Source: TaxDAO
On April 19, the U.S. Internal Revenue Service (IRS) released the first draft tax form 1099-DA specifically for digital asset transactions. The 1099-DA form will be applicable to the 2025 tax return system and is intended to report the digital asset gains traded by brokers. This article sorts out and interprets the contents of the form.
1 Overview of Form 1099-DA
For a long time, the IRS has regarded cryptocurrency as the primary source of unreported income. Surveys show that a considerable number of cryptocurrency investors in the United States are non-compliant in tax reporting, and the new reporting requirements will greatly enhance the IRS's ability to catch cryptocurrency tax evaders. Cryptocurrency is one of the fastest growing industries in the world, but there is currently no tax form specifically for reporting cryptocurrency income or capital gains and losses. Form 1099-DA is a new tax form specifically for digital assets.
Most cryptocurrency traders have encountered problems using the tax forms provided by cryptocurrency exchanges because they are not suitable for cryptocurrency reporting - 1099-DA is designed to solve this problem. The IRS wants to make crypto tax information more accessible and ensure that all cryptocurrency traders report their gains and losses.
2 Who is responsible for filing Form 1099-DA?
Form 1099-DA is the first tax form specifically designed to collect identification information and detailed transaction data of digital asset traders from brokers on a large scale. Anyone considered a digital asset broker is required to submit Form 1099-DA to both clients and the IRS.
The IRS’s proposed regulations spell out who should be considered a broker:
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 digital asset trading kiosks
Notably, the IRS’s proposed regulations do not consider any of the following to be brokers:
Miners, node operators, or others who simply maintain the blockchain.
Hardware wallets that do not directly allow users to buy, sell, and trade digital assets (e.g., wallets that must be connected to an exchange to complete any such transactions).
Software developers who indirectly facilitate digital asset transactions (e.g., by developing code for companies like Coinbase).
Smart contract developers are those who receive income from the smart contracts they create but do not maintain or update the contracts.
Digital asset brokers and those who are deemed to be brokers will issue 1099-DA forms to investors. Brokers report transactions that result in capital gains or capital losses, as well as transactions that exchange one digital asset for another digital asset, on the form. Brokers must use Form 1099-DA to report the gain (or loss) and cost basis of digital asset dispositions to taxpayers and the IRS. 1099-DA requires brokers to specify the type they belong to, including self-service terminal operators, digital asset payment processors, custodial/non-custodial wallet providers, or other digital asset tax filers.
3 Reporting requirements
3.1 Reporting method
The United States adopts a voluntary tax compliance system, and taxpayers are responsible for calculating and reporting their own taxes. Taxpayers need to report two types of information: information reported by third parties and information reported by themselves.
The IRS reconciles the amounts reported by third parties with the amounts reported by taxpayers themselves. Third-party tax forms include W-2, 1099, 1098, etc. Taxpayers need to self-report any income, expenses, or deductions that are not reported on third-party forms. The two reporting methods are completely independent. Currently, cryptocurrency tax calculations in the United States are mainly self-reported, but 1099-DA and its reporting regulations require exchanges to report some information about taxpayers' cryptocurrency transactions, that is, third-party reporting.
3.2 Content of the declaration
Form 1099-DA will report information on the sale or disposal of digital assets, including narrow cryptocurrencies (Bitcoin, Ethereum, etc.), NFTs, and stablecoins.
When did you acquire the digital asset (acquisition date)
How much did you pay for it (cost basis)
When did you sell or exchange it (sale or disposal date)
The disposal gain from the sale or exchange
The total gain or loss (disposal gain minus cost basis)
This form will apply to sales after January 1, 2025, so taxpayers may receive the first 1099-DA form in January 2026.
3.3 Specific reporting details
The draft 1099-DA form published by the IRS mainly includes the following reporting information:
1. Digital asset broker identification (TIN). To protect taxpayer privacy, only the last four digits of the TIN, (Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), Individual Taxpayer Identification Number (ATIN), or Employer Identification Number (EIN) are shown on the 1099-DA.
2. CUSIP Number. Show the CUSIP (Committee on Uniform Security Identification Procedures) number or other applicable identification number, applicable to the digital asset being disposed of.
3. Digital asset code, name of the digital asset.
4. The number of units of the digital asset sold, exchanged, or otherwise disposed of in the transaction.
5. The time of the transaction.
6. The total proceeds from the transaction.
7. The cost basis of the digital asset sold, exchanged, or otherwise disposed of.
8. The amount of the accrued market discount on the digital asset.
9. The amount of nondeductible losses in wash sales involving digital assets (if such assets are treated as stocks or securities for tax purposes).
10. Backup withholding. If the taxpayer does not provide the correct TIN or does not report interest or dividend income, backup withholding may be required.
11. Short-term capital gains and losses and long-term capital gains and losses.
12. Non-cash income, that is, non-cash income such as goods and services obtained in transactions.
14. Sales/transfer transaction ID (TxID), sales/transfer digital asset wallet address, and sales/transfer digital asset unit quantity, etc.
15. State/local income tax information.
4 Non-reporting risks and impact on taxpayers
Failure to submit required 1099-DA Brokers who fail to submit the form may face fines of up to $3,532,500 per year. Deliberately omitting sources of income on tax returns may result in criminal charges, severe financial penalties, and even imprisonment.
Form 1099-DA represents an important shift in the U.S. government's tax regulation. By requiring brokers to disclose investors' cryptocurrency transactions, the implementation of 1099-DA marks the transition of crypto transaction tax reporting from pure self-reporting to a combination of self-reporting and third-party reporting.
On the one hand, the introduction of Form 1099-DA indicates a tightening of regulation, reflecting the IRS's close attention to cryptocurrency, a major source of unreported income. The IRS has taken measures against brokers to enhance its ability to track and punish tax evasion.
On the other hand, the implementation of 1099-DA has brought considerable challenges to the cryptocurrency trading environment. The form requires brokers to report investors' wallet addresses, transaction quantities, etc., which is a major blow to the anonymity of crypto transactions. In addition, the scope of reporting is not limited to cryptocurrency exchanges. Form 1099-DA also applies to platforms and facilities such as decentralized exchanges and Bitcoin ATMs - as long as they meet the definition of brokers under the new regulations. This creates more complex compliance issues for trading platforms.
In summary, 1099-DA may change the operating dynamics of the cryptocurrency market and also reflect the trend of stricter regulation of the industry. This move by the IRS is consistent with global efforts to regulate financial transactions and mitigate financial crimes such as tax evasion and money laundering.
JinseFinance
Alex