April 24, 2024 Draft Form 1099-DA for reporting digital assets from broker transactions leaves questions unanswered
On April 18, 2024, the IRS published a draft Form 1099-DA, Digital Asset Proceeds From Broker Transactions, to collect the data that the IRS said would be required under the proposed regulations (REG-1122793-19) published in August 2023 (see Tax Alert 2023-1513). The draft form does not change any of the requirements in the proposed regulations. Draft Form 1099-DA includes one page of instructions for taxpayers and tax preparers to use in interpreting the form when they receive it from a broker. Some of those instructions shed light on what digital asset brokers are expected to do, but the picture is incomplete. The IRS has not yet published separate instructions on preparing the form, which would be a guide for brokers in building and implementing the information systems related to Form 1099-DA. EY observes: Draft Form 1099-DA could indicate that Treasury and the IRS do not intend to make many changes to the regulations regarding the information required to be reported. Public comment letters submitted to Treasury and IRS by numerous industry groups and exchanges request a reduction in the amount of information reported and phasing in certain aspects of the proposed regulations. Digital asset brokers have noted substantial privacy concerns regarding some of the data types mentioned in the proposed regulations and have also requested parity with traditional financial institutions (or "TradFi") in terms of the amount and complexity of the data required to be reported. Draft Form 1099-DA goes significantly beyond the information TradFi brokers provide on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Broker type involved in transaction Draft Form 1099-DA requires the filer to select the characterization of the broker reporting the transaction. A broker may select (1) kiosk operator, (2) digital asset payment processor, (3) hosted wallet provider, (4) unhosted wallet provider or (5) other. EY observes: This box reflects the broad scope of "brokers" considered to "effect" sales of digital assets, including "digital asset middleman" and "digital asset payment processors," under the proposed regulations. Explanation if no recipient TIN Draft Form 1099-DA shares many features of the Form 1099-B. Like Form 1099-B, the broker will report (1) its own name, taxpayer identification number (TIN) and address and (2) the customer's name, TIN and address. Unlike any other Form 1099, however, if the recipient's TIN is not reported, there is a box for "Explanation if no recipient TIN." This is the first Form 1099 to include this type of box. The draft instructions do not refer to this box, so it is unclear how the IRS intends this box to be used. The proposed regulations also would not require an explanation of missing TINs on Form 1099-DA. EY observes: The IRS still needs to issue additional guidance on what type of explanation is required to populate this box. It is unclear why the IRS needs this information because backup withholding is generally required when a broker does not have a valid Form W-9 for the customer. Therefore, it is normally acceptable to not have a TIN provided that backup withholding is applied. Gross proceeds reporting Similar to Form 1099-B, a digital asset broker will be required to report on draft Form 1099-DA the gross proceeds (box 1f) and cost basis (box 1g) of the assets sold, whether the gain or loss was short-term or long-term (box 6), the amount of any federal tax withheld (box 4), as well as when the assets were acquired and disposed of (boxes 1d and 1e). Unlike Form 1099-B, a digital asset broker is required to report not just the acquisition and disposition dates, but also the time in Coordinate Universal Time (known as "UTC") down to the second. UTC corresponds to Greenwich Mean Time. The Form 1099-DA instructions note that this may be different from the taxpayer's time zone. The instructions also indicate that the time of acquisition may not be required if the sale includes assets acquired at several different times, or if the acquisition time is unknown to the broker. Tokenized securities To the extent the digital asset is a tokenized security, certain tax rules governing securities will apply, so the draft Form 1099-DA carries over boxes from Form 1099-B, such as CUSIP number, accrued market discount (for debt securities) (box 1h) and wash sale loss disallowed (box 1i). Given that the law as it stands now does not subject cryptocurrencies to the wash sale rules, it does not appear that the IRS intends the box to be used for most digital asset sales. The draft Form 1099-DA also allows the broker to indicate (in box 6) that gain or loss may be ordinary (such as for transactions denominated in a foreign fiat currency). Identification of the digital asset Draft Form 1099-DA requires the filer to enter a code for the digital asset for which the amounts are being reported. It appears that if the digital asset does not have an assigned code, the filer enters 999999 in box 1a. In such case, the filer is required to enter in box 1b the name of the digital asset for which the amounts are being reported. EY observes: The fact that the proposed regulations require reporting of the "name" of the digital asset sold, while the Draft Form 1099-DA requires the "code" for the digital asset, may indicate that the IRS plans to issue unique codes for each digital asset (as opposed to general codes for categories of digital assets). For example, it is possible that bitcoin, ethereum, tether, solana, USD Coin, etc., will each have its own unique code. This might also be implied by (1) box 1b requiring the name of the digital asset without a code, and not the type of digital asset, and (2) the code for digital assets without codes being six digits. This approach would require the IRS to issue thousands of codes and frequent code updates, and would pose a challenge with respect to unique, non-fungible digital assets such as NFTs. It is also possible, however, that the IRS will issue general codes for the various types and categories of digital assets, e.g., cryptocurrencies, stablecoins, NFTs, etc. Applicable checkbox on Form 8949 This section of the draft Form 1099-DA will contain a one letter code entered by a filer that should correspond to box, (A), (B), (C), (D), (E) or (F), on the recipient's Form 8949, Sales and Other Dispositions of Capital Assets, for a particular tax year when reporting the details of a disposition of a digital asset. This is similar to the requirement followed by broker-dealers when reporting Forms 1099-B to the IRS and recipients. On the Form 1099-DA, the codes, when they are provided by the IRS in the Form 1099-DA instructions, will inform the recipient whether the disposition of the digital asset is (1) a short-term or long-term covered transaction where cost basis is reported to the IRS, or (2) a short-term or long-term non-covered transaction where cost basis is not reported to the IRS. The codes will also indicate whether the holding period or other details are unknown. EY observes: The IRS still needs to issue additional guidance on how this box on the draft Form 1099-DA is populated. The Form 8949 has not yet been revised to include the draft Form 1099-DA. Boxes 10 and 10b Similar to Form 1099-B, the draft Form 1099-DA requires the broker to identify if the digital asset is a covered or non-covered security. Under the proposed regulations, covered securities would include digital assets acquired on or after January 1, 2023. Further, the proposed regulations would not require cost basis reporting if the broker is not providing hosted wallet services or did not receive a broker transfer statement. The draft Form 1099-DA requires a broker to identify a digital asset as non-covered and provide the reason why it is not covered. By contrast, the Form 1099-B does not require a broker to explain why a security is not covered. EY observes: The public comment letters overwhelmingly requested a delay, noting that very few brokers have systems in place to capture basis information and therefore cannot comply with the requirement to report basis for digital assets acquired on or after January 1, 2023. The inclusion of January 1, 2023, on the form may signal that a delay will not be provided. Boxes 11 and 12 Box 11 requires the filer to report information relating to whether the sale, exchange or other disposition (collectively the "disposition") of the digital asset was recorded on a cryptographically secured distributed ledger or similar technology (e.g., Blockchain). The filer checks box 11d if the disposition was not recorded on a cryptographically secured distributed ledger. Boxes 11a through 11c are completed if the disposition was recorded on such a ledger. Those boxes report the following information:
Box 12 provides details on the transfer-in of digital assets to a broker providing hosted wallet services when there has been a subsequent disposition of the digital assets, as follows:
EY observes: The instructions do not address whether it is acceptable to mask the digital asset address in order to protect this confidential information. The information reporting regulations allow payors to mask a payee's identification number on the recipient copy due to the risk of identity theft. Comments In addition to issuing draft Form 1099-DA, the IRS requested comments on the information collection requirements for digital asset proceeds from broker transactions. Specifically, the IRS requests comments on:
Comments should be submitted by June 21, 2024.
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