The Internal Revenue Service (IRS) is currently contemplating the creation of a new tax form that would require reporting of transactions involving certain cryptocurrencies. The proposed draft, called Digital Asset Proceeds from Broker Transactions, suggests that taxpayers would need to complete Form 1099-DA, which would collect the account holder’s identification and detailed transaction data from cryptocurrency brokers. Shehan Chandrasekera, the Head of Crypto Accounts, believes that implementing a data collection system for traders could have a significant impact on the cryptocurrency industry, potentially marking the end of privacy in taxation.
The IRS is focusing on crypto transactions, requiring brokers such as custody organizations, specific decentralized finance exchanges, and wallets to provide Form 1099-DA for every transaction in which they are involved. Starting from January 1, 2025, brokers will be required to submit this information to both the IRS and the individual taxpayer, similar to how stock brokers currently operate.
The form includes essential details such as the date, photo, sale, sale proceeds, and cost basis. This article aims to provide tax developers with the necessary and valuable information to finalize the process of filing crypto taxes. However, there are certain additional details, such as wallet addresses, that the federal government cannot collect and report on a large scale due to potential privacy and security concerns.
In an attempt to broaden the definition of a “broker,” the IRS has added “unhosted wallet providers” to the form. This move aims to include unhosted wallets under the broker designation, although it has been met with skepticism from opponents.
The clash between privacy and tax compliance is evident in this development. Gordon Law LLC, a firm specializing in tax and crypto law, will analyze Form 1099-DA to understand what entities might fall under the IRS’s definition of a broker. According to the firm, both custodial and non-custodial exchanges, as well as wallets where individuals can buy and sell Bitcoin, Bitcoin ATMs, and other physical counters, would be classified as brokers.
Gordon Law believes that while the crypto community may object to the new form’s inclusion of decentralized exchanges (DEXes) as brokers, the IRS is unlikely to be flexible on this matter. DEXes currently lack the capability to attach tax information to their customers, which could lead the IRS to argue that DEXes should have knowledge of their customers’ identities. Consequently, the IRS may issue an order requiring DEXes to verify their customers’ identities using the Know Your Customer (KYC) process.
However, Gordon Law claims that the IRS notice does not categorize mining equipment, node operators, hardware e-wallets, software developers, and programmers as brokers.