IRS Releases Draft Form 1099-DA

IRS Releases Draft version of Form 1099-DA

In late summer of 2023, the IRS released long-awaited proposed regulations addressing information reporting for digital assets, including cryptocurrencies. The proposed regulations are expansive, and areas addressed in the regulations include digital asset broker information reporting, cost basis reporting, backup withholding and new reporting rules for foreign exempt entities of U.S. brokers.

On April 18, 2024, the Internal Revenue Service (IRS) released a draft version of the Form 1099-DA. This form will be used to report digital asset proceeds from broker transactions to both the IRS and their customers which take place on or after January 1, 2025. In this article we will explore the draft Form 1099-DA’s potential implications for digital assets and cryptocurrency brokers, and what the evolving definitions and regulations means for the future of the digital asset tax compliance.

What is Form 1099-DA?

Form 1099-DA, is a proposed US tax document which will be used by digital assets and cryptocurrency brokers to report information about their clients and transactions on their platforms. The 1099-DA form is meant to help brokers figure out the taxable gains or losses when brokered digital assets change hands.

The current version is a draft, and the final form may be subject to changes based on public feedback. The IRS requested public comments about the draft form. It remains unclear whether finalized regulations and form will be available this year. However, it is interesting to note the instructions included with the form lists a 2025 date.

Proposed Regulations for addressing Tax Information Reporting for Digital Assets

Several questions remain for those final regulations;

• The definition of what is a “broker of digital assets”?
  • Who is required to do tax reporting. The regulations broadly define a “broker” to include:
    • custodial brokers, digital asset trading platforms, decentralized exchanges, digital asset payment processors, digital asset issuers and certain digital asset hosted wallets, among others.
  • The draft 1099-DA form contains a list of checkboxes for the type of broker the reporting entity is, which may not encapsulate all brokers that were listed in the regulation. That list is the following:
    • Kiosk Operator; Digital Asset Payment Processor; Hosted Wallet Provider; Unhosted Wallet Provider; Other

• Initial broker tax obligations include basis tracking of covered securities beginning January 1, 2023
  • Backdating this obligation before the regulations are finalized will cause operational issues for brokers.
  • Even though reporting starts for transaction in 2025, cost basis reporting is not required until digital assets are sold after January 1, 2026.
  • Definition of covered security for cost basis reporting is not finalized.

• What is a “digital asset”?
  • There needs to be more clarity in the definition based on what is available in the market.
  • The draft 1099-DA has many boxes for reporting of unique characteristics of the transactions which includes:
    • the date and time in UTC the assets were acquired
    • the transaction ID or hash from the disposition if it was recorded on a distributed ledger
    • the number of assets transferred out of each origination address
    • the number of digital assets initially transferred in
      • and the date and time in UTC of the transfer-in.

United States Commits to Implement CARF

In addition to these digital asset regulations, the US has also committed to joining OECD led CARF. The IRS and US Treasury are seeking the benefits of receiving reportable information from other tax authorities. The impact of missing taxable income reported on sales of digital and crypto assets is significant. The US is looking for information that non-US brokers previously never had to share through the automatic exchange of information under CARF.

However, the US governmental agencies are going to have many challenges implementing CARF and CRS amendments on top of their own current Digital Asset regulations. Currently the US is not a participating jurisdictions under CRS; for the US to implement CARF we should expect to see modifications to these proposed Digital Aset regulations. This may also impact the proposed timetable for these regulations, as well as expansion of data elements on form W8 to ensure they capture personal identifying information that is standard in CRS but not part of the W8 forms.

How can TAINA Help Digital Asset and Crypto Organizations?

The global digital asset regulatory framework will only continue to grow, with potential amendments and expansion of the requirements for reporting. Having automated systems that can maintain compliance across jurisdictions, be adaptable to changes, and are easy to update is key to robust compliance.

Here at TAINA, we are monitoring and adopting our customer journey to seamlessly integrate with digital asset platforms and requesting/validating necessary customer information to meet the Digital Asset Information Reporting and CARF compliance requirements.

TAINA’s fully automated Validation Platform can help crypto and digital asset companies lighten their compliance burden and prove regulatory compliance whilst improving efficiency, reducing cost, mitigating risk, and improving their overall customer and investor experience. Our advanced software provides a streamlined process for solicitation, processing, and maintenance of tax forms and provides for withholding and information reporting data for your operational processes, ensuring you have good year-end data that will result in clean reporting to tax authorities.

We would value speaking with you about your compliance process and how our fully automated Validation Platform may help you comply with the proposed Digital Asset Information Reporting Requirements.