IRS Releases Draft Of New Crypto Tax Form Used To Report Transactions

The IRS has offered a glimpse of 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 bolster crypto tax reporting and follows proposed regulations published last year.

The proposed regulations would, among other things, require brokers to report customers' sales and exchanges of digital assets. Those transactions would 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, would be required to report sales or exchanges of digital assets on or after January 1, 2025, on the form. In certain circumstances, brokers would also be required to include gain 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 occurred.

The proposed regulations would also require real estate reporting persons (title companies, closing attorneys, mortgage lenders, and real estate brokers) who are treated as brokers, to report the disposition of digital assets paid as consideration by purchasers in real estate transactions that close on or after January 1, 2025. These reporting persons would also be 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, that means you 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.

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

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 that are recorded on a cryptographically secured distributed ledger or any similar technology." That includes 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 be treated as a digital asset for federal income tax purposes.”

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, along with any related withholding.

(You can check out the full-sized 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, unhosted wallet provider, or other. A hosted wallet is typically a crypto platform, like an exchange—think Coinbase—while an unhosted (or self-custody) wallet allows the individual user to control the keys. The Department of Treasury has compared unhosted wallets to anonymous bank accounts, and has suggested that they can be used to conceal illicit financial activity.

Box 1i is interesting. It requires reporting of “wash sales loss disallowed.” The wash sales rules disallow taxpayers from selling and buying a substantially identical security within 30 days—but the rule doesn't currently apply to crypto. So why is it there? The instructions offer a peek, “Shows the amount of nondeductible loss in a wash sale transaction involving digital assets that are also stock or securities for tax purposes.” That could apply to assets like tokenized stocks (equity in a publicly traded company in a digital token form)—but may also be a nod towards proposals that would ban crypto wash sales altogether (again, not current law).

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

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

And, of course, the IRS tacked on its familiar warning about drafts:

This is an early release draft of an IRS tax form, instructions, or publication, which the IRS is providing for your information. Do not file draft forms, and do not rely on draft forms, instructions, and pubs 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 route your message properly.

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