14 AUG 2024 / IRS UPDATES

What’s New in the IRS Crypto Draft?

With the buzz around cryptos and NFTs dominating discussions, the IRS has stepped in with a major update: the first draft of Form 1099-DA. Beginning January 1, 2025, brokerage firms will be required to use this form to report transactions involving the sale and exchange of digital assets. To ensure the form meets the needs of tax professionals and the public, the IRS has opened a 30-day window for feedback on the draft instructions. Let’s break down the key details of this new form and the reactions it has sparked.

Form 1099-DA: Key Updates

The IRS has announced that Form 1099-DA addresses the final regulations for custodial broker reporting within the cryptocurrency broking sector. This aligns with the transition relief provided through Notices 2024-56, 2024-57, and Revenue Procedure 2024-28. The form is designed to offer greater clarity for taxpayers, providing an additional tool to assist in reporting cryptocurrency transactions and other digital assets. It aims to prevent digital assets from being used to hide taxable income, particularly among higher income brackets, and to help taxpayers accurately report their earnings for the year.

According to the IRS Office of Digital Asset Initiative, Form 1099-DA complements the 6045 broker regulations, offering a streamlined process for reporting gains and losses on digital asset transactions starting in 2025.

Industry Reactions

CoinDesk: Leading crypto exchange firm Coindesk has highlighted key points in their report on Form 1099-DA:

The updated form addresses data privacy concerns, simplifying the reporting process by requiring only the dates of transactions, not the time.
The burden of compliance has been minimized, as noted by crypto lawyer Drew Hinkes in a post on X.

Anthony Tuths (KPMG): Anthony Tuths, Leader of the Digital Asset Group at KPMG, shared his thoughts on LinkedIn:

Privacy concerns related to wallet IDs and transaction reference numbers have been removed.
New boxes have been added to report Qualifying Stablecoins and Non-Fungible Tokens (NFTs), reflecting the focus of final crypto regulations.
References to unhosted wallet providers have been eliminated.
Future changes to Form 1099-DA will address broking rules for Decentralized Finance (DeFi) and non-custodial situations.

Jessalyn Dean (Ledgible): Jessalyn Dean, Vice President of Tax Information Reporting at Ledgible, noted significant changes in the revised form:

The box requiring an explanation if no recipient TIN is provided has been removed to reduce ambiguity.
The box indicating broker type has also been eliminated.
Reporting of non-cash proceeds has been simplified into a single box, while Box 8 has been repurposed for brokers to indicate reliance on customer-provided information.
Boxes 11A, 11B, and 11C now aggregate the reporting of Qualifying Stablecoins and NFTs.
Data privacy concerns related to wallet IDs and transaction reference numbers have been addressed.

However, she also flagged some concerns, including the unclear roles of Boxes 5 and 10 and the need for timely instructions to brokers to implement the filing of Form 1099-DA.

As the IRS prepares for the January 2025 implementation of Form 1099-DA, the next steps will be critical. The 30-day feedback window is an opportunity for tax practitioners and brokerage firms to voice any remaining concerns and ensure a smooth transition to the new reporting requirements. The IRS’s ability to address these issues will be key to the successful rollout of these important changes in the digital asset reporting landscape.