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Attention US Crypto Holders! IRS Releases a Draft of New Crypto Tax Form

Form 1099-DA for digital asset proceeds: Explaining its meaning and impact of crypto taxation in the United States 

The IRS is updating its approach to cryptocurrency taxation with a new reporting form slated for use in 2025.

Key takeaways:

  • New IRS Form 1099-DA will streamline reporting for digital asset transactions.
  • Community and legal experts raise concerns over privacy and operational burdens.

The U.S. Internal Revenue Service (IRS) is preparing to enhance the monitoring of cryptocurrency transactions through the newly drafted Form 1099-DA, "Digital Asset Proceeds from Broker Transactions." Set to be implemented in 2025, this form is designed for income reporting from digital asset transactions to be filed in 2026.

Under the proposed guidelines released in August 2023, digital assets including cryptocurrencies, nonfungible tokens (NFTs), and stablecoins will need to be reported. The form requires brokers, such as kiosk operators, digital asset payment processors, and wallet providers, to document and report any sales or exchanges of digital assets. Each transaction must include token codes, wallet addresses, and blockchain transaction locations.

Highlighting the need for such detailed reporting, the IRS rule stated: 

“With third-party information reporting that specifically identifies digital asset transactions, the IRS could more easily identify taxpayers with digital asset transactions that are otherwise difficult to discover.”

Community response and operational challenges

The release of the draft form has elicited a strong response from the crypto community and legal experts, who express concerns over privacy and the feasibility of enforcing these rules. Coinbase's chief legal officer, Paul Grewal, criticized the proposal, saying it sets a 

"dangerous precedent for surveillance of the everyday financial activities of consumers by requiring nearly every digital asset transaction — even the purchase of a cup of coffee — to be reported.”

Additionally, tax experts from Gordon Law and crypto tax service Ledgible have voiced concerns about the increased administrative burden for brokers. The requirement to exchange information on digital asset transfers to ascertain cost basis presents significant challenges, especially in decentralized finance where intermediaries are often absent. Gordon Law notes: "They have no mechanism in place for such data sharing," and there is no clear method to differentiate between self-transfers and taxable events.

Despite these challenges, the IRS is continuing to accept comments on the draft form, indicating that further refinements could be made before its full implementation.