Crypto Tax Reporting Draft Form Signals Compliance Challenges

The IRS unveiled a draft of the first crypto tax reporting form, 1099-DA, on April 19 after months of gathering feedback on proposed regulations that would require “brokers” to report customers’ sales and exchanges of digital assets.

This form aims to translate the tax reporting information required by the proposed regulations into specific boxes—not to resolve contentious issues. Set to take effect in 2025, the form signals the impending finalization of crypto tax regulations, which will likely alter the crypto industry landscape and present difficulties for taxpayers but improve the IRS’s ability to combat tax evasion.

Industry Impact

The new 1099-DA form serves the overarching goal of the Infrastructure Investment and Jobs Act, signed into law by President Joe Biden on Nov. 15, 2021. An integral provision of the IIJA—Section 80603—aims to formulate and enforce laws to boost tax revenue from digital asset transactions, estimated at $28 billion over a decade by the Joint Committee on Taxation.

This provision reflects a growing recognition of crypto assets within the regulatory framework. The introduction of a dedicated 1099-DA form further signifies confidence in the industry’s sustainability and its potential to enhance government revenue.

However, this optimism is tempered by the anticipated compliance costs, which significantly vary across reporting entities. The current definition of broker as suggested by the 1099-DA form—encompassing kiosk operators, digital asset payment processors, and hosted and unhosted wallet providers—appears to impose uniform reporting requirements on diverse crypto entities.

Unlike centralized exchanges, many decentralized trading platforms lack mechanisms for collecting taxpayer information unless they undergo substantial know-your-customer changes, which conflict with their decentralized ethos.

Digital asset payment processors and wallet providers also face the challenge of navigating cryptocurrencies’ dual nature as both currency and asset, complicating the handling of supported transactions. The expected tax compliance costs could reshape the industry landscape.

Taxpayer Challenges

To comply with regulatory requirements, individuals engaged in reportable digital asset transactions—whether as consumers or investors—must provide sensitive personal identifying information to in-scope digital asset brokers necessary for their completion of the 1099-DA form, which raises privacy and security concerns.

Additionally, taxpayers are responsible for accurate tax reporting to the IRS. They must verify the gross proceeds and cost basis reported in broker-issued 1099-DA forms.

Many digital asset brokers currently lack the infrastructure to share cost basis information and differentiate between taxable transactions and non-taxable transactions (such as self-transfers). If the broker marks the cost basis of digital assets involved in a transaction as zero or misreport non-taxable transactions, taxpayers will have to reconcile or risk overpaying tax.

Taxpayers will also need to check responses to crypto-specific questions mandated by the form, including the transaction ID, digital asset address, and whether the sale is recorded on the distributed ledger. Verifying these responses can prove challenging for taxpayers without the necessary knowledge and technological capabilities to access such data.

IRS Implications

The IRS’s new 1099-DA form will strengthen the agency’s ability to collect taxes from crypto transactions and reduce tax evasion. With this form in place, digital asset brokers will be compelled to implement know-your-customer measures to collect and report taxpayer information to the IRS. This regulatory move helps foster a culture of self-enforcement among brokers, improving compliance across the industry.

However, the IRS will have to confront a deluge of data collected through the 1099-DA forms. Unlike Social Security numbers, which provide unique identification and can be cross-checked with government-maintained records, digital asset addresses generated via cryptography are virtually endless and don’t uniquely identify taxpayers. Transaction-specific data the IRS seeks to collect can also be massive due to the nature of blockchain record-keeping.

While it may be challenging for the IRS to scan the collected data for red flags, the agency can lean on selected data to strategically audit individuals’ crypto transactions if irregularities arise in other areas of their tax filings. The IRS’s mere possession of this data should deter tax evasion.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Vivian Fang is finance professor at the Kelley School of Business, Indiana University. She has been teaching and researching cryptocurrencies since 2018.

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