IRS Unveils Digital Asset Reporting Mandates, Sparking Industry Concerns

The Internal Revenue Service (IRS) of the United States has released a draft of its new Form 1099-DA "Digital Asset Proceeds from Broker Transactions" for reporting income generated through digital asset transactions. This form will require brokers to report information on all digital asset transactions, including token codes, wallet addresses, and blockchain transaction locations. The form is expected to begin its usage in 2025 for reporting in 2026.

IRS Unveils New Reporting Requirements for Digital Asset Transactions

Washington, D.C. - The Internal Revenue Service (IRS) has released a draft of its new Form 1099-DA "Digital Asset Proceeds from Broker Transactions," signaling a significant shift in the agency's approach to taxation of digital assets.

The form, which is expected to be implemented in 2025 for reporting in 2026, will require brokers to report all digital asset transactions, including exchanges and sales. This includes transactions involving cryptocurrencies, non-fungible tokens (NFTs), and stablecoins.

"With third party information reporting that specifically identifies digital asset transactions, the IRS could more easily identify taxpayers with digital asset transactions that are otherwise difficult to discover," the IRS stated in a release announcing the proposed rule.

The Form 1099-DA will require a range of information from customers, including token codes, wallet addresses, and blockchain transaction locations. This data will be used by the IRS to verify the accuracy of tax reporting by individuals and businesses.

Industry Reaction

The crypto industry has expressed concern over the proposed reporting requirements, arguing that they misunderstand the nature of digital assets and decentralized technology.

The Blockchain Association, an industry trade group, said the rule "includes fundamental misunderstandings about the nature of digital assets and decentralized technology."

Coinbase, a major cryptocurrency exchange, said the proposed rules would create "a dangerous precedent of surveillance of everyday financial activity."

Tax Experts Weigh In

Tax experts have also raised concerns about the administrative burden and potential for error associated with the new reporting requirements.

Ledgible, a crypto tax and accounting service, noted the challenges of reporting decentralized finance (DeFi) transactions, where there may not be a clear intermediary to facilitate reporting.

Gordon Law Group highlighted the difficulties brokers will face in determining the initial value or cost basis of digital assets, as well as the challenges of distinguishing between taxable and non-taxable transfers.

Impact on Taxpayers

The new reporting requirements could have a significant impact on taxpayers who have previously underreported their digital asset income. The IRS will be able to use the information reported on Form 1099-DA to identify discrepancies and assess additional taxes and penalties.

The IRS also has the ability to detect offshore activity, even if foreign exchanges do not formally serve U.S. citizens. Taxpayers who transfer digital assets to U.S. exchanges could be subject to scrutiny by the agency.

IRS Seeking Comments

The IRS is currently soliciting comments on the draft Form 1099-DA. The agency is encouraging all interested parties, including individuals, businesses, and industry stakeholders, to submit their feedback.

The deadline for submitting comments is December 21, 2023. The IRS will review the comments received before finalizing the form and issuing additional guidance.

About the IRS

The Internal Revenue Service (IRS) is the tax agency of the United States. The agency is responsible for administering and enforcing the internal revenue laws of the country. The IRS collects taxes, processes tax returns, and provides taxpayer assistance.

About the Blockchain Association

The Blockchain Association is a trade association representing the blockchain industry. The association's mission is to promote the development and adoption of blockchain technology. The association's members include a range of companies, including cryptocurrency exchanges, blockchain startups, and technology companies.

About Coinbase

Coinbase is a leading cryptocurrency exchange. The company provides a platform for individuals and businesses to buy, sell, and store cryptocurrencies. Coinbase is headquartered in San Francisco, California.

About Ledgible

Ledgible is a crypto tax and accounting service. The company's mission is to make it easy for individuals and businesses to report and manage their crypto taxes. Ledgible's platform provides a range of tools and resources to help taxpayers understand and comply with the complex tax rules governing digital assets.

About Gordon Law Group

Gordon Law Group is a law firm specializing in crypto tax and legal matters. The firm provides a range of services, including tax planning and preparation, legal compliance, and dispute resolution. Gordon Law Group is headquartered in Los Angeles, California.