IRS Introduces Draft Form for Reporting Digital Asset Income Amidst Crypto Community Criticisms
Summary:
The U.S. Internal Revenue Service (IRS) has proposed a new form, 1099-DA, to document earnings from digital asset transactions, starting from 2025. With this, brokers of various types, including kiosk operators, digital transaction processors, and wallet providers, are required to provide detailed reports of digital asset sales or exchanges, including details like token codes, wallet addresses, and transaction locations. The measure has attracted criticism from the crypto community and tax experts for its alleged misunderstanding of digital assets, invasive surveillance potential, and its complex requirements, particularly for decentralized finances. The IRS continues to accept feedback on the draft form.
The U.S. Internal Revenue Service (IRS), has proposed a new form dubbed Form 1099-DA "Digital Asset Proceeds from Broker Transactions" for documenting earnings from digital asset transactions. The form is slated for implementation in 2025, with reports to be made in 2026.
Every customer that sells or trades digital assets will have a Form 1099-DA prepared by their broker. The brokers involved span kiosk operators, digital asset transaction processors, hosted and unhosted wallet providers, among others. This form will be sent to both the customer and the IRS for verification.
The form will require details such as token codes, wallet addresses, and blockchain transaction locations. According to the proposed rule in August 2023, cryptocurrencies, nonfungible tokens, and stablecoins are required to be reported. The rule suggested that specified third-party information reporting of digital asset transactions could assist the IRS in identifying taxpayers with digital transactions that are normally hard to track.
The proposed reporting requirements have not been well received by the crypto community. The Blockchain Association posited that the rule misunderstands the essence of digital assets and decentralized technology, whereas Coinbase's legal officer, Paul Grewal, claimed that the proposed rules would establish an invasive precedent, mandating the reporting of nearly every digital asset transaction. The reporting rules for 2024 also faced similar objections.
Tax specialists have likewise shared their critiques online. Crypto tax and accounting service Ledgible noted that it would prove difficult to report decentralized finances, wherein there may not be an intermediary to adhere to the reporting requirements. This could also notably increase brokers' administrative workload due to high transaction volumes.
Moreover, brokers will be mandated to swap information on digital asset transfers to accurately figure out the cost basis (original value or purchase price), as stated by Gordon Law. There is no existing mechanism for such data exchange. It's also impossible to distinguish between self-transfers and taxable transfers when a crypto owner transfers assets across exchanges. Taxpayers who previously underreported their crypto income may be identified when reporting their 2025 taxes.
The IRS is still open to feedback on the draft form.
Published At
4/20/2024 12:06:39 AM
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