On August 9, 2024, the IRS released an updated draft Form 1099-DA, Digital Asset Proceeds From Broker Transactions, to be used by brokers to report certain digital asset transactions that take place beginning in CY 2025. Beginning in early 2026, brokers will send taxpayers Forms 1099-DA and file them with the IRS. The IRS had released a prior draft form in April 2024 based on proposed regulations (see Tax Alert 2024-0854).

The new draft form reflects the final regulations for custodial broker reporting (TD 10000) and the transitional relief described in Notice 2024-56, Notice 2024-57 and Revenue Procedure 2024-28 (see Tax Alert 2024-1385).

The new 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. The IRS said it expects to post the draft instructions for filers soon.

Differences in the new draft

Type of broker involved in transaction

The new draft form no longer requires brokers to specify which type of broker they are. The final regulations limit the scope of brokers required to report transactions that take place in CY 2025 to hosted wallet providers, kiosk operators and digital asset payment processors, among others, while deferring the regulations that would require reporting by operators of noncustodial digital asset trading platforms and unhosted wallet providers.

Explanation if no recipient TIN

The new draft form removes the box for "Explanation if no recipient TIN" if the recipient's tax identification number (TIN) is not reported. Commentors to the prior draft form requested guidance on what type of explanation would be required, noting the burden to complete a free form field. The new draft form, like other Forms 1099, only requires reporting of the customer's name, TIN and address.

Name of digital asset

The prior draft form required a broker to report the code for the digital asset, but only required the name of the digital asset if the digital asset code was 999999. The new draft form requires a broker to report both the code for and the name of the digital asset in all cases. Reporting the name of the digital asset is required by the final regulations.

EY observes: Traditional brokers are familiar with reporting property names as it has been required for many years on Box 1a of Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Broker reliance on customer-provided acquisition information

The new draft form requires a broker to check box 8 if it relied on customer-provided acquisition information. This requirement was added in response to a new provision in the final regulations permitting brokers to take into account customer-provided acquisition information for purposes of identifying which units are sold, disposed of or transferred under the identification rules, and requiring brokers to report whether it took such information into account.

Covered and noncovered securities

The final regulations extended the deadline to treat a digital asset as a covered security to include digital assets acquired on or after January 1, 2026 (as opposed to January 1, 2023). The new draft form has been updated to take this date change into account. In addition, while the first potential reason for a digital asset being noncovered on the prior draft form was that the broker did not provide "hosted wallet services" for the digital asset, the new draft form updates the wording to state that the broker did not provide "custodial services" for the digital asset.

The new draft form retains the requirement that a broker identify if the digital asset is a covered or noncovered security and, if applicable, to provide the reason why the digital asset is a noncovered security. Some commentators requested that the IRS remove the question about the reason for noncovered status from the form because Form 1099-B does not require this explanation when reporting gross proceeds from the sale of a noncovered security.

EY observes: This requirement could be administratively burdensome as this information is not typically captured by a broker, and coding systems to reflect and report this information could be difficult and costly to implement.

Transferred-in digital assets

The new draft form requires a broker to identify a digital asset that was transferred into a broker account. Box 12 requires reporting the number of units transferred in and the date of the transfer.

EY observes: This new box is likely a result of the delay of broker transfer statement guidance.

Identification of sales only for cash

A reportable transaction includes a sale for cash, as well as an exchange of a digital asset for another type of digital asset, securities, commodities, real property or certain services. Box 7 requires the broker to identify if the sale proceeds were only in cash.

EY observes: This is a welcome simplification from the prior draft form, which would have required a broker to provide the type, and in some cases the name and/or other explanation, of any non-cash proceeds. This box will likely be leveraged by the IRS for tax return matching purposes by helping the IRS review backup withholding amounts during the transition period when the broker can deposit less than 24% of the gross proceeds amount if the broker (1) has to sell a portion of the property transferred in order to deposit the backup withholding liability in cash and (2) there was a change in value of the digital asset.

Other changes

The new draft form removes the requirement to report the time of the digital asset transaction as well as wallet addresses. New check boxes were added for a broker to identify if it is using the optional reporting methods for specified non-fungible tokens (NFTs) and qualifying stablecoins, and if so, to report the number of applicable transactions. Another new box requires a broker to report the gross proceeds from the first sale of any specified NFT that the customer created or minted.

EY observes: The reporting of digital wallet addresses was a security concern to many brokers and taxpayers.