Understanding Form 1099-DA: Implications for Crypto Brokers & Customers

• Digital Asset Industry Faces Major Changes in Tax Laws
• Impact and Scope of Proposed Digital Asset Reporting Regulations
• Background Information
• Scope of Digital Asset Broker
• Impact on Customers and Potential Brokers
• Conclusion

Digital Asset Industry Faces Major Changes in Tax Laws

In a crucial development for the digital asset industry this year, new regulations proposed by the Department of the Treasury and the Internal Revenue Service have broadened the application of the Form 1099 information reporting by securities brokers to include digital asset brokers. Set to take effect from 2025, these regulations will impact a wide range of businesses operating in the digital asset ecosystem, necessitating the setup of systems to collect and report information to the IRS and their customers.

Impact and Scope of Proposed Digital Asset Reporting Regulations

These changes to the tax laws come as a response to concerns about substantial non-reporting of cryptocurrency transactions. As a part of this broader discussion, we delve into the broad implications of the proposed digital asset reporting regulations and its impact on potential brokers and their customers.

Background Information

Prior to the introduction of the Infrastructure Investment and Jobs Act of 2021, brokers were typically required to file information returns on Form 1099-B for each customer for whom they sold specified financial instruments. The Form 1099-B is filed with the IRS, and a copy is sent to the customer to aid in the completion and filing of their tax return. The IRS then matches the Form 1099-B to the tax return to identify any under-reported amounts.

With the introduction of new provisions, information reporting extends to digital asset brokers. The IRS have announced plans to issue a new form for this purpose, the Form 1099-DA (for digital assets).

Scope of Digital Asset Broker

The proposed regulations introduce a new term, digital asset middleman, which includes any person who provides a service proportional to a sale of digital assets. The definition of this term is broad and would include multiple brokers involved in the same transaction.

The proposed regulations also specify that services indirectly effectuating a sale of digital assets come under the umbrella of facilitative services, potentially expanding the definition of digital asset middleman.

Impact on Customers and Potential Brokers

The broad definition implies the potential for multiple brokers to be involved in a single transaction. While the securities broker reporting rules contain a multiple broker rule to prevent such duplication, the proposed regulations do not provide a similar rule for digital asset middlemen. This could lead to confusion for taxpayers and result in additional burdens.

Before the proposed regulations, several companies may have believed they were exempt from the definition of digital asset brokers. With the broadened definition, these businesses must now develop, test, and implement information collection and reporting systems.

Conclusion

The final regulations should address two key issues for the Form 1099-DA to be useful: the introduction of a multiple broker rule to prevent duplication, and an extension of the effective date to give companies enough time to develop reliable and compliant information reporting systems. Without these measures, the tool intended to promote tax compliance could potentially lead to tax confusion.

Edited by Jonathan Stoker