IRS releases draft of new crypto tax form used to report transactions

The IRS gave a glimpse into the future of crypto reporting. The agency has released a draft of Form 1099-DA, Digital Asset Proceeds From Broker Transaction, now available on the IRS website.

The form is the next step in the agency’s efforts to strengthen crypto tax reporting and follows proposed regulations published last year.

Among other things, the proposed regulations would require brokers to report customers’ sales and exchanges of digital assets. Those transactions will be reported to the IRS on the new Form 1099-DA.

Under the proposed regulations, brokers, including digital asset trading platforms, digital asset payment processors and certain digital asset hosted wallet providers, will be required to report sales or exchanges of digital assets on or after January 1, 2025 on the form. In certain circumstances, brokers will also be required to include profit or loss and basis information for sales that occur on or after January 1, 2026 — much like the 2008 requirement that brokers report the cost basis of certain securities to the IRS when a sale has taken place.

The proposed regulations will also require real estate reporting persons (title companies, closing attorneys, mortgage lenders and real estate brokers) who are treated as brokers to disclose the disposition of digital assets paid as consideration by buyers in real estate transactions that close on or after January 1, 2025. There will also be these reporting persons are required to include the fair market value of digital assets paid to sellers in real estate transactions that close on or after January 1, 2025, on Form 1099-S, Proceeds From Real Estate Transactions. (Form 1099-S is an existing tax reporting form.)

According to the draft instructions for Form 1099-DA, if you receive the form, it generally means you have 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 mark 1 of form 1040.

The question as it appeared on Form 1040 for tax year 2023 reads:

At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

For purposes of Form 1040, the IRS defines digital assets as “any digital representations of value recorded on a cryptographically secured distributed ledger or any similar technology.” These include non-fungible tokens (NFTs) and virtual currencies such as cryptocurrencies and stablecoins. And in the “if it walks like a duck and quacks like a duck” category, the IRS notes: “If a particular asset has the characteristics of a digital asset, it will qualify as a digital asset for federal income tax purposes be treated.”

The information reported on Form 1099-SA is similar to Form 1099-B—those consolidated statements you get from your broker—and includes the types and amounts of digital assets acquired, sold or disposed of with any related disclaimer.

(You can view the full-size form, along with the instructions, here.)

The form requires the broker to self-identify as a kiosk operator, digital asset payment processor, hosted wallet provider, non-hosted wallet provider, or other. A hosted wallet is typically a crypto platform, such as an exchange — think Coinbase — while an unhosted (or self-custody) wallet allows the individual user to control the keys. The Treasury Department compared no-host wallets to anonymous bank accounts, and suggested they could be used to hide illegal financial activity.

Box 1i is interesting. It requires reporting of “was sales loss disallowed.” The wash sale rules prohibit taxpayers from selling and buying a substantially identical security within 30 days — but the rule does not currently apply to crypto. So why is it there? The instructions provide a glimpse, “Show the amount of non-deductible loss in a wash sale transaction involving digital assets that are also stocks or securities for tax purposes.” This could apply to assets such as tokenized shares (shares in a company that are publicly traded in a digital token form) – but could also be a nod to proposals that would outlaw cryptocurrency sales entirely (again, not current law) .

Form 1099-SA also requires the cost basis to be reported (if the asset is considered a non-covered security for basis purposes, box 10a will be checked, and an explanation will be presented in box 10b).

Form 1099-DA will also report the transaction ID or hash of the associated ledger if the sale, exchange or other disposition is recorded on a distributed ledger—such as the blockchain. A transaction hash is the unique string of characters generated by the respective blockchain for the transaction.

And of course, the IRS applied its famous warning about drafts:

This is an early release draft of an IRS tax form, instructions, or publication, which the IRS provides for your information. Do not file draft forms, and do not rely on draft forms, instructions and bars for filing. Forms and instructions are subject to OMB approval before they can be officially released, so we post drafts of them until they are approved.

If you have thoughts about the draft form, the IRS will accept comments online at IRS.gov/FormsComments. Include “NTF” followed by the form number (in this case it would be “NTF1099DA”) in the body of the message to send your message properly.

For developments related to Form 1099-DA and its instructions, such as legislation enacted after it was published, you can visit the IRS website at www.irs.gov/Form1099DA. You can also check back for our Forbes tax and digital asset teams’ coverage.