The IRS published the first draft of the 1099-DA with supplementary information on 4/22/2024 (89 FR 29433). The Form 1099-DA will be used by digital asset brokers to report transactions of US taxpayers, similar to the Form 1099-DIV brokers and banks issue every year.
Back in November 2021, the Infrastructure Investment and Jobs Act (“IIJA”) amended Code Sections 6045 and 6045A to expand their scope. These Code Sections impose reporting obligations on brokers and entities involved in the sale or transfer of securities. The IIJA amendments included digital assets in the reporting obligation. Originally, mandatory broker reporting for digital asset transactions were supposed to start with tax returns due in 2023, contingent upon the issuance of comprehensive regulations. Therefore, the reporting requirements remained pending until the IRS could provide the necessary regulatory guidance.
Last year, on August 29, 2023, the IRS issued proposed regulation (Proposed Regulation 2023-17565). The final regulations are expected to be issued soon, which means that the mandatory broker reporting for digital asset transactions will begin in 2025.
The first draft of the reporting form, the 1099-DA, is now published and offers clues as what suggested changes the final regulations have adopted, or have not adopted after receiving thousands of comments.
The checkbox labeled “Broker type involved in the transaction” on the form enumerates various broker categories including Hosted and Unhosted Wallet Providers, Digital Asset Payment Processors, and Kiosk Operators. This enumeration underscores that the forthcoming regulations do not exempt DEFI protocols and wallet providers from their obligations, contrary to suggestions by some commentators. Additionally, it dismisses the notion of a deferred implementation date proposed by others.
Field 10b requires cost basis to be tracked from 1/1/2023. The proposed regulations already outlined this requirement, but given that the proposed regulations were not issued until August 2023, many potential brokers either did not know that they might be subject to the reporting requirement until the regulations defined the term broker or did not expect to have to collect basis information retrospectively. So, the 1/1/2023 basis start date will be challenging for many brokers. If the start date as defined in proposed §1.6045-1, including -1(d)(2)(i)(C), does not change, the adjusted cost basis reporting will start for tax years beginning on or after January 1, 2026, and not for 2025. While the cost basis reporting is mandatory for all transaction occurring on January 1, 2026 and later, the data for the basis reporting has to go back to 1/1/2023, the start of the basis tracking. This does not preclude brokers to start reporting earlier and basis further back, voluntarily.
The Form at box 11 requires the listing of every Transaction Hash, which is a specific and unique number code that is assigned to each transaction on a blockchain. The listing of every single Transaction Hash will make these filing voluminous.
The form also holds a few surprises. It includes in box 1i a field to report “Wash sales loss disallowed”. Now, this could mean that the IRS expects that digital assets are or in the near future will be subject to the wash sale rules. More likely, however, is that the IRS just included this field for digital assets that are also classified as securities and as such are subject the wash sale rule.
Box 5 has to be checked if a loss is not allowed based on the proceeds amount. The instructions state that no loss can be taken if gross proceeds are from a reportable change in control or capital structure This is the exact same instruction as for Form 1099-B, Box 7. “Taxpayers 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.” (see 89 FR 29433)
All in all, the draft form suggests that the final regulations will not back down from many challenging requirements that were proposed in August 2023. This will continue the controversial debate over how the industry can and will be able to adapt. The IRS wants the digital asset transaction data even though it knows that processing the enormous amount of data will be challenging. That means, if they are willing to spend a portion of their new funding in processing these returns, they will up their enforcement to collect taxes, interest and penalties from taxpayers who hold digital assets.