The IRS shared the latest update regarding Form 1099-DA on September 9, 2024. Form 1099-DA, Digital Asset Proceeds from Broker Transactions, is the new form created by the IRS to increase compliance on income reporting due to trades and sales of digital assets. The form requires crypto brokers to report information regarding the sale of certain digital assets starting in 2025 and furnish the form to taxpayers beginning in 2026. Earlier in August, the IRS released a revised draft of Form 1099-DA, but this is the first time they have shared a version of the instructions for the form.
So, for any crypto brokers out there, what should you know about the new Form 1099-DA draft instructions?
Optional Reporting of Basis Information
The draft instructions address transactions for both 2025, when crypto brokers are not required to report cost basis information, and 2026, when reporting becomes mandatory. The instructions note that even though brokers are not required to report the cost basis for 2025 sales of digital assets, they may voluntarily choose to report it on the form. The IRS also notes that basis information is not required for qualifying stablecoins or specified nonfungible tokens (NFTs) for which brokers use the optional reporting methods even after 2026. Additionally, for noncovered securities in 2026, as long as the broker checks box 9 to indicate the sale of noncovered security, they can voluntarily report the cost basis on the form without penalty for failing to furnish or report the information correctly.
How Many Forms do Brokers need to File?
The instructions specify that a separate Form 1099-DA needs to be filed for each type of security- short-term covered, long-term covered, and noncovered securities even if all three types were sold in a single transaction. For the 1099-DA, the instructions define covered security as any digital asset acquired after 2025 for cash, stored-value cards, different digital assets, or any property or services the disposition of which the broker must report in an account for which the broker provided custodial services. Additionally, crypto brokers should report each sale of digital assets in a separate form but may include the broker fee if it was paid with the same digital asset as the underlying transaction.
Codes and Descriptions for Digital Assets
Box 1a on Form 1099-DA requires crypto brokers to indicate the code for the digital asset sold. The code, referred to as a Digital Token Identifier (DTI), is a 9-digit alphanumeric identification issued by the Digital Token Identification Foundation (DTIF) to globally identify the digital asset. DTIF, a non-profit division of Etrading Software, developed the DTI to standardize the way digital tokens are identified across platforms and jurisdictions. A registry is publicly available to search for all DTIs. For digital assets not yet registered with DTIF, the draft instructions guide brokers to use code “999999999”. The name of the digital asset reported in Box1b of the form should also match the one with the corresponding code in the DTIF registration.
Form 1099-DA or Form 1099-B?
Crypto brokers affecting sales of a dual classification asset- a digital asset that is also a security reported on Form 1099-B- should generally report the information on Form 1099-DA instead of 1099-B with some exceptions listed in the draft instructions.
E-Filing Form 1099-DA
The IRS has two e-filing portals for filing forms 1099- FIRE, Filing Information Returns Electronically, and IRIS, IRS Information Return Intake System. IRIS is a free system, but it limits the number of form uploads to 100MB at a time. For sizeable crypto brokers, utilizing the IRIS for filing Form 1099-DA raises concerns with the anticipated high volume of forms they may need to submit. If the IRS cannot increase the system’s functionality, crypto brokers may need assistance managing the e-filing process to avoid duplicate or missed filings.
Conclusion
The release of the draft Form 1099-DA instructions is the latest step in providing clarity regarding filing the form. The IRS plans to issue a notice soon allowing the public a 30-day window to comment on the draft instructions. Crypto brokers subject to the reporting requirements should stay updated with the latest information about the form and start preparing for the form filing.
Need Assistance?
Tax1099 is an experienced IRS authorized e-filing and compliance platform that can help your company file Form 1099-DA. Since the 1099-DA is a new form, working with an experienced professional can help ensure that you and your clients stay compliant with the regulations. Subscribe to Tax1099’s mailing list to receive important updates about digital asset compliance requirements.
