Increased IRS Tracking of Cryptocurrency: Form 1099-DA

By: Elise Norotsky

Beginning January 1, 2025, cryptocurrency will have its first form of standardized reporting, the form 1099-DA, Digital Asset Proceeds From Broker Transactions.[1] The form reports gross proceeds and gain, loss and cost-basis information and is filed by brokers dealing with digital assets, such as Coinbase, Kraken, or Gemini.[2] Prior to its enactment, the lack of standardized reporting made the realm difficult to efficiently audit, and thus regulate. This significant shift in how digital assets like cryptocurrencies and NFTs are taxed aligns digital asset reporting with traditional financial and tax reporting practices.[3] While it makes certain aspects easier for investors, taxpayers with digital assets should expect an uptick in audits and investigations in addition to complexities introduced by new rules for computing gains and losses, determining cost basis, and applying backup withholding.[4] Additional problems arise for those holding previously unreported crypto, foreign exchanges, and real estate transactions involving digital assets.[5]

The intended and primary impact of the 1099-DA is to increase transparency and facilitate compliance in a realm whose complexity has previously left gaps or opportunities to evade taxes.[6] The largest difficulty in taxing cryptocurrency assets stems from the fact that they are “pseudonymous”, meaning they are difficult to connect to individuals or firms.[7] Centralized exchanges are often subject to standard “know your customer” tracking roles, mitigating the pseudonymous difficulty, however, one looking to keep tax authorities in the dark could use centralized exchanges abroad, decentralized exchanges, or direct peer-to-peer trades where no central governing body is overseeing the transactions.

A notable change resulting from the enactment of the form is that the rules for determining cost basis have changed, transitioning from universal to wallet-by-wallet accounting. This will require taxpayers to track the cost basis of their digital assets held in each wallet.[8] Thus, a taxpayer who sells 2 ETH (etherium) from a specific wallet, using the FIFO inventory method, would then use the cost basis of the 2 earliest purchased ETH in that specific wallet as the basis for calculating the gain on that sale.[9]

As noted, problems may arise for those with previously unreported crypto, but there are multiple ways to address them, such as filing an amended return.[10] They may also use the IRS’s streamlined disclosure program or participate in the Voluntary Disclosure Program, but they must make sure to make the election prior to the initiation of any investigation or audit.[11] Additionally, offshore exchanges not serving the U.S. need not file this form, thus those taxpayers will not be given all information necessary to report on their taxes.[12]

Real estate reporting entities will also have to report digital assets used by purchasers as payment for property transactions.[13] They must report the fair market value of digital assets paid as consideration by purchasers to acquire real estate in transactions that close after Jan. 1, 2025, and the fair market value of digital assets paid to sellers of real estate on Form 1099-S.[14]

To ensure compliance, enterprises may need to upgrade financial systems and should increase cybersecurity measures to protect the sensitive data now being reported.[15] Additionally, staying up to date with further regulatory changes is critical, as the Form 1099-DA is a sign of more regulation and standardization in the digital realm to come.[16]

 

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[1]Michelle Legg, Form 1099-DA: Expert Guide, Koinly (Mar. 10, 2025),  https://koinly.io/blog/form-1099-da/

[2] Id.

[3]Thompson Reuters Tax & Accounting, How to Comply with the New IRS Digital Asset Regulations, Thompson Reuters (Dec. 19, 2024),  https://tax.thomsonreuters.com/blog/how-to-comply-with-the-new-irs-digital-asset-regulations/

[4]  Legg, supra note 1

[5]Gordon Law, Form 1099-DA for Digital Assets: Comprehensive Guide and Latest Updates, Gordon Law (last visited Apr. 4, 2025, 1:41 PM), https://gordonlaw.com/learn/form-1099-da/

[6] IRS, Digital assets: Existing and new reporting requirements – YouTube video text script, IRS (Jan. 10, 2025), https://www.irs.gov/newsroom/digital-assets-existing-and-new-reporting-requirements-youtube-video-text-script

[7] Baer et al., Crypto Poses Significant Tax Problems – and They Could Get Worse, IMF BLOG (Jul. 5, 2023), https://www.imf.org/en/Blogs/Articles/2023/07/05/crypto-poses-significant-tax-problems-and-they-could-get-worse

[8] Gordon Law, New Crypto Accounting Rules: Get Ready for New Cost Basis Method in 2025, Gordon Law (last visited Apr. 4, 2025, 1:49 PM), https://gordonlaw.com/learn/new-crypto-cost-basis-rules/

[9] Id.

[10] Gordon Law, supra, note 5

[11] Id.

[12] Id.

[13] Turbo Tax Expert, What Is Form 1099-DA and What Does It Mean for Crypto Investors, TurboTax (Oct. 16, 2024, 2:24 AM), https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-form-1099-da-and-what-does-it-mean-for-crypto-investors/c1NcDG7kh

[14] Id.

[15] Miles Fuller, Complete Guide to Understanding Form 1099-DA: Essential Insight and Tips, taxbit (Apr. 19, 2024), https://www.taxbit.com/blogs/navigating-the-new-irs-form-1099-da-key-considerations-for-enterprises/

[16] Id.