The IRS released a draft of a new tax form, Form 1099-DA, that brokers will use to report proceeds from certain digital asset transactions. The draft Form 1099-DA can be found on the IRS website and below. The effective date for these reporting obligations is delayed until 2025, pending the finalization of Treasury regulations and the final publication of Form 1099-DA.
Background
Under the new requirements, persons acting as “brokers” in “digital asset” transactions will be required to report the name, address, gross proceeds from and certain other information associated with the transaction to the IRS and provide payee statements to customers. For this purpose, the term “broker” includes a dealer, a barter agent and any other person who, for consideration, regularly acts as a middleperson with respect to property or services. Essentially, a digital assets broker is any person is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. Merchants that accept digital assets as payments will not generally be considered brokers. The term “digital assets” means any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the IRS.
The good news is that a broker for tax reporting purposes may not necessarily be a considered a custodian or a broker for SEC and FINRA purposes; however, the definition of “broker” under the Internal Revenue Code of 1986, as amended (the “Code”) also treats issuers that regularly offer to redeem their own tokens as “brokers” for tax reporting purposes. Thus, the term “broker” under the Code is construed broadly and includes platforms that host wallets, trading platforms, digital asset payment processors (stablecoins) and digital asset kiosks, not all of which are “brokers” under SEC or FINRA rules.
Form 1099-DA as currently drafted requires brokers to report the following:
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The customer’s name, address and taxpayer identification number.
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The type of broker it is: kiosk provider, digital asset payment processor, hosted wallet provider, unhosted wallet provider or other.
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The name, number of units, date and time acquired, date and time sold, gross or net sale proceeds and cost basis of the digital asset being sold.
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Any wash sale losses, which presently only apply to certain digital assets that are subject to the wash sale rules.
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Whether the sale proceeds are cash or non-cash proceeds. If the latter, there are two additional prompts to describe the non-cash proceeds.
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Whether the digital asset is a non-covered security (which includes digital assets for which the broker is not required to track basis), and if so, the reason why.
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Transfer-in date and time for off-ledger transactions.
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The transaction ID and digital asset address(es).
LEGAL TOKENS
We expect many brokers prepare their own similar, substitute versions of Form 1099-DA to accommodate multiple transfers of digital assets. A substitute Form 1099-DA will be generally acceptable for IRS purposes if it contains the same information that is reported on the IRS version of the Form. The 1099-DA can also be combined with other 1099s if a broker is reporting dividends (Form 1099-DIV), interest (Form 1099-INT and Form 1099-OID), payment processors (Form 1099-K) or other gross proceeds (From 1099-B).
We recommend brokers and those who may be considered a broker for these purposes discuss the forthcoming reporting obligations with their tax counsel and accountants to ensure compliance with the new IRS reporting requirements.
