IRS Unveils Draft 2025 Digital Asset Reporting Form for U.S. Taxpayers

The United States Internal Revenue Service (IRS) has released a draft of Form 1099-DA to facilitate the reporting of income derived from digital asset transactions.

Titled “Digital Asset Proceeds from Broker Transactions,” the form is scheduled for implementation in 2025, covering reporting periods for 2026.

Under the proposed regulations, various entities—including kiosk operators, digital asset payment processors, hosted wallet providers, and unhosted wallet providers—will be responsible for issuing Form 1099-DA for customers who sell or exchange digital assets.

Copies of the form will be distributed to both customers and the IRS, enabling the tax authority to verify reported data.

Draft Form Mandates Inclusion of Addresses

The draft form requires the inclusion of token codes, wallet addresses, and blockchain transaction locations.

According to a rule proposed in August 2023, cryptocurrencies, non-fungible tokens (NFTs), and stablecoins will be subject to these reporting requirements.

The rule aims to enhance the IRS’s ability to identify taxpayers involved in digital asset transactions, which are often difficult to detect without third-party reporting.

Upon the announcement of the proposed reporting requirements, the crypto community expressed mixed reactions.

The Blockchain Association criticized the rule, citing “fundamental misunderstandings about the nature of digital assets and decentralized technology.”

Similarly, Coinbase’s chief legal officer, Paul Grewal, warned that the rules could establish a concerning precedent of financial surveillance, as nearly all digital asset transactions, even minor ones like purchasing a cup of coffee, would need to be reported.

Tax Experts Raise Concerns

Tax experts have also raised concerns regarding the new reporting rule.

Ledgible, a crypto tax and accounting service, highlighted the challenges of reporting decentralized finance (DeFi) transactions where intermediaries may not exist to fulfill reporting requirements.

Ledgible’s own Jessalyn Dean takes a look at the new draft 1099-DA, and walks you through what stands out, what’s surprising, and everything you need to know. #taxinformation #crypto #digitalassets #regulation #IRS https://t.co/jw7iakRj93

— Ledgible | Digital Asset Tax, Accounting, & Data (@Ledgiblecrypto) April 19, 2024

Additionally, brokers will face an increased administrative burden as they process a large volume of transactions.

The accurate determination of cost basis (initial value or purchase price) for digital asset transfers will require information sharing among brokers, a process that currently lacks an established mechanism.

Furthermore, distinguishing between self-transfers and taxable transfers when a crypto owner moves assets between exchanges remains a challenge.

Taxpayers who previously underreported their crypto income may face scrutiny when reporting their taxes in 2025.

While users of foreign exchanges that do not formally serve U.S. citizens may not submit the form, the IRS can potentially detect offshore activity if assets are subsequently transferred to a U.S. exchange.

The draft form is currently open for public comments, allowing stakeholders to provide feedback and suggestions before its finalization.

Countries around the world are increasingly recognizing the need to tax cryptocurrency holdings as the digital currency market expands.

Brazil, for instance, has introduced legislation effective from January 1, 2024, imposing a tax of up to 15% on profits from cryptocurrencies held overseas by Brazilian nationals.

Meanwhile, India continues to enforce stiff taxes on crypto transactions, maintaining a 30% tax on profits and a 1% Tax Deducted at Source (TDS) on all transactions.

Likewise, the UK national taxing authority asked crypto users last year to disclose any unpaid taxes they might have in order to avoid fines.