IRS Draft Form 1099-DA for Digital Asset Transactions
Have you invested in cryptocurrencies like Bitcoin or Ethereum? If so, you need to pay attention to a critical tax reporting update from the IRS. A seismic shift is coming that will impact every US crypto investor and trader. The IRS is rolling out a new form – the 1099-DA – exclusively for reporting capital gains and losses from virtual currency transactions.
This change aims to simplify digital asset tax reporting and improve compliance. But it also creates new challenges for traders, investors, and crypto platforms.
Read on to discover everything you need to know about IRS Form 1099-DA. I’ll explain what it is, who must file it, when it takes effect, and how to prepare.
The rise of cryptocurrencies creates a tax reporting headache
First, a quick history lesson to provide context.
Cryptocurrencies like Bitcoin and Ethereum rose to prominence after 2009. But the IRS only started issuing meaningful crypto tax guidance in 2014.
Initially, virtual currency transactions didn’t require specialized reporting. Investors and traders simply included gains and losses from crypto along with other capital assets on Form 1040 Schedule D.
But as crypto trading volumes grew, concerns emerged around tax non-compliance. The IRS estimated billions in unpaid crypto-related taxes annually.
To increase visibility, the IRS took two key actions:
- Declared crypto to be property instead of currency for federal tax purposes. This meant capital gain and loss rules applied.
- Stated that crypto exchanges must issue Form 1099-K/MISC to traders and investors for transaction volumes over $20,000 per year.
However, the existing Forms 1099 proved inadequate for crypto’s unique properties. They lacked cost basis info needed to calculate gains and losses accurately.
The infrastructure bill passed in 2021 sought to rectify this. It defined “brokers” issuing 1099s broadly to include crypto exchanges, platforms, and software providers.
This paved the way for a new specialized reporting tax form – the 1099-DA.
What is IRS form 1099-DA?
Form 1099-DA (short for 1099-digital assets) is a new IRS tax document created exclusively for reporting crypto and digital assets transactions.
It standardizes how crypto brokers furnish digital asset trading data to the IRS and investors. The goals are to:
- Simplify digital asset tax reporting
- Provide investors accurate data to calculate crypto gains/losses
- Improve taxpayer compliance
Form 1099-DA requires listing each cryptocurrency disposal (sale, trade, or spend). It captures key details like:
- Date acquired
- Date sold or exchanged
- Proceeds amount
- Cost basis
- Net gain/loss
With this information, taxpayers can easily calculate and report capital gains and losses from virtual currency transactions.
Who must file form 1099-DA?
Two groups face 1099-DA filing requirements:
- Crypto brokers
- Taxpayers with crypto activity
Let’s look at each category:
Crypto brokers must furnish 1099-DA to traders and the IRS
First, any business defined as a crypto broker must file Form 1099-DA. This includes:
- Centralized and decentralized cryptocurrency exchanges
- Crypto payment processors
- Hosted wallet providers
- Other platforms facilitating transfers of digital assets
These third-party brokers must track reportable crypto transactions and furnish a completed 1099-DA to:
- Each customer conducting trades on their platform
- The IRS
This reporting mirrors how stock brokers currently issue 1099-B forms to investors and the IRS.
Taxpayers must report digital asset data from 1099-DA on tax return
Second, taxpayers receiving one or more 1099-DA forms must report that data properly on their tax return.
Specifically, they should transcribe:
- The aggregate gains and losses from 1099-DA forms onto 1040 Schedule D
- Total proceeds amounts to Form 8949
This summarizes crypto activity for the IRS while validating the details furnished by brokers.
When does IRS form 1099-DA take effect?
The IRS first released draft form 1099-DA in April 2024 for feedback. An updated draft version followed in August 2024.
But 1099-DA is not yet finalized. The IRS plans to post final form 1099-DA and instructions at an unspecified later date.
Here is the rollout timeline:
- 2024: Final version of form 1099-DA and guidance released
- 2025: Crypto brokers begin tracking reportable transactions
- 2026: Brokers furnish 1099-DA to customers and the IRS for 2025 tax year activity
- 2026: Taxpayers begin reporting data from received 1099-DAs on their 2025 return
So the first tax year requiring 1099-DA filings is 2026 for activity occurring in 2025.
How can I prepare for form 1099-DA reporting?
Form 1099-DA promises to simplify crypto tax reporting. But this seismic shift also creates transition challenges.
Here are key steps you can take now to get ahead of the curve:
Track your historical crypto transactions
First, aggregate records of all your historical cryptocurrency activity since you began trading. This includes:
- Purchase dates, cost basis, and fair market value
- Sale dates, proceeds, and fair market value
- Transfers between wallets and platforms
Tracking down historical trades can be tedious. But taking the time now will pay dividends later.
Maintain meticulous records moving forward
Going forward, be meticulous about tracking each transaction in real-time.
For purchases, record:
- Date acquired
- Cost basis (including fees)
- Fair market value on purchase date
For disposals via sale, trade, or spend:
- Date disposed
- Proceeds amount
- Fair market value on disposal date
Ideally use crypto tax software to automate transaction tracking. Otherwise, use a spreadsheet.
Standardize cost basis methodology
When selling or trading crypto assets, you must use a standardized cost basis method, such as first-in, first-out (FIFO). Decide your preferred method now and stick with it consistently. This avoids IRS questions down the road.
Adjust Capital Gains Tracking Approach. Currently, you may rely on exchange transaction histories and Form 1099-Ks to calculate gains and losses.
But for simplicity, shift to treating 1099-DA as the sole source of truth once mandated. Transfer the aggregated data directly to your tax return.
Consider tax implications before moving crypto
When transferring between exchanges or wallets, think through the tax implications before initiating the move.
- Will it trigger a reportable taxable event that exchanges must track and report via 1099-DA? Factor this into your logic.
Evaluate Tax Planning Strategies
- Higher crypto visibility with Form 1099-DA may impact your tax liability.
- Explore proactive tax planning moves in advance, like tactical loss harvesting to offset future gains.
Understand Reportable Exemptions
- Some crypto transactions are exempt from 1099-DA reporting even under the new rules. This includes blockchain forks, airdrops, and gifts received below annual limits.
- Know these exceptions to avoid unnecessary IRS correspondence if excluded from a broker’s reporting.
What information is reported on form 1099-DA?
In addition to your personal information, 1099-DA includes all disposals of digital assets triggering a taxable event. This encompasses:
- Selling crypto for fiat currency
- Trading one crypto for another
- Using crypto to purchase goods/services
- Earning crypto as income
Exempted transactions not reported on 1099-DA include:
- Buying crypto with fiat currency (not a taxable event)
- Transferring crypto between your own wallets
- Donating crypto to a tax-exempt charity
- Gifting crypto below annual exclusion limits
- Inheriting crypto from an estate
Prepare for form 1099-DA from IRS
The introduction of IRS Form 1099-DA fundamentally transforms cryptocurrency tax reporting. This new specialized document aims to provide investors and traders complete data to easily calculate gains and losses.
But the transition also introduces challenges around cost basis tracking, aggregating multiple broker forms, and handling previous years’ transactions.
Get ahead of the curve by taking proactive steps now to organize your trading history. Maintain meticulous ongoing transaction records. Consider the tools and strategies needed to simplify your tax reporting under the new 1099-DA regime.
The landscape shifts significantly starting with the 2025 tax year. With proper planning, you can ease this transition painlessly. Embrace Form 1099-DA as progress towards mainstream crypto adoption. But ensure you have processes in place to leverage its benefits while avoiding new pitfalls.
With a sound tax reporting foundation, you can confidently move forward as cryptocurrencies become further woven into the fabric of finance. The future shines brightly as increased regulatory clarity allows innovators to focus on advancing real-world utility and unlocking the vast potential of blockchain technology.
