Earlier this summer, the U.S. Department of the Treasury and the IRS released final regulations on reporting requirements for sales, exchanges, transfers, and payment processing involving digital assets. Supplemental transitional relief and guidance were issued in the form of Notice 2024-56, Notice-2024-57, and Revenue Procedure 2024-28.
This is not a new tax—owners of digital assets have always been subject to tax on the sale or exchange of digital assets. However, under the Infrastructure Investment and Jobs Act (IIJA), reporting requirements similar to those that already apply to traditional financial services are now in place to help taxpayers file accurate returns and pay taxes.
Jessalyn Dean, vice president of tax information reporting at Ledgible, a digital asset tax information & accounting platform, noted that the final regulations incorporated many of the comments and recommendations submitted by Ledgible and other industry leaders—and raised questions about what comes next.
Form 1099-DA
A key piece of the guidance focused on a new tax form—Form 1099-DA, Digital Asset Proceeds From Broker Transaction—to ensure consistent reporting. Earlier this year, the IRS released a draft of Form 1099-DA, available on the IRS website.
The form may not come as a surprise to those who buy and sell digital assets on centralized exchanges. Dean notes that those taxpayers may have already been on the receiving end of Form 1099-B for sales and exchanges of assets. Now, she says, they will simply get a Form 1099-DA instead of a Form 1099-B.
The issuance of Form 1099-DA does not change a transaction’s taxability—it is simply a reporting mechanism.
The driver of the new form is compliance. When income information is reported from third parties—think about your Form W-2 or Form 1099—tax compliance exceeds 90%. However, when there is no third-party income information—self-reporting—tax compliance is just 55%. Requiring third-party reporting for digital asset transactions should boost compliance.
There’s a secondary benefit of Form 1099-DA: basis reporting.
For some taxpayers, buying and selling transactions on different platforms and in multiple digital wallets may make calculating taxable gains difficult. Dean says this is true even when taxpayers want to be tax compliant.
(Dean points to a Treasury Inspector General for Tax Administration (TIGTA) report that notes, among other things, that for tax years 2019 to 2022, the number of taxpayers who self-reported as having digital assets on Form 1040 totaled 12.6 million. That represented an increase of 649% from tax years 2019 to 2021. That number slightly decreased in 2022 but still represented a 202% increase from tax year 2019.)
Taxable Transactions
Here’s why basis matters. The IRS considers cryptocurrency a capital asset. In 2014, the agency issued guidance making it clear that capital gains rules apply to any gains or losses.
- If you buy and sell cryptocurrency as an investment, you’ll calculate gains and losses the same way you buy and sell stock.
- If you treat cryptocurrency like cash—spending it directly for goods or services or using it to buy other digital assets—the individual transactions may result in a gain or a loss.
For tax purposes, you figure your capital gains or losses by determining how much your basis—typically, the cost you pay for assets—has gone up or down from when you acquired the asset until there’s a taxable event. A taxable event can include a sale, gift, or other disposition.
You can see the issue—if you can’t figure out your basis, properly calculating your tax is impossible.
Holding an asset for more than one year before a taxable event is considered a long-term gain or loss. And if you hold an asset for one year or less before a taxable event, it’s considered a short-term gain or loss.
And while cryptocurrency goes up and down, you care the most about the beginning and the end—what happens in the middle doesn’t count. That’s because when cryptocurrency dives for tax purposes, that doesn’t equal a realized loss. Similarly, when it goes back up in value, that doesn’t equal a realized gain. To realize a gain or a loss for tax purposes, you must do something with the asset, like sell or otherwise dispose of it.
At tax time, you’ll report any realized gains and losses on Schedule D. You don’t need to file a Schedule D if you don’t have any realized gains or losses—even if the value changes, if there’s no sale or disposition, there’s nothing to report.
Tracking
Dean explains that it’s really hard to assemble records, especially in crypto. “Actually tracking basis,” for digital assets, says Dean, “is a nightmare for taxpayers.”
There are not only lots of transactions happening—there are multiple kinds of currency. According to TIGTA, the number of types of virtual currency has grown significantly since April 2020, from 5,000 to over 26,000 as of July 2023. That’s an increase of 420%.
Historically, there have been taxpayers who wanted to comply but “didn’t have the right tools in their toolkit to do so.” That resulted in many taxpayers complaining, “What am I supposed to do?”
Timing
The regulations are effective for transactions after January 1, 2025, for gross proceeds reporting and January 1, 2026, for basis reporting.
That’s a staggered phase-in, which, Dean notes, is not unlike what happened with Form 1099-B reporting. When that law was passed years ago, mandatory reporting was rolled out in phases between 2011 and 2016.
Consequences
There are going to be reconciliation issues, Dean says. That’s unavoidable as assets are onboarded for reporting purposes. There is, she notes, lots of nuance in the regulations. There can be difficulties in determining which—and when—assets were acquired and at what cost. This can especially be tricky when assets are tracked onto platforms from decentralized exchanges and unhosted wallet providers (those are currently out of scope for reporting purposes until the IRS releases further guidance).
Reactions
Dean says that many in the digital asset community view these changes as positive. The industry applauds the phase-in of reporting and the deferral of others.
Dean specifically pointed to the phased backup withholding requirements related to documentation on Forms W-9, W-8, or appropriate substitutes. Backup withholding, explains Dean, is typically a disincentive for taxpayers to provide a bad name or taxpayer identification number to a payor—that kind of behavior means that the IRS can’t properly do data and forms matching. However, forcing brokers and other reporters to scramble to get records from taxpayers will take time, and requiring 24% withholding in the interim seems unfair. Dean says allowing more time is gracious, especially since most taxpayers are not typically subject to backup withholding.
However, some concern remains about the definition of broker—that’s been a talking point for some time. The final regulations don’t alleviate those worries. Specifically, says Dean, “It pulls into scope people that operate software that aren’t financial professionals that deliver financial services.” For example, it might pull in software that doesn’t offer financial services. Forcing those third parties to collect personal information to issue reporting forms, warns Dean, “could kill business and innovation.”
Compliance
Some taxpayers rely on crypto tax aggregator software to complete Form 8949 (filed with Schedule D to report capital gains). But, Dean notes, the software is only as good as the information that it gets fed. It can require a huge upfront cost in terms of time. Much like budgeting software, the information may not be accurate if you’re not willing to put in the time to train it—what goes into a groceries category versus, say, dining out.
Taxpayers may also not know how to categorize transactions. For example, what is a staking reward? Income? Or the return of capital? (Spoiler alert: The IRS categorizes staking rewards as income.)
Dean suggests that you can get out ahead of some of these difficulties by seeking out early tax advice from knowledgeable and trusted tax advisors. However, not all advisors are created equal.
Finding a suitable match can be difficult. You’ll want to ask questions—and credentials could play a role.
Some organizations now have crypto tax certification programs (like this one).
Those certifications don’t carry the weight of credentials since most are in the early stages. However, they signal to taxpayers that those tax professionals are interested in gaining and demonstrating additional skills.
Ultimately, you want to find someone who is both competent and whom you trust. You may find that in your immediate community—or online. It makes sense to do your homework before choosing a tax professional.
“People,” says Dean, “want to be compliant.” “But those are less sexy headlines.”
What’s Next?
The final regulations do not include reporting requirements for decentralized or non-custodial brokers that do not take possession of the digital assets being sold or exchanged. Dean says taxpayers should watch for additional guidance from the IRS—it’s coming. Many think it may even happen this year.
Dean also advises taxpayers to pay attention to IRS Revenue Procedures (a revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers under the law). At the same time these regulations were finalized, the IRS issued Revenue Procedure 2024-28. That revenue procedure allows for a transition from a universal or multi-wallet approach to allocating basis in digital assets to a wallet-by-wallet or account-by-account approach. Under the revenue procedure, taxpayers can generally rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units based on the taxpayers’ records of unused bases and remaining units in those wallets or accounts. That, Dean says, is an opportunity to avoid a reconciliation disaster.
As additional guidance is provided, it should make things easier for taxpayers. “Knowing when they will get a 1099—and when they won’t—is important,” says Dean.
That doesn’t mean some taxpayers aren’t nervous. Back in 2010, Dean notes, many thought that requiring the reporting of cost basis for traditional investment products would be problematic. “They thought the sky was falling,” she said, “but everything turned out just fine.”
Dean expects a similar trajectory with the most recent guidance. “In the short term, it will be painful,” she says. “But it’s short term pain for long-term benefit.”
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