On 4/19/24, the IRS published draft Form 1099-DA for reporting digital asset proceeds from broker transactions. The IRS states that: “This early draft release reflects the notice of proposed rulemaking that appeared in the Federal Register on August 29, 2023. This early draft release may change based on decisions made in response to comments received in response to that notice of proposed rulemaking. For sales or exchanges of digital assets that take place on or after Jan. 1, 2025, the proposed regulations would require brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, to report gross proceeds on a newly developed Form 1099-DA and to provide payee statements to customers. Brokers, in certain circumstances, would also be required to include gain or loss and basis information for sales that take place on or after Jan. 1, 2026, on these information returns and statements, so that customers have the information they need to prepare their tax returns”.
The important take away is that taxpayers that are not digital asset compliant may want to start considering becoming compliant ready now. When Form 1099-DA is approved, the IRS will have the ability to track digital asset income. That said, it is best to have good recordkeeping of all digital asset transactions. This means that taxpayers involved with digital assets need to keep track of their digital asset trading activities, wallets, exchanges, and account reconciliation in order to be aware of their potential reporting obligations.
What was the proposed rulemaking?
On 8/29/23, the IRS issued a Notice of Proposed Rulemaking and Notice of Public Hearing for Digital Assets Proposed Regulations. The IRS Digital Assets Proposed Regulations address information reporting, the determination of amount realized and basis, and backup withholding, for certain digital asset sales and exchanges by requiring brokers, digital asset trading platforms, digital asset payment processors, and certain digital asset hosted wallets to:
- file information returns,
- furnish payee statements on dispositions of digital assets effected for customers in certain sale or exchange transactions,
- require real estate reporting persons, who are treated as brokers with respect to reportable real estate transactions, to include on filed information returns and furnished payee statements the fair market value of digital asset consideration received by real estate sellers in reportable real estate transactions. Real estate reporting persons would also be required to file information returns and furnish payee statements with respect to real estate purchasers who use digital assets to acquire real estate in these transactions.
As per the Notice of Proposed Rulemaking and Notice of Public Hearing, the IRS Digital Assets Proposed Regulations is effort to “crack down on tax cheats while helping law-abiding taxpayers know how much they owe on the sale or exchange of digital assets. This is part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules.”
IRS Form 1099-DA Instructions for Recipient states that:
- Brokers must report proceeds from (and in some cases, basis for) digital asset dispositions to the taxpayer and the IRS on Form 1099-DA.
- Taxpayer may be required to recognize gain from these dispositions of digital assets.
- Reporting is also required when taxpayer’s broker knows or has reason to know that a corporation in which taxpayer owns a digital asset that is also stock has had a reportable change in control or capital structure.
- Taxpayer may be required to recognize gain from the receipt of cash, services, digital assets, or other property that was exchanged for a digital asset that is also the corporation’s stock.
- If taxpayer received a Form 1099-DA, taxpayer generally sold, exchanged, or otherwise disposed of a financial interest in a digital asset and should check the “Yes” box next to the question on page 1 of Form 1040.
- Broker type involved in transaction are: Kiosk Operator, Digital Asset Payment Processor, Hosted Wallet Provider, Unhosted Wallet Provider and Other.
Are you a taxpayer that has sold, exchanged, or otherwise disposed of a financial interest in a digital asset?
Are you a digital asset compliant taxpayer?
How is your digital asset recordkeeping?
Who is your Digital Asset CPA? ©
