Draft Form 1099-DA Gives Glimpse into Implementation of Reporting Requirements

The IRS released a draft version of the new Form 1099-DA, Digital Asset Proceeds From Broker Transactions, on April 18, 2024, based on the proposed broker reporting regulations. As the name suggests, the form will be used for reporting proceeds from digital asset broker transactions and is a result of the 2021 addition of broker reporting requirements to the Internal Revenue Code.

Digital Asset Broker Regulations

The Infrastructure Investment and Jobs Act (“IIJA”) of 2021 added new reporting requirements for brokers of digital assets under IRC Sec. 6045. This legislation requires brokers to report gross proceeds for sales and exchanges of digital assets on or after January 1, 2025. Additionally, they must report the gain or loss and basis information for digital assets sales and exchanges that occur on or after January 1, 2026, for assets acquired on or after January 1, 2023. 

The IRS released proposed regulations for these reporting requirements in August of 2023. As proposed, the regulations would implement a broad definition of brokers who are required to report sales and exchanges of digital assets. Brokers would include digital asset trading platforms, payment processors, and some hosted wallet providers. In certain real estate transactions where digital assets are used to purchase real property, “real estate reporting persons” would also be considered brokers. Sales and exchanges of digital assets would include any disposition of digital assets for cash, stored-value cards, broker services, or other digital assets. 

While the proposed regulations contained some provisions aimed at reducing the possibility of duplicate reporting, under the proposed regulations a Form 1099-DA would be issued for every transaction that is considered a sale or disposition. Critics have noted that this will lead to an extremely high volume of forms, putting undue stress on potential brokers and the IRS itself. 

Draft Form 1099-DA

The required information will be reported on the Form 1099-DA. The draft Form 1099-DA is functionally similar to already existing information returns, particularly the Form 1099-B. The draft form advises recipients that if they are receiving the form, they have disposed of digital assets and must answer “Yes” to the question regarding digital asset transactions on Form 1040. However, unlike the Form 1099-B, the draft instructions are limited only to instructions for the recipient of the Form 1099-DA, with no instructions for brokers. 

Of particular note is box 1i, which requires reporting of “wash sales loss disallowed.” Wash sale rules are governed by IRC Sec. 1091 and disallow taxpayers from claiming a loss when they sell and buy a substantially identical security within 30 days. Under current law, the wash sale rule generally does not apply to digital assets. 

The instructions state that the box is for “transactions involving digital assets that are also stock or securities for tax purposes.” While digital assets are treated as “property” and not “securities” for purposes of IRC Sec. 1091, the IRS likely included this section for two reasons. First, it is possible for a security to also be a digital asset. Second, there have been several proposals to amend IRC Sec. 1091 to affirmatively include digital assets, so this may have included as a failsafe should this proposal become law. 

Required Information

The draft form offers a glimpse into the information the IRS will be collecting. While the form looks similar to the 1099-B, it is significantly longer due to the extra information that must be reported. The draft form highlights how much information brokers will need to request and collect from their clients. 

General Information

Brokers will be required to provide the following general information:

• Payee’s taxpayer identification number,
• Payee’s name and address,
• Any account number assigned to the payee,
• The Committee on Uniform Security Identification Procedures (“CUSIP”) number for disposed digital assets, if applicable, and
• Whether the broker is a kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider, or other digital asset filer.

Digital Asset Sale Information

A majority of the information reported on the form is related to the sale of digital assets. Most of this information will be reported in boxes 1a – 1i. The information required to be reported for each transaction includes:

• The code for the disposed digital asset,
• The name of the digital asset if given code 999999,
• The number of digital assets/units disposed,
• The date and time the digital assets were acquired,
• The date and time of the sale or disposition,
• The gross proceeds from the disposition, including any non-cash consideration,
• The cost or other basis of the digital asset,
• Accrued market discount,
• Wash sale losses disallowed,
• Whether the digital asset is a covered security,
• Any federal and state income tax withheld, and
• The character of gain or loss as ordinary or short- or long-term gains or losses. 

The instructions indicate that all reported times should be in Coordinated Universal Time, commonly known as Greenwich Mean Time. This means the reported time will most likely require conversion by the taxpayer to align with their local time.

Additional Information

In addition to the monetary information regarding the sale, brokers will also be required to report identifying sale information. This includes:

• The sale transaction ID,
• The digital asset address, and
• Whether the sale was recorded on the distributed ledger. 

For transactions where the digital assets were transferred into an account at the broker, which then provided hosted wallet services for the digital asset units, brokers must provide the following information:

• The transfer-in transaction ID,
• The transfer-in digital asset address, and
• The date and time of transfers if not recorded on the distributed ledger.

Finalization of the Form

This is only a draft version of the form and cannot be filed. A December 2023 Treasury Inspector General for Tax Administration report indicated that the form will not be finalized until after the final digital asset regulations have been published. The IRS is requesting comments on the form, which must be submitted by June 21, 2024. The agency has specifically requested comments on:

• How to improve the “quality, utility, and clarity” of the collected information,
• How to minimize the burden of collecting the information for taxpayers and brokers,
• What technology could be utilized to automate or ease the burden of collecting information,
• Whether collecting the information on the draft form will “have practical utility.”

It is unclear if the form reflects any comments received from the public and industry specialists during the proposed regulations’ comment period. The IRS received nearly 130,000 comments during that time and will likely receive significant comments on the draft form. Accordingly, there will likely be changes to the form before it is finalized. 

The form is dated for 2025, which indicates that the IRS does not intend to delay implementation any further. The IRS has faced scrutiny from Congress over its decision to delay other reporting requirements, such as the addition of digital assets to IRC Sec. 6050I reporting. 

The IRS has estimated that approximately eight billion Forms 1099-DA will be filed on behalf of 13-16 million digital asset owners within the first year of implementation. Taxpayers who believe they will receive a Form 1099-DA should engage a trusted advisor.