Key Takeaways:
Form 1099-DA requires brokers to report crypto transactions, including cost basis and acquisition details, to the IRS starting 2025.
Missing cost basis records may result in higher taxable gains as the IRS could default to a $0 acquisition value.
The new reporting rules could trigger audits, increased IRS scrutiny, and a potential market sell-off before January 2025.
YEREVAN (CoinChapter.com) — Starting Jan. 1, 2025, U.S. cryptocurrency holders will face stricter tax enforcement as crypto exchanges begin reporting user transactions to the IRS through Form 1099-DA. This new requirement, outlined under the Infrastructure Investment and Jobs Act, will increase tax transparency for digital assets, including cryptocurrencies, NFTs, and stablecoins. Investors must prepare as all sales, swaps, and disposals will be reported directly to the IRS.
Draft Form 1099 DA. Source: IRS.GOVIRS Mandates New Crypto Reporting Rules
Form 1099-DA requires U.S. crypto brokers, such as Coinbase and Kraken, to disclose key details of digital asset transactions. These include the acquisition date, cost basis, sale proceeds, and disposition dates. Previously, taxpayers self-reported their crypto activity, leading to widespread underreporting.
A significant issue is the treatment of older crypto holdings. If investors cannot prove the original purchase date or cost basis of assets, the IRS may consider the cost basis as $0, resulting in higher taxable gains. For example, if someone acquired DOGE in 2020 at $0.002 and sells it in 2025 at $0.40, the IRS will require proof of the original cost basis. Without records, the tax will apply to the full gain.
Risk of a January Crypto Market Crash
With the new regulations starting in January, concerns are rising about a potential market sell-off. Traders with long-term holdings may liquidate assets before the IRS reporting takes effect to minimize tax exposure. This situation could lead to increased selling pressure in early 2025.
The uncertainty surrounding missing cost basis records adds to the problem. Investors who transferred assets between wallets and exchanges over the years may struggle to consolidate their transaction histories. These challenges could push many to sell now rather than face inflated tax bills later.
Increased Audits and IRS Scrutiny
The IRS also uses blockchain analysis tools to identify unreported transactions. The rollout of Form 1099-DA will give the IRS direct access to individual transaction data, reducing the margin for error in reporting.
The new requirements may also trigger audits of prior tax years. Investors who failed to report crypto gains in the past could face penalties, back taxes, and additional scrutiny. The IRS encourages taxpayers to ensure all past and current crypto activity is accurately reported to avoid audits.
Cost Basis Warning. Source: GordonlawForm 1099-DA: Purpose and Key Details
Form 1099-DA was introduced under the Infrastructure Investment and Jobs Act (IIJA) to improve crypto tax compliance in the U.S. It requires digital asset brokers to report details of transactions, including sales, swaps, and cost basis, to the IRS. The form applies to entities “in a position to know” the identities of transaction parties, such as Bitcoin ATMs, payment processors, and wallet providers.
However, concerns remain about including unhosted wallets (self-custodied wallets), which critics argue are not brokers. A March 2024 court ruling involving Coinbase suggested hosted and unhosted wallets may be excluded. Miners, node operators, and software developers are already excluded from reporting requirements.
The current draft of Form 1099-DA, based on August 2023 proposals, may still change before it takes effect in 2025, with final implementation expected by 2026.
