The IRS appears to be on the verge of changing the way digital asset (i.e., cryptocurrency) transactions are reported for federal tax purposes. On April 19, 2024, the IRS issued its first draft of Form 1099-DA, the intended form for reporting the sale or exchange of digital assets. As noted in the preamble to Form 1099-DA, the current draft reflects the notice of proposed rulemaking that appeared in the federal register on 8/29/23 [1], and is subject to change based on comments to those proposed rules.
For taxpayers engaging in sales or exchanges of digital assets, Form 1099-DA would be issued to the IRS by an applicable broker, and would include several items of information related to the taxpayer and the digital assets at issue. Notable items of reported information include the following:
- The name and type of broker used for the transaction;
- The type, amount, and digital address of the digital assets at issue;
- The date and time of acquisition or disposition of the digital assets; and
- Whether the transaction resulted in a gain or loss, and the nature thereof (e., ordinary, short-term, or long-term).
Form 1099-DA also specifically includes a box to be checked for transactions where the sale is not recorded on the digital asset’s distributed ledger. This may apply, for example, with respect to transactions involving the transfers of ownership of an entire wallet.
The current draft of Form 1099-DA raises a series of questions, many of which will likely be raised in public comments over the coming months. For example, many proponents of digital assets cite privacy as one of the primary benefits of using digital assets over traditional means of payment. The requirement that a digital address be included on reports to the IRS appears at odds with this function. Additionally, there is a potential concern with the number of Forms 1099-DA that would be required, and the IRS’s ability to handle this volume. The current version of Form 1099-DA appears intended to report information with respect to individual digital asset transactions, rather than summary information for a series of transactions. On June 3, 2024 alone, the Bitcoin (BTC) blockchain reflected nearly 770,000 separate transactions [2]. When considering the number of transactions occurring over the course of an entire year, as well as the number of other digital assets subject to Form 1099-DA, the total number of forms may be incredibly high.
[1] A link to that notice is here: https://www.federalregister.gov/documents/2023/08/29/2023-17565/gross-proceeds-and-basis-reporting-by-brokers-and-determination-of-amount-realized-and-basis-for.
[2] https://ycharts.com/indicators/bitcoin_transactions_per_day.
