The IRS has unveiled a draft tax Form 1099-DA, aimed at reporting digital asset proceeds from broker transactions. This form mandates brokers, including unhosted wallet providers, to report proceeds from digital asset dispositions to the IRS.
However, a crypto tax expert has expressed concerns regarding the IRS collecting specific data points, like wallet addresses, citing potential privacy and security risks.
IRS Releases Draft Tax Form for Reporting Digital Asset Transactions
The U.S. Internal Revenue Service (IRS) has unveiled the long-awaited draft tax form for reporting digital asset transactions, slated for use in tax filings beginning in 2025. Known as Form 1099-DA, the form is designated for reporting “Digital Asset Proceeds From Broker Transactions.”
Key Instructions and Details: According to the instructions provided on the form for recipients, brokers are required to report proceeds from digital asset dispositions to taxpayers and the IRS using Form 1099-DA. Brokers filling out the form must specify their role, whether as a kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider, or other digital asset filer, as detailed by the IRS.
The form further advises recipients that if they receive a Form 1099-DA, they likely sold, exchanged, or otherwise disposed of a financial interest in a digital asset, prompting them to check the appropriate box on page 1 of Form 1040.
Expert Opinion: Shehan Chandrasekera, head of tax strategy at crypto tax firm Cointracker, shared his perspective on the new IRS tax form. Taking to social media platform X, he expressed concerns, stating, “I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US.”
Chandrasekera’s Analysis of Form 1099-DA
Shehan Chandrasekera, head of tax strategy at Cointracker, described the newly introduced 1099-DA form as “the first tax form specifically designed to collect your ID and detailed transaction data at scale from ‘brokers.'” He outlined that centralized exchanges, certain decentralized exchanges, and wallets would be mandated to generate this form for each sale transaction and submit the information to both the IRS and the individual, similar to procedures followed by stock brokers, commencing from January 1, 2025.
While acknowledging that the 1099-DA form captures conventional data points such as date acquired, date sold, proceeds, and cost basis of crypto assets sold, Chandrasekera emphasized significant concerns regarding the collection and reporting of additional data points, particularly wallet addresses, to the IRS at scale. He warned that such practices could potentially lead to substantial privacy and security issues.
Detailed Data Requirements on Form 1099-DA
Shehan Chandrasekera provided insights into the IRS’s data requirements for digital asset transactions. For sales-related data points, each transaction must include the “sale transaction ID (TxID),” the “digital asset address from which the units were sold,” and the “number of units sold.” Additionally, for transfer-related data points, the IRS mandates declaration of the “transfer-in TxID number,” the “transfer-in digital asset address,” and the “number of units transferred in.”
Chandrasekera highlighted a notable inclusion in the new draft Form 1099-DA: the checkbox for “unhosted wallet provider.” He emphasized that this indicates the IRS’s intention to categorize unhosted wallets under the broker definition, despite industry feedback.
The incorporation of unhosted wallet providers on the form suggests that users may need to provide KYC (Know Your Customer) information before creating unhosted wallets or interacting with platforms using such wallets. Chandrasekera suggested that this could significantly alter how users engage with crypto platforms and may reshape the landscape of decentralized finance (DeFi) as we currently know it.
Important:Â Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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