The IRS recently unveiled a draft for the first crypto tax reporting form, 1099-DA, following months of collecting input on proposed regulations that would require crypto “brokers” to report customer sales and digital asset exchanges. Scheduled to be implemented in 2025, the form is a signal that finalization of crypto tax regulations is imminent. These forthcoming regulations are expected to impose challenges for the taxpayers but enhance IRS’s capability to rein in tax evasions.
The introduction of the new 1099-DA form is in line with the goals of the Infrastructure Investment and Jobs Act, which was signed into law by President Joe Biden on Nov. 15, 2021. A critical provision of the IIJA, Section 80603, is aimed at formulating and enforcing laws to increase tax revenue from digital asset transactions — projected to reach $28 billion over 10 years by the Joint Committee on Taxation. Yet, the prospect of increased compliance costs, varying among reporting entities, temper this optimism.
The current definition of a broker, as offered by the 1099-DA form, includes operators of kiosk, digital asset payment processors, and both hosted and unhosted wallet providers. This definition seems to impose a uniform set of reporting requirements on diverse entities in the crypto sphere. Such entities as decentralized trading platforms, many of which lack systems for collecting taxpayer information, face unique challenges in complying with these requirements, given their inherent decentralized ethos.
Individuals engaged in reportable digital asset transactions, whether as consumers or investors, must provide sensitive personal identifying information to in-scope digital asset brokers necessary for their completion of the 1099-DA form, raising concerns about privacy and security. Taxpayers are also liable for accurate tax reporting to the IRS, involving verification of the gross proceeds and cost basis as reported in broker-issued 1099-DA forms. This could potentially require reconciliation of discrepancies or risk overpayment of tax.
By introducing the 1099-DA form, the IRS is in a stronger position to control crypto transactions and mitigate tax evasion risk. The new form will compel digital asset brokers to put in place know-your-customer measures for collecting and reporting taxpayer information. Despite the challenge of dealing with the immense transaction-specific data, the IRS can use selected data to strategically audit individual’s crypto transactions in the event of irregularities appearing in other sections of their tax filings. The possession of such data by itself could serve as a deterrent against tax evasion.