance on what kind of events in crypto and digital assets could apply in these circumstances. They defer to the broker to simply figure it out in the dark with the further statement that, 'The broker should advise you of any losses on a separate statement.'"
This may be an area where the Treasury and the IRS will need to provide further guidance in the final regulations or a FAQ page. Guidance will probably be needed in other areas as well.
"It seems as though the IRS, at this point, was not yet interested in addressing comments about the information being requested and the scope of the regime as a whole," said Jonathan Jackel, managing director in the financial services organization at EY. "With this being an initial draft form, that can still change, but many of the concerns stemming from the proposed regulations remain present, especially with regards to compliance moving forward as well as compliance dating back to the start of 2023. Digital asset brokers will continue to need clarity on these concerns as they go about building and enhancing their reporting systems."
He pointed to a box on the form asking for an explanation if there's no Taxpayer Identification Number provided. "There is a box for if the broker is reporting without a recipient's TIN, to give an explanation if they don't have the recipient's TIN," said Jackel. "This is atypical of Forms 1099 and serves as an example of the scope of this reporting — that some of the data points required go far beyond what many brokers are capable of reporting."
