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October 24, 2024
2024-1956

IRS updates draft Form 1099-DA for digital asset brokers with more details

  • The deadline for giving input on the new Form 1099-DA is looming, with the newest versions of the form asking for information that will be required to be reported for 2025.
 

The IRS has alerted brokers that they have until November 6, 2024, to comment on new Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The IRS is still fine-tuning Form 1099-DA and its instructions, which brokers will use to report digital asset transactions occurring in 2025. Three draft versions of the form have been issued, most recently on September 9, 2024, as well as two draft versions of instructions, most recently on September 30, 2024.

Purpose of Form 1099-DA

Form 1099-DA will be used by digital asset brokers to report sales of digital assets, including cryptocurrencies and nonfungible tokens (NFTs). Reporting is scheduled to begin with calendar year 2025, with copies of the forms due to customers on February 16, 2026, and electronically filed forms due to the IRS on March 31, 2026. Brokers will generally report the gross proceeds of the sales of digital assets that occurred in 2025. Starting with the 2026 calendar year, brokers must report the basis of digital assets that became "covered securities" after being purchased in an account with a custodial digital asset broker on or after January 1, 2025.

EY observes: Brokers should already be in the process of planning how to collect and preserve the data required for producing Forms 1099-DA, as well as obtaining Forms W-8 and W-9 from customers. Brokers will be required to collect tax forms for new accounts in 2026 and remediate any undocumented accounts by January 1, 2027.

While much of the form and instructions are straightforward distillations of the requirements in the regulations (published as TD 10000 on July 9, 2024), there are some open questions and clarifications to which the IRS could respond in the final form (for details on the regulations, see Tax Alert 2024-1385).

Identification of digital asset types

The instructions require that the broker include in box 1a the code for the type of digital asset that was issued by the Digital Token Identification Foundation (DTIF). If the digital asset is not registered with the DTIF, a broker should write "999999999" in box 1a and presumably any reasonable version of the name will be acceptable in box 1b. Digital token identifiers (DTIs) are nine random letters and numbers, and codes can be downloaded or queried individually on DTIF's website. Brokers must also use the name for the token as it appears in the DTIF list in box 1b.

EY observes: Because the instructions refer to the "name" of the token, a broker presumably should use the "DTI Long Name" of the token rather than its "DTI Short Code." However, many digital assets have more than DTI. For example, the DTI Long Name "1INCH Token" has four different DTIs, while "Aave Token" has five different DTIs, plus another under the long name "Aave." It is unclear at this point how a particular code should be selected when more than one is listed.

Noncovered securities

If a digital asset is a noncovered security, Form 1099-DA requires the broker to state why. This differs from Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, which has no such requirement.

Box 10 of Form 1099-DA provides three possible reasons for a digital asset to be treated as noncovered: (1) the broker did not provide custodial services for it, (2) the broker provided custodial services, and it was transferred to broker, or (3) the broker provided custodial services, and it was acquired before 2026. This is not an exhaustive list, however, because digital assets also would be noncovered if they were acquired for an exempt recipient or exempt foreign person, or were owned by a foreign flow-through entity or intermediary. While Form 1099-DA reporting would be rare in these instances, it is possible, and the checkboxes do not seem to incorporate these possibilities.

The instructions for box 10 state: "If you are reporting the sale of a noncovered security, check the appropriate box, if applicable." It appears that not checking an item in box 10 is the appropriate response when the available checkboxes do not apply. It is unclear, however, whether a Form 1099-DA for a noncovered security without a checked box 10 will be considered valid.

In addition, the instructions do not provide guidance on which box to check if multiple boxes apply, i.e., when the asset is a pre-2026 acquisition and the broker did not provide custodial services.

Box 10 is not required to be completed for 2025, unless the broker chooses to check box 9 to indicate that the digital asset is a noncovered security. Box 9 is optional for 2025.

Reporting for a widely held fixed income trust (WHFIT)

Many exchange-traded funds (ETFs) that hold digital assets are organized as trusts and treated as WHFITs. The September 9 version of the draft instructions suggested that brokers would be required to report dispositions of digital assets by the WHFIT to holders of interests in the WHFIT on Form 1099-DA. The September 30 version clarifies that this reporting can be done on either Form 1099-DA or Form 1099-B. Redemptions of a WHFIT interest would be reported to the customer on a single Form 1099 as previously described, even if the WHFIT were to sell its underlying digital assets as part of the transaction. The WHFIT's broker would report to the WHFIT on Form 1099-DA the sales of digital assets by the WHFIT.

EY observes: This is a beneficial change for securities brokers, who already use Form 1099-B but would have needed to commit resources to implementing Form 1099-DA for customers who hold digital asset WHFITs, even if they do not allow their customers to trade digital assets directly.

Dual classification assets

Digital assets that are also considered assets subject to reporting under preexisting rules for Form 1099-B would only have to be reported on Form 1099-DA. For example, sales of tokens that represent a traditional security generally would be reportable on Form 1099-DA, rather than Form 1099-B. The same kind of information that would have been reported on Form 1099-B is incorporated into the Form 1099-DA. For example, a tokenized bond may be sold with accrued market discount, which would be reported in box 1h of Form 1099-DA. Wash sale loss disallowances, which apply only to "a stock or security," are applied to tokenized securities and reported in box 1i of Form 1099-DA.

Even though other digital assets may be reported without basis and other items applicable to covered securities in 2025, the Form 1099-DA draft instructions contemplate that tokenized covered securities will be subject to the preexisting rules governing the reporting of securities during 2025. An example in the instructions illustrates that a purchase, sale and repurchase of a tokenized security, all occurring in 2025, results in reporting the sale with both cost basis and the loss that was disallowed under the wash sale rules.

Reporting quantities of digital assets

Form 1099-DA will require brokers to report units of digital assets sold and transferred to 10 decimal places. This is considerably more precise than most traditional broker systems can handle, but not unusual in crypto-asset systems.

Account number

The draft instructions point out that a customer's account number is not the customer's wallet address. In addition, the instructions imply that reporting the account number is optional if the recipient has only one account with the broker.

Solely cash proceeds paid in a transaction

Box 7 on Form 1099-DA must be checked if only cash proceeds were paid in the transaction, because digital assets may be sold in exchange for other digital assets or stored-value cards in addition to cash. According to the draft instructions, box 7 should be checked "even if you have combined the reporting of an underlying transaction with the report of the transaction to pay broker fees, as described in How many forms to file for each transaction, earlier."

EY observes: The cross reference to the "How many forms to file for each transaction" section of the draft instructions appears to be an error.

Number of forms to file

Like Form 1099-B, the instructions to Form 1099-DA require brokers to file up to three Forms 1099-DA per sale to report:

  • Sales of covered securities that result in long-term gain or loss
  • Sales of covered securities with short-term gain/loss
  • Noncovered securities

For 2025, basis reporting is not required, so only a single form will be needed for each sale that occurs next year.

The instructions allow brokers to file one Form 1099-DA reporting the aggregate of all dispositions of a particular qualifying stablecoin with the number of dispositions of that stablecoin. Similarly, sales of specified NFTs may be reported on a single Form 1099-DA. Basis information will not be required if brokers use these optional methods for qualifying stablecoins and specified NFTs.

Exempt recipients

The draft Instructions note that reporting on Form 1099-DA is not required for customers who are exempt recipients. The instructions list a few exempt-recipient types, including charitable organizations, individual retirement accounts, governments, corporations and US digital asset brokers.

EY observes: The instructions omit any mention of numerous other exempt-recipient types included in the regulations, such as common trust funds, 1940 Act entities, real estate investment trusts and commodities dealers. The Form 1099-B instructions include a similarly truncated list of exempt recipients.

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Contact Information

For additional information concerning this Alert, please contact:

Financial Services Organization

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor