The IRS Form 1099-DA is planned to take effect January 1, 2025 and will be required for all digital asset brokers.

Introduction

The IRS has drafted the first ever tax form specific to crypto and digital assets. This form, Form 1099-DA, will fundamentally change how cryptos are reported to the IRS and individuals, shifting much of the reporting responsibility off of the taxpayer and onto "brokers". More on that later.

Background

In April 2024, the IRS released the first draft of Form 1099-DA with requirements for custodial brokers being released in July 2024 and a revised draft of Form 1099-DA in August 2024. This form and associated reporting requirements will bring more transparency and reporting to the crypto space than ever before. For the first time, crypto transactions will more or less be treated similar to traditional assets like stock and securities when it comes to brokers being required to report transaction activity to both the taxpayer as well as the IRS. Effective for the 2025 tax year, the IRS will be receiving an immense amount of data regarding taxpayer's crypto activity.

Key Points

1. This form aims to standardize reporting requirements over digital assets, requiring all "brokers" to submit a 1099-DA to the IRS and taxpayer. The IRS defines a broker as an entity that “regularly provides services effectuating transfers of digital assets on behalf of another person”. This includes exchanges, digital asset wallet providers that facilitate trades/transfers, and can even potentially include crypto ATMs. This, of course, raises a lot of questions for wallet providers and crypto ATMs that are not KYC. It is very possible that those brokers who do not collect the adequate information from the taxpayer to complete the 1099-DA will be out of compliance and could face legal action if they continue to serve US taxpayers.
   1. There has been some confusion around whether or not noncustodial wallets will be classified as brokers for purposes of these reporting requirements. In the final requirements Rule published by the IRS in July 2024), the IRS specifies that a facilitative service includes any service that "directly or indirectly effectuates a sale of digital assets, such as providing a party in the sale with access to an automatically executing contract or protocol, providing access to digital asset trading platforms, providing an automated market maker system, providing order matching services, providing market making functions, providing services to discover the most competitive buy and sell prices, or providing escrow or escrow-like services to ensure both parties to an exchange act in accordance with their obligations". While this language suggests it is very likely certain unhosted wallets could be subject to the 1099-DA reporting requirements, it is also important to note that "unhosted wallet providers" has removed from the explicit definition of "broker". This continues to be a grey area and we are eagerly awaiting more clarity from the IRS.
2. The 1099-DA will provide proceeds, cost basis, and gain/loss details for each transaction facilitated on the platform, as well as additional details. More on cost basis later.
3. There is a new section for "wash sales". The instructions read: "Shows the amount of nondeductible loss in a wash sale transaction involving digital assets that are also stock or securities for tax purposes." This is particularly confusing as we know the IRS currently defines crypto as property. This likely means that, as expected, new guidance and regulation will be coming out explicitly disallowing wash sales for crypto. As mentioned in a previous post, the wash sale loophole is still currently open for crypto in 2024, but is expected to be closed as early as 2025. This wording in the 1099-DA further solidifies these expectations.
4. "Noncovered Assets" will be specifically identified and documented. Noncovered assets are assets that the broker did not provide custodial services for or assets that were transferred into the platform and/or were acquired prior to 2026. If the box is checked indicating it's a non covered asset, certain fields in the form may be blank INCLUDING THE COST BASIS FIELD. This is extremely important to understand as the proceeds may appear as 100% capital gains unless you provide the accurate cost basis on the asset. This will result in taxpayers paying substantially more tax than they might actually owe. Taxpayers should not rely on 1099-DAs with missing cost basis data for tax owed.
5. Brokers must attest to relying on customer-provided data. There is a section where the broker will indicate if they have relied on customer provided data, such as cost basis. The ability to submit data such as cost basis will vary on a broker by broker basis. For example, Coinbase may create a feature to input your own cost basis on assets transferred into the exchange which will then be included on the 1099-DA. If that is the case, this box will be checked.
6. Both stablecoins and NFT transactions are allowed to be aggregated (separately), as long as total proceeds is less than $10,000 annually. All other digital asset transactions will have to be reported separately.

Implications For Taxpayers

Taxpayers can expect to receive 1099-DAs from various different exchanges and wallet providers. The forms received will also be reported directly to the IRS. However, for assets purchased prior to 2025 as well as all assets transferred into a qualifying exchange/wallet provider, cost basis data will not be accurate and will be left blank on the form. As a result, it is imperative that taxpayers maintain accurate cost basis records on their own and continue to report their transaction using Form 8949 (these 1099-DA forms do not replace the requirement to report using Form 8949 and Schedule D).

Comments

While the 1099-DA is going to help streamline data requirements, there are still many issues this will not solve. For one, there are various cost basis accounting methods available to taxpayers. The 1099-DA will default to First-In-First-Out (FIFO). However, a taxpayer may elect to utilize Specific Identification (assuming they meet the data requirements), allowing them to elect more favorable methods such as Highest-In-First-Out (HIFO), which may result in differences in what is being reported on the Form 1099-DA vs what the taxpayer is reporting on their 8949. While the 1099-DA will help bring a lot more transparency to crypto trading, it will not necessarily result in fully accurate tax reporting for taxpayers.

Additionally, it is very important that taxpayers do not solely rely on the 1099-DAs, especially if transferring assets between wallets and exchanges. As mentioned, if an exchange receives an asset from an outside source, it will assign a blank/$0 cost basis to the asset on the 1099-DA. If this was provided to a traditional CPA or filed into turbotax, this would wrongfully result in 100% capital gain. Instead, the taxpayer should identify the cost basis on the assets transferred in and ensure they are correctly reporting it on their 8949. By maintaining accurate records for all crypto activity, taxpayers can ensure they have the proper paper trail to back up their numbers as well as ensure they are optimizing and minimizing tax due while remaining compliant.

TLDR

Starting January 1, 2025, brokers dealing with digital assets, including exchanges and certain wallet providers, must collect and report taxpayer transaction data to the IRS via Form 1099-DA. This form will detail proceeds, cost basis, and gain/loss, though gaps in cost basis (for non-covered assets) can impact tax liability. Taxpayers should keep independent records, especially for assets transferred between wallets, to ensure accurate tax reporting.