IRS releases draft Form 1099DA for digital asset reporting

In detail

Draft Form 1099-DA was developed in response to the 2021 enactment of the Infrastructure Investment and Jobs Act, which imposes information reporting obligations on service providers who effect transfers of digital assets on behalf of another in return for consideration. Treasury and the IRS in August 2023 issued proposed regulations regarding information reporting, determination of the amount realized and basis, and backup withholding for certain digital asset sales and exchanges. The regulations, if finalized as proposed, would impose obligations to file information returns and furnish payee statements on dispositions of digital assets based on companies engaging in a broad array of services or activities related to digital assets.  

See our Insight, Treasury issues extensive proposed regulations with broad scope around digital asset information reporting, for more information.

These reporting requirements generally are proposed to become effective for sales and exchanges of digital assets effected on or after January 1, 2025, with later effective dates for basis reporting and transfer statements. The data requirements contained in draft Form 1099-DA are based on the proposed regulations without consideration of the multiple taxpayer comments and recommendations for modification. 

Observation: The draft Form 1099-DA provides more insight into what data the IRS is considering with respect to the proposed regulations issued last summer. The Treasury Inspector General for Tax Administration report issued in December 2023 notes the IRS cannot complete the development of the forms, instructions, and guidance until after the final digital asset regulations have been issued. The regulations have not been finalized as of the release of this draft form. The draft Form 1099-DA continues the evolving dialogue between Treasury, the IRS, and industry in this complex area especially around the information to be reported and the systems needed to provide this information. 

Form 1099-DA is intended to facilitate a broker’s reporting for each digital asset sale for which the broker is required to file an information return. In addition to providing the payee’s taxpayer identification number (TIN) and account number, the form is to be used to: 

• provide the Committee on Uniform Security Identification Procedures (CUSIP) number for the digital assets disposed; 
  
• indicate where the payee should report this information on Form 8949, Sales and Other Dispositions of Capital Assets, and Form 1040, Schedule D, Capital Gains and Losses; and 
• indicate whether the broker filing the form is a kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider, or other digital asset filer.     

The data required in box 1(a-i) relate to the sale and include:  

• the code for the disposed digital asset; 
  
• the name of the digital asset as required; 
• the number of digital asset units disposed in the transaction; 
• the date and time the digital assets were acquired in Coordinated Universal Time (UTC);   
• the disposition date and time in UTC;  
• the gross proceeds from the digital asset transaction, which includes non-cash consideration; and 
• the aggregate cost or other basis of the digital assets sold, exchanged, or disposed. 

Other information reported in box 1 includes market discount and wash sale loss disallowance when the disposed digital asset also constitutes a security (e.g., a digital asset that is a digital representation of another asset that is a security) as well as certain option transactions. 

Observation: The current wash sale rules do not explicitly apply to digital assets. The Instructions for Recipient included in the draft suggest that wash sale information is required only when a digital asset is also a security that is subject to the wash sales rules. It should be noted that industry comments strongly suggest that the IRS should require only the current Section 6045 reporting obligations be applied with respect to an asset that could be classified as both a digital asset and a security. It was noted that this approach would cause the least disruption to persons classified as brokers with gross proceeds and basis reporting obligations. 

The Draft Form 1099-DA provides information that is intended to aid the IRS in verifying valuations and in determining the basis claimed by taxpayers in connection with digital asset transactions. In addition to the box 1 data, other information to be reported include whether: 

• the basis of the digital assets has been reported to the IRS, 
  
• the gross gain or loss is short-term, long-term, or ordinary, and 
• gross proceeds were paid in cash or non-cash. 

To the extent the sale is of a digital asset that was held by the broker in a hosted wallet on behalf of the customer and that digital asset previously was transferred into that account, Form 1099-DA provides: 

• the transaction ID of the transfer-in transaction, 
  
• the alphanumeric identifier that represents the origination digital asset address from which the transferred-in digital asset was transferred,  
• the number of units transferred in by the customer as part of that transfer-in transaction, and 
• the date and time in UTC of any transfer-in not recorded on the distributed ledger.