What is the proposed IRS Form 1099-DA for digital asset reporting?

The IRS proposed regulations requiring brokers to report digital asset transactions on a new Form 1099-DA, similar to how stock transactions are reported on Form 1099-B. The rules require reporting of gross proceeds, cost basis, and gain or loss for covered digital asset sales and exchanges.

Who qualifies as a broker under the proposed digital asset reporting rules?

The proposed regulations expand the definition of broker under IRC Section 6045 to include any person who effectuates transfers of digital assets on behalf of others, including cryptocurrency exchanges, certain payment processors, and hosted wallet providers that facilitate digital asset transactions.

IRS Releases Draft Digital Asset Reporting Rules | Lynch Law

The IRS has released proposed regulations under REG-122793-19 that would, for the first time, require brokers to report digital asset transactions to both the IRS and to taxpayers on a new Form 1099-DA. The proposed rules implement the information reporting requirements enacted as part of the Infrastructure Investment and Jobs Act of 2021, which expanded the definition of "broker" under IRC § 6045 to include persons who effectuate transfers of digital assets on behalf of others. For cryptocurrency investors, digital asset exchanges, and the businesses that facilitate these transactions, the proposed regulations represent a fundamental shift in the tax compliance landscape.^[1]

What the Proposed Rules Require

Under the proposed regulations, brokers of digital assets would be required to report the gross proceeds from the sale or exchange of digital assets, the customer's adjusted basis in the assets sold, and whether the gain or loss is short-term or long-term. This information would be reported on a new Form 1099-DA, which is modeled on the existing Form 1099-B used for securities transactions. The reporting would apply to dispositions of digital assets occurring after the regulations are finalized, with a proposed effective date that has been the subject of ongoing discussion.^[2]

The definition of "digital asset" in the proposed regulations is broad, encompassing any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. This includes not only well-known cryptocurrencies like Bitcoin and Ethereum but also stablecoins, non-fungible tokens (NFTs), and other digital assets that can be transferred between parties. The breadth of the definition means that the reporting requirements will apply to a wide range of transactions that have historically operated with minimal tax reporting infrastructure.

Who Is a "Broker"?

The expanded definition of "broker" is one of the most significant—and most controversial—aspects of the proposed rules. Under the Infrastructure Act, a broker includes any person who, for consideration, is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person. The proposed regulations interpret this definition to include centralized exchanges, certain hosted wallet providers, and digital asset payment processors.

The regulations do not, in their current form, extend the broker definition to decentralized exchanges (DEXs), unhosted wallet providers, or miners and validators who participate in the network consensus process but do not effectuate specific customer transactions. This exclusion was a significant area of concern during the legislative process, and the IRS has indicated that it may address decentralized finance (DeFi) transactions in a future rulemaking. For now, the proposed rules focus on centralized intermediaries that maintain customer accounts and have the information necessary to comply with the reporting requirements.^[3]

Basis Tracking and Cost Basis Reporting

One of the most challenging aspects of the proposed rules is the requirement for brokers to track and report the customer's adjusted basis in digital assets. Unlike traditional securities, which have been subject to cost basis reporting since 2011, digital assets present unique tracking challenges. Customers frequently transfer assets between wallets and exchanges, making it difficult for any single broker to determine the customer's original acquisition cost. The proposed regulations address this by requiring brokers to report basis information only for assets acquired through the broker—that is, assets for which the broker has sufficient information to determine the cost basis.

For assets transferred into a broker's platform from an external wallet, the broker would report the proceeds but would indicate that the basis is unknown. The customer would then be responsible for determining and reporting the correct basis on their tax return. This approach is pragmatic, but it places a significant compliance burden on individual taxpayers who must maintain their own records of acquisition costs, particularly for assets acquired through decentralized platforms, mining, staking, airdrops, or other means for which no broker holds basis information.

Implications for Taxpayers and Businesses

For individual cryptocurrency investors, the proposed rules mean that digital asset transactions will be subject to the same information reporting regime that has long applied to stocks, bonds, and other securities. The days of relying on the honor system for crypto tax reporting are coming to an end. Taxpayers who have not been diligent about tracking their digital asset transactions and reporting gains and losses should take this opportunity to reconstruct their transaction histories and ensure that their past filings are accurate. The IRS has made clear that the introduction of broker reporting does not create a fresh start—taxpayers who failed to report gains from prior years remain subject to examination and penalties for those years.^[4]

For businesses that operate as digital asset exchanges, hosted wallet providers, or payment processors, the proposed regulations create significant compliance obligations. These businesses will need to build or upgrade their systems to track customer transactions, calculate basis, generate Form 1099-DA, and transmit the information to the IRS. The compliance costs will be substantial, particularly for smaller platforms, and the operational challenges of integrating tax reporting into real-time transaction processing should not be underestimated.

For business owners who accept cryptocurrency as payment for goods or services, the proposed rules may also have implications. While the primary reporting obligation falls on the broker, businesses that receive digital assets should ensure that they are properly recognizing income at the fair market value of the asset at the time of receipt and tracking the basis of any assets held for future disposition. Consulting with a qualified tax advisor to establish proper accounting procedures for digital asset transactions is increasingly important as the regulatory framework matures.

The proposed regulations are subject to a notice-and-comment period, and the final rules may differ from the current proposal in significant respects. We will continue to monitor developments and provide updates as the final regulations are issued.

References

^[1] REG-122793-19, Proposed Regulations on Gross Proceeds and Basis Reporting by Brokers for Digital Asset Transactions; Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, § 80603 (amending IRC § 6045).
^[2] Proposed Treas. Reg. § 1.6045-1 (reporting requirements for digital asset transactions); the new Form 1099-DA would parallel the existing Form 1099-B framework.
^[3] Proposed Treas. Reg. § 1.6045-1(a)(21) (definition of broker for digital asset purposes); the IRS reserved the treatment of decentralized platforms for future guidance.
^[4] See IRS Form 1040, Schedule 1 (digital asset question); the IRS has included a question about digital asset transactions on the individual income tax return since 2019.