The Tax Times: IRS Releases Digital Asset Draft Form 1099-DA

Tuesday, April 23, 2024

IRS Releases Digital Asset Draft Form 1099-DA

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. A federal tax law passed in 2021 made broker information reporting rules also apply to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin), effective for 2024 and later years. However, the IRS delayed the effectiveness of these rules until it issued final regulatory guidance. Thus, the rules won't become mandatory for brokers until the IRS issues that final guidance. Some cryptocurrency exchanges already send out Forms 1099-B to investors.

The IRS intends to have the cryptocurrency reporting done on a new form, Form 1099-DA.The new 2025 Form 1099-DA is generally expected to be included on federal income tax returns by taxpayers who answer "yes" to the digital asset question that asks if they, at any time during the relevant tax year, received, sold, exchanged, or disposed of a digital asset or financial interest in a digital asset. Common examples of digital assets to be reported include cryptocurrencies, stablecoins, and non-fungible tokens.

Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash in a transaction, that business must report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300.

The same federal tax law mentioned above required businesses to treat cryptocurrency and other digital assets like cash, effective after 2023. Thus, businesses accepting payments of $10,000 or more in cryptocurrency, or in combined crypto and other cash, would have had to report that to the IRS (on IRS Form 8300). But IRS also delayed the effectiveness of these rules until it issues final regulatory guidance. Thus, until the IRS issues that final guidance, the rule counting crypto as cash for the cash-reporting rules doesn't apply.

If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

If they haven't already done so, cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will need to begin tracking the holding period and the buy and sell prices of the digital assets in customers' accounts.

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.

Please keep in mind that the cryptocurrency exchanges or platforms will probably not have all the information they need to meet their reporting requirements under the new rules. This may make the first year of reporting for digital assets challenging for investors, as well as exchanges and platforms.

Finally, these rules on required reporting by brokers and by businesses do not affect the taxability of cryptocurrency transactions. Cryptocurrency is regarded as property, and transactions in it can result in taxable gain that must be reported by a taxpayer. The receipt of cryptocurrency as payment is also a taxable event.

If taxpayers with cryptocurrency transactions failed to meet their U.S. tax compliance obligations, a voluntary disclosure should be considered. With the enhanced scrutiny by the IRS and the DOJ, a taxpayer always wants to get to the government before the government finds them.

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