Digital asset reporting: Draft form available

On April 18, the IRS released a draft of Form 1099-DA, “Digital Asset Proceeds From Broker Transactions.” The form will be used by brokers to report digital asset transactions under IRC Section 6045(g). Proposed regulations regarding the digital asset broker reporting rules were issued in August 2023, but the Form 1099-DA was not released at that time.

Reporting proposed to start in 2025

When enacted, the digital asset broker reporting rules initially were effective for information returns required to be filed and furnished beginning in 2024. However, the date for reporting was delayed. Under the proposed regulations, reporting will begin for digital asset transactions effectuated in 2025.

Even if final regulations are issued in the near term, reporting for 2025 transactions will be a challenge because digesting the final regulations, determining whether and to what extent they are applicable, and developing systems and procedures to comply with the final regulations will be a long and costly process. Historically, filers subject to new information reporting requirements have stated that it can take 18 months to two years to put new systems and procedures in place. Developing a new information reporting system can be especially challenging for filers that previously were not subject to reporting. Additionally, taxpayers typically cannot make significant investments in information reporting systems and procedures based solely on proposed regulations as the rules are not set until the final regulations are published.

Crowe observation

Though final regulations have not yet been published, a new Form 1099-DA is necessary before the start of the new reporting regime. Having a draft can be helpful to understand what might be included in the final rules.

Draft Form 1099-DA

The draft form and instructions for recipients have been released, but instructions for filers have not yet been released.

Crowe observation

Filer instructions most likely are dependent on the rules that are included in the final regulations and, therefore, cannot be released until final regulations are issued.

Following are highlights of the draft form and recipient instructions:

• Identification of the type of broker involved in the transaction is required, for instance kiosk operators, digital asset payment processors, hosted wallet providers, or unhosted wallet providers. These categories could indicate that, despite comments, the final regulations might adopt the proposed regulations’ broad approach to the definition of broker.
• Information about the filer and recipient is required, including their name, address, and taxpayer identification number (TIN) as well as a space for an explanation if there is no recipient TIN. Allowing taxpayers to include an explanation on an information return is unique to the Form 1099-DA.
• The specific type of digital asset disposed (boxes 1a and 1b) and the specific type of proceeds, such as cash or no cash proceeds (boxes 7a, 7b, 8, and 9), are reported on the form using codes that have not yet been released.
• Boxes 1g and 2 provide important information about basis. The instructions explain that box 1g might be blank, and if so, the recipient will need to determine basis using their records. If box 2 is checked, basis is reported to the IRS.
• Boxes 10a and 10b are related to noncovered securities and include identifying reasons why the security is noncovered.
• Information regarding the disposition and certain transfers into a broker is required, including the transaction ID or hash from the distributed ledger associated with the transaction (boxes 11a, 11b, 11c, 12a, 12b, 12c). A checkbox is provided if the disposition was not recorded on this distributed ledger (box 11d). If the transfer into the broker was not recorded on the distributed ledger, information about the date and time are required to be provided (box 12d).

Looking ahead

It is unclear whether the draft form is indicative of where the final regulations will land or whether it merely reflects the rules set forth in the proposed regulations. It is not common practice for the form to be at the forefront of new rules when there is an active regulations project, so it is possible that the draft form could change once the final regulations are issued.

On the other hand, the draft form could signal that final regulations will be released soon and that the general structure of the reporting regime in the proposed regulations will remain under the final regulations. Industry insiders recently have joined the IRS, and it is unclear what impact they might have on the final regulations. Given this uncertainty, taxpayers involved in digital asset transactions should monitor developments and consult with their tax advisers to understand how they might be affected by the new digital asset broker reporting requirements.