Digital assets are becoming increasingly popular, transforming financial markets and outpacing taxing authorities’ ability to implement compliance measures. Undoubtedly, the IRS is behind in its tax compliance race but took a stride forward recently when it introduced Form 1099-DA, Digital Asset Proceeds from Broker Transactions. The form requires crypto brokers to report details of digital asset transactions by taxpayers to align with the regulations introduced as part of the expanded rules in the Infrastructure Investment and Jobs Act of 2021. The form is a hot topic as crypto brokers must issue these forms to taxpayers in 2026 for transactions occurring as of January 1, 2025. Given cryptocurrency is a significant area of focus for the IRS, it’s safe to assume the agency will continue to evolve this reporting to ensure crypto sales are reported by brokers, included in tax returns by taxpayers, and taxes collected from the taxpayer. As with all information reporting programs, the intention is to require third party reporting of income to the IRS that will dramatically increase the taxpayer self-reporting of that income and the associated voluntary tax payments.
Is your company considered a broker under these new regulations? Are you up to date regarding the information you need to collect and report as part of these new digital asset reporting requirements? With the regulations going into effect soon, brokers must take steps now to get accurate forms in the hands of taxpayers in 2026. In this blog, we’ll discuss what crypto brokers should consider getting ready for the upcoming 1099-DA form and overall reporting requirements.
Determine if you are considered a broker subject to the Form 1099-DA reporting
When the IRS released the proposed regulations for digital asset transaction reporting in August 2023, the interpretation of the definition of a crypto broker was one of the most contested topics. Critics said it was too broad, encompassing too many possible platforms, and would burden the IRS with the amount of information returns they would receive.
The final regulations released in July 2024 narrowed down the definition of a broker to entities who take ownership over the digital assets sold by their customers and include the following:
- Custodial digital asset trading platforms
- Digital asset hosted wallet providers
- Digital asset kiosk owners
- Digital asset issuers that regularly offer to redeem those digital assets
If your company qualifies under any of the above criteria, you are required to comply with the new regulations and file 1099-DA. According the final regs, crypto brokers do not include industry participants who do not take possession of a taxpayer’s digital assets (ex: decentralized exchanges), but the IRS reserves the right to change this in the future.
Set up systems to track required information
The final regulations require brokers to report information like customer identifying information, gross proceeds, number of units sold, name of the digital asset disposed of, etc., for reportable sales on Form 1099-DA. The final regulations typically consider reportable sales for Form 1099-DA as any disposition of a digital asset for another digital asset, cash, securities, commodities, real property, or certain services with the following exceptions:
- Digital assets retained by the broker to pay the customer’s transaction costs
- Digital assets sold by the broker to cover its backup withholding obligations, if the sale is “immediately after” the customer’s exchange of one digital asset for a different digital asset
- Disposition of a digital asset representing loyalty program credits associated with a non-digital asset business, provided the digital asset is exchanged for goods or services (not for other digital assets) and cannot be used outside the loyalty program’s own distributed ledger
- Sales of digital assets used in “a video game or network of video games” that cannot be used outside of the game or network
- Sales of digital assets offered by sellers of goods or services that can be redeemed for goods or services (not cash, stored value cards or qualifying stablecoins) and cannot be used outside the seller’s distributed ledger
- Settlement of a forward contract that references digital assets
Additionally, the IRS has not yet decided on the reporting requirements for the following types of transfers of digital assets but may sometime in the future:
- Wrapping and unwrapping transactions
- Liquidity provider transactions
- Staking transactions
- Transactions described by digital asset market participants as lending of digital assets
- Transactions described by digital asset market participants as short sales of digital assets
- Notional principal contract transactions
Crypto brokers need to ensure they have all customer identification information on file and that it is accurate. They must also update their systems to capture accurate exchange information for reportable sales and ensure their system aligns with how the IRS identifies each digital asset to streamline completing the form.
Be prepared for what is to come ahead
Acknowledging the challenges for crypto brokers when implementing these new reporting requirements, the IRS offers transitional relief and delays for some required information. Collecting cost basis information is one of the more challenging aspects of this reporting requirement for brokers. The final regulations delay the reporting of cost basis information until January 1, 2026, which brokers should utilize to determine how they will begin collecting this information if they are yet to start. Crypto brokers may need to consider setting up inter-broker cost basis sharing arrangements, means for offering customers inventory tracking methods, and how they will collect unknown acquisition information from customers.
The IRS is also providing transitional backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs, and penalty relief for brokers who make a good faith effort but fail to report or furnish Forms 1099-DA to taxpayers. However, the IRS has yet to issue guidance on what good faith effort means. Brokers struggling to meet these reporting requirements should start documenting the challenges they face and the measures they take to fulfill their obligations.
Shore up data protection protocols
A concern with the draft Form 1099-DA was the requirement to report transaction hashes and wallet addresses, with critics saying that reporting this information was a data safety concern. The updated draft form removed the boxes requiring this information, but crypto brokers must still collect and store it. Digital asset platforms should review their data protection protocols and test them to ensure they are intact and can safeguard sensitive information from potential thieves. As with any data breach, the results can be damaging not only to the customers but also to the company’s reputation.
Consult a professional
Are the new digital asset reporting regulations causing you stress? Consult experts, who can help you meet your crypto broker reporting obligations to avoid costly penalties. Tax1099 is an award-winning IRS authorized e-filing and compliance platform that can help your company file Form 1099-DA. Our team of experienced professionals will ensure you are properly reporting digital asset transaction information.
The new digital asset reporting requirements are quickly approaching. Any crypto brokers subject to the Form 1099-DA requirements should immediately start taking steps to ensure they comply with the new regulations, as the IRS will undoubtedly be watching.
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