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Form 1099-DA

What Crypto Investors Need to Know About Form 1099-DA

The IRS plans to require crypto exchanges and other platforms to issue Form 1099-DA beginning in 2025 – and it could have big implications for crypto traders and investors.

You’ve probably heard the IRS is cracking down on crypto tax evasion. After issuing its initial guidance in 2014, the agency added a crypto question to Form 1040 and hired thousands of new agents to combat tax evaders.

But that’s just the beginning.

Starting in 2025, brokers, digital trading platforms, payment processors, and hosted wallet providers will have to issue Form 1099-DA for all digital asset sales or exchanges. The new form will tell the IRS about each crypto transaction, including the dates, amounts, and fair market value, to better estimate tax obligations.

So, if you trade or invest in cryptocurrencies or other digital assets, you’ll want to familiarize yourself with Form 1099-DA. If your calculations differ from those reported on the form, the IRS may flag the difference and assess unpaid taxes.

Let’s dive into what you need to know and the impact on the broader industry.

What is Form 1099-DA?

IRS Form 1099-Digital Assets (Form 1099-DA) is a new form that standardizes and streamlines the process of reporting cryptocurrency transactions.

With conventional investments like stocks and bonds, the IRS already requires brokers to submit Form 1099-B, Form 1099-DIV, and Form 1099-INT to stay on top of their capital gains, dividend income, and interest income, respectively.

While some crypto tax platforms may furnish a Form 1099-MISC for rewards or a Form 1099-B for futures trades, most capital gains and losses on crypto assets aren’t reported to the IRS, making it challenging to know how much taxpayers owe.

As a result, the IRS has relied on subpoenaing crypto exchanges to receive transaction data for specific customers it suspects underreported their taxes. In 2023 alone, these techniques led to 2,676 cases, with illicit proceeds totaling $37 billion.

Form 1099-DA brings crypto assets up to the same standards as stocks and bonds, making it much easier for the IRS to spot tax evaders.

New Tax Prep Processes

The new tax prep process will involve collecting Form 1099-DA from your crypto exchanges and other 1099 forms and providing them to your accountant or accounting platform.
As with 1099-B forms, you will report the details of each transaction on Form 8949 using the data from Form 1099-DA. If your records differ from Form 1099-DA, you must provide adjustment codes to correct any cost basis mistakes.

Form 1099-DA

Example of a Form 1099-B. Source: IRS

In particular, you may need to complete Form 8949 columns (f) and (g) if you receive an incorrect Form 1099-DA, if you are excluding or postponing a capital gain, if you have a disallowed loss, or in other situations. 

For example, if the basis shown on your Form 1099-DA is incorrect, you may need to enter the correct basis in column (e) or correct the error by entering an adjustment in column (g). The IRS is still finalizing Form 1099-DA, so these processes may change. 

The rest of the tax prep process is essentially the same.

You carry over the totals from Form 8949 to Form 1040 Schedule D, where they factor into your overall tax obligation. Long-term gains are subject to the lower capital gains tax rate, while short-term gains are taxed at your marginal tax bracket rate. If you have any crypto income from interest or rewards, those totals carry over onto Form 1040 Schedule 1. The IRS will tax this income as ordinary and at your marginal tax bracket rate.

Fines & Penalties

The IRS may assess fines and penalties if they suspect you’re underpaying your taxes.

You will typically receive a notice or letter with the amount due and a due date to pay if they find you owe taxes you didn’t report on your return. The payment due dates are 21 calendar days after they send the notice or 10 business days if you owe $100,000 or more.

If you don’t pay your taxes by the due date, the failure to pay the penalty is 0.5% of the tax you didn’t pay for each month or a partial month that you don’t pay after the due date. However, you can reduce the penalty to 0.25% per month or partial month if you set up an approved payment plan.

Potential Challenges

Many crypto experts warn that Form 1099-DA may not be as accurate for crypto as Form 1099-B is for stocks due to differences in market mechanics.

Here’s why:

Taxpayers can use first-in, first-out (FIFO) or specific identification (specific ID) to calculate the crypto or securities cost basis.

When trading stocks, taxpayers can tell their broker to use specific IDs and instruct them which lots of securities to sell. But, in crypto, exchanges don’t provide any pre-sale identification mechanism. So, instead, they default to the FIFO accounting method.

The problem occurs when a taxpayer uses a specific ID and exchanges use FIFO cost basis methods, resulting in irreconcilable differences. 

It’s also unclear what crypto platforms would need to send Form 1099-DAs. The regulations may apply to everyone, from digital asset payment processors to decentralized platforms that operate via smart contracts. And that could lead to widespread chaos for DeFi platforms that don’t collect customer information.

In particular, many DeFi platforms don’t require users to set up an account (they’re decentralized, after all!). As a result, they don’t have every user’s name and address, making it impossible to send Form 1099-DAs.

Crypto Tax Software

ZenLedger and other crypto tax software can help ease the burden of Form 1099-DA by automating some of these calculations and paperwork.

Form 1099-DA

ZenLedger generates the tax forms you need automatically. Source: ZenLedger

ZenLedger connects to your exchange and wallets to aggregate transactions. This syncing allows you to use FIFO or Specific ID accounting methods to compute your cost basis, even if you trade the same assets across multiple exchanges.

If differences arise from the cost basis reported on Form 1099-DA, this data can help you match transactions and prove your version is correct. And, unlike many other crypto tax solutions, ZenLedger’s Grand Unified Accounting reports can help you defend your decisions with data in the event of an IRS audit with a complete record of every transaction.

What’s Next?

Form 1099-DA is just one arrow in the IRS’ quiver to fight tax evasion.

After securing over $45 billion in funding last year, the IRS plans to hire roughly 87,000 new agents to pursue tax evasion cases. The agency also continues to hire outside contractors with crypto expertise to help them identify crypto investors whose tax returns omit or contain incorrect data – including a former Binance.US executive.

In addition to these efforts, the IRS continues to use John Doe summonses to obtain information about taxpayers it suspects of tax evasion from crypto exchanges. For example, a recent summons targeted taxpayers with the equivalent of $20,000 in transaction value for any year between 2016 and 2020.

Ultimately, the combination of Form 1099-DAs providing baseline information about every taxpayer, more in-house crypto expertise, and a larger number of tax agents could help significantly reduce crypto tax evasion.

The Bottom Line

The IRS plans to introduce Form 1099-DA in 2025, which could upend the crypto tax preparation process. While there’s still a lot of uncertainty surrounding the new tax form, crypto traders and investors should ensure they have their house in order before the new requirements go into effect – and the easiest way to do that is with crypto tax software.

ZenLedger can help aggregate transactions across crypto wallets and exchanges, compute your capital gains and losses, and generate the tax forms you need to ensure your crypto taxes are accurate.

Get started today for free!

The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.

Justin Kuepper