IRS Introduces Tax Form 1099-DA for Digital Assets
20 April 2024
The U.S. Internal Revenue Service (IRS) has finally unveiled the long-awaited draft tax form for reporting digital asset transactions, slated for tax filings in 2025. Dubbed Form 1099-DA, it's tailored for reporting "Digital Asset Proceeds From Broker Transactions."
According to the instructions on the form for recipients, "Brokers are obliged to report proceeds from (and in some cases, basis for) digital asset dispositions" to taxpayers and the IRS via 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 outlined by the IRS.
Furthermore, the form indicates: "If you received a Form 1099-DA, you likely sold, exchanged, or otherwise disposed of a financial interest in a digital asset and should indicate this on Form 1040."
When discussing the implications of the new IRS tax form, we underscore its significance in terms of data collection. The 1099-DA form marks the first of its kind, specifically tailored to gather ID and detailed transaction data at scale from brokers. Centralised exchanges, certain decentralised exchanges, and wallets will now be tasked with generating this form for each sale transaction and submitting the information to the IRS and taxpayers, akin to stock brokers, commencing 1/1/2025.
While the form captures expected data points such as date acquired, date sold, proceeds, and cost basis of crypto assets sold, it also necessitates the reporting of additional data points, notably wallet addresses, which could raise significant privacy and security concerns.
In terms of sales-related data points, the IRS mandates information for each transaction, including the sale transaction ID (TxID), the digital asset address from which the units were sold, and the number of units sold. For transfer-related data points, the tax authority requires the declaration of the transfer-in TxID number, the transfer-in digital asset address, and the number of units transferred in.
The inclusion of "unhosted wallet provider" as a checkbox in the new draft Form 1099-DA signals the IRS's intention to encompass unhosted wallets under the broker definition, despite industry feedback. This development implies that users will likely have to provide KYC information before creating an unhosted wallet and/or when interacting with platforms via unhosted wallets, potentially altering how users engage with crypto platforms and impacting decentralized finance (defi) as we currently know it.
48 nations commit to Crypto-Asset Reporting Framework (CARF)
15 November 2023
On November 10th, a coalition of 48 countries issued a joint statement committing to adopting the OECD's Crypto-Asset Reporting Framework (CARF) by 2027. The United Kingdom outlined its intentions in a policy paper, aiming to incorporate CARF into domestic law and activate exchange agreements for information sharing by 2027.
The coalition emphasised the need to keep pace with the rapid expansion of the crypto-asset market. They welcomed the OECD's CARF as a new international standard for automatic exchange of tax information, aiming to bolster tax compliance and combat evasion, thus preserving public revenues. Additionally, they announced the adoption of CRS amendments earlier agreed upon by CRS jurisdictions.
The involvement of the U.S. in the joint statement is particularly notable since it isn't a participant under CRS. Consequently, uncertainties persist regarding how the U.S. will implement necessary CRS amendments for digital assets. The U.S. Treasury and IRS proposed regulations on August 25, 2023, introducing U.S. Broker Digital Asset Tax Reporting. They acknowledged the benefits of information exchange under CARF but indicated that modifying the proposed regulations would be necessary for U.S. brokers to collect and exchange required information under this framework.
It remains to be seen whether the proposed regulations' timetable will be affected, especially with the industry convening for a public hearing this week to discuss comments provided to the Treasury on the proposed regulations.
You can access the statement via the U.S. Treasury website here and the HM Treasury site here.
