13 January 2025 IRS finalizes Form 1099-DA and instructions with further details, adds digital asset reporting to draft 2025 General Instructions for Certain Information Returns
On January 10, 2025, the IRS released a final version of 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 2025, which followed the release of final Instructions for Form 1099-DA (Final Instructions) on January 8, 2025. Beginning in early 2026, certain digital asset brokers will send taxpayers Forms 1099-DA and file them with the IRS. The IRS had released five draft Forms 1099-DA (see Tax Alerts 2024-1956, 2024-1570 and 2024-0854 ), and three draft versions of the Final Instructions. On January 8, 2025, the IRS also released draft 2025 General Instructions for Certain Information Returns, which has been updated for the first time to include instructions related to Form 1099-DA. The final Form 1099-DA 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). Generally, digital assets that are also considered assets subject to reporting under preexisting rules for Form 1099-B would be reported only 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. The Final Instructions, however, provide a transitional rule permitting reporting on Form 1099-B or Form 1099-DA for 2025 sales for cash of digital assets that are tokenized assets. EY observes: Traditional brokers had asked the IRS to permit reporting tokenized securities on Form 1099-B, or at least give them a transition period. These brokers, who otherwise would not be required to implement the new Form 1099-DA because they do not facilitate digital asset transactions (other than in tokenized securities), now have additional time to make the required system changes to implement the new Form 1099-DA. One exception to the rule that transactions in tokenized securities are generally reported on Form 1099-DA relates to limited-access regulated networks (LARNs). Tokenized securities that are settled or cleared on a LARN are reported on Form 1099-B, not Form 1099-DA. Industry participants requested allowing members to continue reporting on Form 1099-B if LARN status of a network is not preserved. Under the Final Instructions, if a LARN ceases to meet the requirements for LARN status under the applicable regulations, the broker may continue to file Form 1099-B for effected transactions during the calendar year in which the LARN ceases to meet the requirements. EY observes: An earlier draft of the instructions provided that brokers would be able to continue filing Form 1099-B for up to one year after the LARN ceased to meet the applicable requirements. The Final Instructions permit continuing to file on Form 1099-B only for transactions that take place during the calendar year of the disqualification, which may not provide much of a grace period if the disqualification occurs late in the year. Certain prior drafts of the Final Instructions would have required brokers to report the number of units of digital assets sold and transferred to 10 decimal places. The Final Instructions require the number to be reported to 18 decimal places. Both the "Instructions for Recipient" portion of the final Form 1099-DA and the Final Instructions note that box 1f, which shows the total proceeds from the digital asset transaction, should not include gross proceeds from the first sale of a specified nonfungible token (NFT) that the recipient created or minted, as that amount is reported in box 11c. The final Form 1099-DA requires a broker to check box 8 if it relied on customer-provided acquisition information for determining basis. This requirement was added in response to a 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 they took such information into account. Industry participants requested clarification as to whether this box must be checked if the broker relied on the information for the specific sales transaction being reported, or for any sales transaction that would impact the specific sales transaction being reported. The Final Instructions were updated to specify that box 8 is checked if the broker received customer-provided information for any sales transaction that would impact the specific sales transaction being reported. According to the Final Instructions, box 8 should be checked "even if the customer-provided acquisition information was not used for the particular digital asset lot reported on this form." The Final Instructions also note, however, that, "[i]f the customer previously sold, exchanged, or otherwise disposed of all the digital assets for which they provided that customer-provided acquisition information, you do not need to check this box." EY observes: The following example illustrates the guidance in the Final Instructions. A broker maintains two tax lots of Token X for a customer: a lot of 10 units transferred to the broker by the customer, and an additional lot of 2 units purchased through the broker on Date 2. The customer tells the broker that the 10 transferred units of Token X were purchased on Date 1. The customer then sells 10 units on a FIFO basis. Box 8 should be checked on Form 1099-DA reporting this sale. Moreover, when the remaining 2 units are sold, Box 8 also should be checked. Similar to Form 1099-B, the final Form 1099-DA requires the broker to identify if the digital asset is a noncovered security (i.e., a security whose basis does not need to be reported to the IRS) and report this in box 9. If noncovered, earlier drafts of Form 1099-DA required a broker to provide the reason why in box 10. By contrast, the Form 1099-B does not require a broker to explain why a security is noncovered. The final 1099-DA reserves box 10 for future use and does not require the broker to provide the reason for the digital asset's noncovered status. EY observes: This is a welcome revision for brokers. This requirement could have been administratively burdensome as this information is not typically captured by a broker, and coding systems to reflect and report this information could have been difficult and costly to implement. Box 12b records the date that digital assets were transferred into a custodial account. The Final Instructions add that the box should be left blank if the digital assets were transferred on a variety of dates. The Final Instructions provide more detailed guidance on which boxes do and do not need to be completed if the broker is reporting sales of digital assets using an optional method for reporting sales of qualifying stablecoins and specified NFTs, as well as how certain boxes should be filled out. For example, for specified NFTs being reported under the optional reporting method, the digital asset code "999999999" should be entered in box 1a, and the term "Specified NFTs" should be entered in box 1b. All the draft Forms 1099-DA have required the broker to provide the one letter code that should correspond to a box 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. While some of the earlier drafts of the Instructions required the broker to use the same codes as those applicable to transactions reported on Form 1099-B (codes (A), (B), (D), (E) and (X)), the Final Instructions require the broker to use new codes (G), (H), (J), (K) and (Y). If the Form 1099-DA does not include basis information (which is not required for sales effected in 2025), code (Y) should be used. EY observes: The Form 8949 has not yet been revised to include the final Form 1099-DA and the new codes. The draft 2025 General Instructions state that the due date for furnishing 2025 Forms 1099-DA to recipients is February 17, 2026, and the deadline for electronic filing with the IRS is March 31, 2026. The draft 2025 General Instructions note that Form 1099-DA must be electronically filed through the Information Reporting Intake System (IRIS) and may not be filed through the Filing Information Returns Electronically System (FIRE). EY observes: There are several nuances to using IRIS that filers should assess before the filing deadline, including that IRIS supports only certain Forms 1099, and it is unclear whether the combined state program can be used for IRIS. Therefore, some filers will need to use both IRIS and FIRE if they are filing multiple form types or have state filing obligations. Importantly, IRIS has record limitations that may require multiple files to be created by a single payor, which may result in additional work reviewing files or performing corrections.
Document ID: 2025-0213 | ||||||
