Home » Understanding the IRS Form 1099-DA Draft: An In-Depth Analysis

Understanding the IRS Form 1099-DA Draft: An In-Depth Analysis

The IRS has released the first draft of Form 1099-DA, Read along how we dissect key elements and explore the broader implications with insights from seasoned crypto tax experts.
Co-authored by
Kristin Stroud. Tax Attorney | CPA | Blockchain | Crypto | NC Blockchain Initiative | BRIDGING the gap between tradfi and web3 taxation

Patrick Camuso, CPA | Digital Asset Investors | Web3 Businesses | CryptoCPA since 2016 | First CPA Firm To Accept Crypto | NFT Sales Tax | Author CPA and

The draft Form 1099-DA aims at regulating digital asset transactions within the broker-dealer framework. This initiative underscores the IRS’s attempt to integrate the growing digital asset adoption into the existing financial ecosystem

IRS recently released Form 1099-DA, Digital Asset Proceeds From Broker Transactions

TL;DR:

  • A new coding system for digital assets could enhance reporting consistency.
  • “Unhosted wallet providers” being included as brokers may impose significant challenges.
  • UTC reporting could potentially simplify global tax documentation.
  • The box for wash sales losses needs to be clarified on possible future regulations inclusion.
  • Detailed reporting could overly burden entities, especially those in DeFi.Stringent regulations might lead to geo-blocking restricting U.S. taxpayer access.
  • Keep updated on form revisions to ensure compliance and leverage emerging provisions.
  • Consult tax professionals regularly to navigate the development of this draft.


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Why 1099-DA draft matters?

Formalizing tax treatment for digital assets clarifies regulations, potentially attracting more financial players and integrating cryptocurrencies into mainstream finance, moving the industry out of a regulatory grey area.

Overview of Form 1099-DA

Form 1099-DA is designed to capture a wide array of information about digital asset transactions aimed at entities that the IRS defines as brokers. Patrick Camuso, a certified public accountant with expertise in crypto taxation, highlights that these entities are required to report digital asset transactions like traditional securities. 

“This form represents a significant shift towards formalizing the reporting of digital assets and includes several categories such as unhosted wallets, which have been a major point of contention.”

Patrick Camuso, CPA

Crypto Tax Experts’ Key Concerns

The draft has sparked considerable discussion among industry professionals regarding its scope and the feasibility of its requirements. One of the primary concerns revolves around the inclusion of unhosted wallet providers under the broker category. 

Definition of Broker and the “Unhosted Wallet” Risk

A major point of contention in the draft Form 1099-DA lies in its definition of a broker. Particularly it is the inclusion of “unhosted wallet providers” under this category. Patrick Camuso highlights this issue, emphasizing the implications for decentralized platforms: “Unhosted wallet providers are going to have this reporting requirement(…) This is going to cause a big issue in terms of if this gets passed and this tax reporting requirement comes down.” This inclusion could potentially lead to significant compliance challenges and may affect the operational dynamics of decentralized platforms like Uniswap.

Kristin Stroud, a tax attorney and CPA, echoes this sentiment, expressing disappointment that the draft seems to overlook substantial feedback provided by tax professionals. “The persistence of controversial elements like the broad definition of brokers, despite industry feedback, is concerning and suggests a potential underestimation of the practical challenges,” Stroud explains. She points out the challenges it is posing for decentralized finance (DeFi) participants, especially node operators and DAOs. Stroud articulates that many DeFi participants may not have the necessary information or infrastructure to comply with the requirements imposed by this broad definition.

Furthermore, Coin Center, an independent nonprofit research and advocacy center focusing on the public policy issues facing cryptocurrency has also voiced concerns highlighting similar issues with the broad definition of brokers and its implications for web3 intermediaries. 

Wash Sales Rule

Another notable aspect of the form is the inclusion of a box for reporting disallowed wash sales losses. While there is an anticipation that the wash sales rule may apply to crypto in the future, it is not currently applicable. This is by virtue of the fact that the Treasury has classified crypto as property instead of security to date.

However, the form in its present iteration is confusing to taxpayers who are aware of the current ‘wash sale loophole’.

Box1i related to wash sales loss disallowed… may prompt taxpayers to think the rule is currently applicable. Despite the form instructions indicating that the purpose is to disclose wash sale losses for digital assets that are also considered traditional securities, there is significant potential for confusion.

Kristin Stroud, CPA

Camuso mentions this feature as one of the notable elements of the form, highlighting its potential link to future regulations regarding wash sales on digital assets. He expresses curiosity about how this feature will be utilized, pondering whether it is in anticipation of applying wash sales regulations to digital assets or if it’s related to specific types of digital assets like Bitcoin ETFs.

Time Zone Requirement

The draft mandates reporting all transactions in UTC (Coordinated Universal Time), which can introduce new complexities. Particularly for US taxpayers transacting on the last day of the year, with the anticipation that the transaction will be captured during the tax year ending. Kristin Stroud points out the potential issues, noting, “It requires UTC, which is interesting because I’m unaware of any other reporting forms that mandate a specific time zone for reporting. While standardization is laudable, accurate reporting could be accomplished by simply allowing the broker to report transactions as occurring according to UTC or the time zone of the taxpayer’s domicile.” 

Patrick Camuso, however, views this standardization positively, appreciating the move towards uniformity which he believes could simplify the process across global transactions. 

Codification of Digital Assets

The form introduces a system for codifying digital assets, which could lead to more standardized reporting procedures. Camuso notes, “If you look in Boxes 1a and 1b, here’s asset coding that they’re going to start applying to certain digital assets… We’ll have to see which other assets they put on that list.” This approach aims to categorize digital assets clearly, possibly simplifying the reporting process. It also raises questions about how various assets will be classified and treated under tax regulations.

Potential Implications and Industry Impact

Both experts agree that the new reporting requirements could have profound implications for the digital asset industry. Stroud is particularly critical of the operational burdens these requirements may impose, especially on decentralized financial platforms and DAOs, which might lack the infrastructure to comply with such detailed reporting obligations.

Moreover, Camuso warns of the potential for geographical restrictions, by digital asset platforms, which could limit access for U.S. taxpayers to certain protocols to avoid the burdensome reporting requirements.

For a section-by-section review of the IRS Form 1099-DA draft, check out Squeeze Taxes’ post, which specifically addresses the implications of including unhosted wallets and the proposed coding system for digital assets.
Read the full analysis here.

Future Prospects

Despite the challenges, there is a consensus that the draft indicates a growing recognition of digital assets by regulatory bodies.

I will say (…) the fact that they have compiled this form and that they are working through the proposed regulations lends an air of legitimacy to cryptocurrency that has not been there.(…) it does indicate that they are beginning to take cryptocurrency seriously.

Kristin Stroud, CPA

Both experts hope the IRS will consider the practical and technical feedback from more crypto accounting experts before finalizing it.

Conclusion

The IRS Form 1099-DA draft marks an important step in regulating digital asset transactions. Yet it remains open to significant revisions.

Given the uncertainties surrounding the draft, it is critical for those affected to stay informed about revisions as they unfold. Engaging with tax professionals for guidance and actively participating in the commentary process are essential steps to ensure that the final regulations are both practical and equitable.


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Authors

  • Kristin Stroud

    Kristin Stroud is a licensed tax attorney and Certified Public Accountant (CPA) with extensive experience in the field. She specializes in tax law, providing legal advice and representation related to taxation matters. Her expertise includes practical tax-focused cryptocurrency compliance, consulting, analysis, and content. Kristin is actively involved in the blockchain and digital asset ecosystem, offering tax-related guidance and consulting services. She holds memberships in professional organizations such as AICPA

  • Patrick Camuso

    Patrick Camuso, a Certified Public Accountant (CPA), is the founder and managing member of Camuso CPA. With extensive experience in crypto taxation, he specializes in serving digital asset investors and Web3 businesses. Explore in-depth tax strategies, navigate complex accounting issues with expert guidance, and stay informed with our insightful analysis.

Kristin Stroud

Kristin Stroud is a licensed tax attorney and Certified Public Accountant (CPA) with extensive experience in the field. She specializes in tax law, providing legal advice and representation related to taxation matters. Her expertise includes practical tax-focused cryptocurrency compliance, consulting, analysis, and content. Kristin is actively involved in the blockchain and digital asset ecosystem, offering tax-related guidance and consulting services. She holds memberships in professional organizations such as AICPA

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