Decoding the New IRS Form 1099-DA

If you've dabbled in cryptocurrencies, you might soon receive a new tax form in your mailbox. The IRS is introducing Form 1099-DA, a significant development in how it tracks and taxes digital asset transactions.

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Whether you're a seasoned crypto trader or someone who bought a few tokens out of curiosity, understanding Form 1099-DA will be crucial for your future tax filings.

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In this post, we'll break down what Form 1099-DA is, who will receive it, what information it contains, and how it might affect your tax situation. We'll also explore some of the nuances and special rules that come with this new reporting requirement. So, let's dive in!

Who's getting a 1099-DA?

If you've been actively trading or investing in digital assets through a "digital asset broker" - think Coinbase, Kraken or Gemini, not your cousin's mining rig in the garage - you're probably on the list. Your broker will be required to submit form 1099-DA to the IRS to report your transactions and you’ll receive a copy for your records.

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You’ll use the information in your copy of the form to report all taxable crypto transactions on your personal tax return, typically on Form 8949 and Schedule D. You don't need to submit your copy of the 1099-DA itself with your tax return.

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It's worth noting that if you're only holding digital assets without selling or trading them, or if you're exclusively using decentralized platforms or personal wallets, you might not receive a 1099-DA. However, this doesn't necessarily mean these transactions aren't taxable - it just means the reporting burden falls on you, without the assistance of a pre-filled form from a broker.

What's on the form?

Here's what you'll find based on the latest draft of the form:

• Your personal info: Name, address, and taxpayer identification number. You know, in case the IRS wants to send you a thank-you card.
• Gross proceeds: This is the total amount you received from selling your digital assets. It's not your profit – it's the full sale price.
• Date of sale: Exact date and time of each transaction. No more "I think it was sometime last year" excuses.
• Type of digital asset: Whether it was Bitcoin, Ethereum, or your favorite obscure altcoin.
• Number of units: The quantity of each digital asset sold or exchanged.
• Cost basis: If known by the broker, the original purchase price of the digital assets sold.
• Holding period: Information to determine if the gain or loss is short-term or long-term.
• Type of transaction: Whether it was a sale for cash, an exchange for a different digital asset, or used to purchase goods or services.
• Fair market value: For transactions involving exchanges or purchases, the fair market value of the digital assets at the time of the transaction.
• Digital asset transaction costs: Fees associated with the transaction, if applicable.
• Whether the broker relied on customer-provided acquisition information.

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The exact format and all details are yet to be finalized, but these are the key elements the IRS is likely to require based on the regulations.

How's it different from other 1099s?

If you're thinking, "This sounds an awful lot like that 1099-B form I get for my boring old stocks," you're not wrong. But the IRS wants you to know that your Bitcoin is not the same as your grandma's IBM shares. Digital assets are special snowflakes in the eyes of the taxman.

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The extreme volatility of many cryptocurrencies, combined with their diverse use cases as both investments and mediums of exchange, creates a complex landscape for tax reporting. The underlying blockchain technology introduces novel concepts like hard forks and airdrops, which have their own tax implications. Moreover, the decentralized nature of many digital asset platforms and the rapid evolution of the crypto space make tracking and reporting more challenging than with traditional financial instruments. Add to this the global nature of crypto transactions and the IRS's classification of digital assets as property rather than currency, and you begin to see why a tailored form is necessary.

When does this start?

The IRS is giving everyone some time to get their ducks in a row. Brokers won't start issuing these forms until 2026, covering transactions from 2025. The IRS is also providing “transitional relief” to brokers for the first year so your 1099-DA may even be late.

What this means for you

Well, it means the days of conveniently "forgetting" about that massive Ethereum windfall are numbered. When you get a 1099-DA, the IRS gets one too. It's like they're tagging along on your digital gold rush, but instead of a pickaxe, they're bringing an auditor.

Special rules for stablecoins and NFTs

The IRS, in its infinite wisdom, has decided that not all digital assets are created equal. They've carved out special rules for "qualifying stablecoins" and Non-Fungible Tokens (NFTs). There are reporting thresholds that might save you from documenting every $2 transaction. The IRS isn't interested in your CryptoKitties unless they're worth more than your actual cat.

Stablecoins

The IRS has introduced the concept of "qualifying stablecoins." These are digital assets designed to maintain a stable value relative to a specific currency, typically the U.S. dollar. For these assets, the IRS has implemented a $10,000 annual de minimis threshold. This means if your total transactions in qualifying stablecoins for the year don't exceed $10,000, your broker isn't required to report them. This acknowledges that stablecoin transactions often result in minimal gains or losses.

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However, if your stablecoin transactions exceed this threshold, they're reported in aggregate rather than as individual transactions. This balanced approach aims to capture significant activity while reducing the reporting burden for small, everyday transactions.

NFTs

For NFTs, the IRS has introduced a different threshold. Brokers can opt for an alternative reporting method for what the regulations term "specified NFTs." Under this method, if a customer's total gross proceeds from NFT sales don't exceed $600 for the year, the broker isn't required to report these transactions.

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If the $600 threshold is exceeded, brokers can report these sales in aggregate, rather than detailing each individual transaction. This acknowledges the unique nature of NFTs, which can range from digital art to virtual real estate, and often involve smaller, more frequent transactions compared to other cryptocurrencies.

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Additionally, for NFT sales, brokers are required to distinguish between primary sales (first sale by the creator) and secondary market sales, recognizing the different tax implications these might have.

Privacy concerns

Now, I know what you're thinking: "But what about my privacy? I got into crypto to stick it to the man, not to invite him to my digital wallet!" Rest assured, the IRS states that they're not after your private keys or your seed phrase. Their primary interest is in the financial outcomes of your digital asset transactions - the gains, losses, and income generated through your cryptocurrency activities. This information helps ensure tax compliance.

Simplify your crypto tax reporting with Bitwave

Given the complexities of crypto tax reporting, especially with the introduction of Form 1099-DA, many investors and businesses are turning to specialized software solutions like Bitwave.

Bitwave is a comprehensive crypto accounting and tax platform designed to address the unique challenges of digital asset reporting.

Bitwave integrates with major exchanges and wallets to automatically import your crypto transactions, calculates taxes in real-time, and helps reconcile 1099-DA information with your own records. It supports a wide range of digital assets, from Bitcoin and altcoins to stablecoins and NFTs, while staying up-to-date with the latest IRS guidance.

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As the crypto tax landscape continues to evolve, having a robust system like Bitwave in place allows you to focus more on your investment strategies and less on the complexities of tax reporting, ensuring you stay compliant without getting bogged down in the details. Schedule a demo today.

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