Form 1099-DA Explained: New Crypto Tax Form?

Earlier this year, the IRS announced that they are working on a new form called Form 1099-DA, specifically designed for crypto transactions aiming to overcome the challenges tied to the Infrastructure Bill’s reporting rules. 

Form 1099 has long been the go-to document for reporting non-employment income to the IRS. There are over 20 variations of this tax form, and they all were initially designed for securities and other asset classes. But when it comes to crypto transactions, it’s been a bit like fitting a square peg into a round hole.

In November 2021, the US government, led by President Joe Biden, passed the Infrastructure Bill, and with it came a whole new set of tax rules for the crypto world. They decided to label crypto exchanges, payment processors, and platforms as “brokers,” making them responsible for reporting their customers’ capital gains and losses to the IRS using various 1099 forms (mainly Form 1099-B, Form 1099-MISC, and Form 1099-K), starting in the 2023 tax year.

Naturally, this new requirement received its fair share of criticism. Why? It overlooks the unique nature of blockchain technology and cryptocurrencies, which makes it difficult, if not impossible, in some cases, for crypto exchanges to accurately track and report the information and data necessary for these forms. As a result, the reporting process and its inception got delayed.

And this is where the Form 1099-DA comes in. 

What is Form 1099-DA?

Form 1099-DA - New Crypto Tax form

Earlier this year, news about a new form called 1099-DA started circulating. It’s a fresh IRS form designed to address the specific complexities of cryptocurrency transactions. This form is set to collect details, like when you bought and sold crypto, the type of asset, your total profit, and the cost basis. 

Speculations say that with this new form, the IRS aims to tackle the hurdles preventing the implementation of the reporting rules outlined in the Infrastructure Bill.

When Will Form 1099-DA Come into Effect?

There is a bit of uncertainty around when exactly the Form 1099-DA will come into effect. Some sources suggest it might kick in from 2024, while others say it won’t be in place until the 2026 tax year. That means you might receive your first Form 1099-DA in 2027.

The long delay is likely to prepare crypto exchanges and platforms to adjust and make the necessary changes to meet the new reporting requirements. 

The Problem with Form 1099-DA

The biggest problem with Form 1099-DA (or any kind of Form 1099) in crypto is calculating cost basis. 

Let us explain with a couple of examples –

Scenario 1

Imagine Sarah bought 1 Bitcoin on Binance for $10,000. She then transferred it to Trust Wallet. Later, she used Trust Wallet to sell that Bitcoin for $20,000 on Coinbase. 

When self-reporting, Sarah would typically use the initial purchase price of $10,000 as her cost basis, resulting in gains of $10,000.

However, the exchanges are required to report her trades too and they might not know the full history of your assets. They might only report the $20,000, the value when she transferred the Bitcoin in. That would result in an overestimation of her gains.

Sarah is then faced with the challenging task of reconciling these discrepancies between her personal records and what is reported to the IRS, which can be a real headache.

However, this is not the only problem. Which accounting method you use to calculate your cost basis can also create a lot of complexities. Let’s look at another scenario. 

Scenario 2

Alex buys one Bitcoin (BTC) for $10,000 through a crypto exchange that utilizes a first-in, first-out (FIFO) accounting method. Alex records this purchase in his own records as well.

Over time, Alex makes several additional BTC purchases at varying prices and keeps track of their transactions using the specific identification method that allows him to choose which Bitcoin they are selling when he decides to dispose of some. The market price of Bitcoin fluctuates significantly during this time.

Now, when he sells some of those Bitcoins for a profit, the exchange reports the sale using the FIFO method. This means the Bitcoin Alex sells is considered the one he bought first for $10,000, even though he used specific identification for his personal records.

As a result, the cost basis reported by the exchange and Alex’s own cost basis calculations will differ significantly, creating a massive reporting disaster where he may have to go back and reconcile all of his previous transactions using the FIFO method to make his tax report align with what the exchange reported. 

These problems are only the tip of the iceberg, as it can get increasingly complex the more we get into the nuances. Overall, it seems the Form 1099-DA might create more complexities for the taxpayers instead of simplifying it unless the Form 1099-DA removes the cost basis reporting requirement altogether.

How to Prepare for Form 1099-DA?

Preparing for Form 1099-DA can be a bit tricky since the IRS hasn’t given us all the details yet. Right now, it’s mostly guesswork.

The smart move is to keep records of your crypto transactions for up to six years using crypto tax software like Bitcoin.Tax. Even though we’re not sure how far back Form 1099-DA will look, having your data safe and sound is the best step you can take, given what little we know about it.