Form 1099-DA: What Crypto Investors Need to Know About IRS Digital Asset Reporting

The use of cryptocurrencies is continuing to grow. With this, the IRS introduced Form 1099-DA, the new form, which reports digital assets transactions such as cryptocurrencies, stablecoins, and non-fungible tokens (NFTs) starting in the 2025 tax year, aiming to streamline tax reporting and compliance for digital asset transactions. A lot of changes to record-keeping and tax filing accompanies this transition and this article will help investors and traders prepare for it.

1. Understanding Form 1099-DA

To simplify the process of reporting taxable events involving digital assets, the IRS designed Form 1099-DA. This is the crypto counterpart of Form 1099-B, which reports bond and stock transactions. The new form captures crucial information including transaction details, gross proceeds, and most of the time, cost basis. Greater tax compliance and transparency for cryptocurrency transactions is the goal.

Crypto accounting plays a significant role in ensuring taxpayers correctly report digital asset transactions. Proper record-keeping and understanding of cost basis calculations are essential for compliance.

2. What Information Does Form 1099-DA Contain?

Form 1099-DA includes key data points necessary for reporting crypto-related taxable events:

1. Transaction Dates and Types - the date of the transaction and whether it’s a sale, exchange, or trade.
2. Digital Asset Details - the name of the specific asset involved, whether it be Bitcoin, Ethereum, stablecoins, NFTs, or etc.
3. Gross Proceeds - the total USD value received from the transaction
4. Cost Basis (When Applicable) - for covered securities, the purchase price is provided to calculate gains or losses. However, for noncovered securities, investors are required to calculate and report the data independently since the cost basis may not be included.

While the IRS is able to monitor taxable activity accurately through the form, there are still gaps such as peer-to-peer trades or transactions on decentralized exchanges (DEXs). These transactions must be accounted for by taxpayers themselves.

3. Why the IRS Introduced Form 1099-DA

With the rise of cryptocurrencies, challenges in tracking and taxing digital asset transactions were faced. In the past, a lot of inconsistencies and underreporting occurred due to taxpayers being responsible for self-reporting. By providing detailed transaction data directly to the IRS through Form 1099-DA, the brokers and exchanges help make identifying taxable income and ensuring compliance easier. This makes crypto accounting solutions even more essential for active investors.

4. Challenges with Form 1099-DA

While Form 1099-DA simplifies reporting in some ways, it introduces new complexities:

1. Incomplete Cost Basis Information - taxpayers must use personal transaction records to calculate the cost basis for noncovered securities.
2. Volume of Reports - active traders may receive a separate form for each transaction, resulting in dozens, or even hundreds of forms.
3. Excluded Transactions - peer-to-peer trades, DEX activity or any other transactions conducted outside of centralized exchanges, are not captured by Form 1099-DA but remain the taxpayer’s responsibility to report.

Managing the additional administrative burden and filling in these gaps are things that investors must be prepared for.

5. How to Prepare for Form 1099-DA

1. Track Your Transactions

Always maintain accurate records of transactions involving these specific assets, including the purchase price, sale price, transaction date, types of asset, and etc. Especially for noncovered securities that are not covered by Form 1099-DA, immaculate record-keeping is essential.

2. Understand Taxable Events

Understanding what are taxable events is key. While simply holding crypto is not taxable, other transactions like selling cryptocurrency, trading digital assets for another and using crypto as payment for goods and services are taxable.

3. Leverage Crypto Tax Tools

To simplify tax preparation, use crypto accounting software and portfolio management tools that automate tracking transactions and calculating gains or losses by integrating with exchanges or wallets.

4. Consult a Tax Professional

To ensure compliance with new requirements, like Form 1099-DA, work with crypto tax professionals. They will help you navigate through complex and constantly evolving tax laws.

5. Stay Informed

Monitor official announcements from the IRS and subscribe to trusted sources to stay ahead of any changes since guidance for digital asset taxation is regularly updated.

6. Final Thoughts

A new era of crypto tax reporting is represented by Form 1099-DA. This significant shift by the IRS aims to close the tax gaps and simplify compliance by standardizing the requirements in reporting digital asset transactions. However, proactive steps are needed to be done by investors and traders to prepare including, tracking transactions, understanding taxable events, and seeking professional guidance.

7. Consult with Experts

Need help navigating the new digital asset tax regulations? We stand as your vigilant financial co-pilot, ensuring compliance and peace of mind. Book a free consultation today at Onchain Accounting and stay ahead in the crypto landscape!

Disclaimer: No financial, tax, legal advice or opinion is given through this post. All information provided is for educational purposes only and may not apply to your specific situation.