The U.S. Internal Revenue Service (IRS) has released a highly anticipated draft tax form for digital asset transactions, known as Form 1099-DA, which will apply to tax filings in 2025. The form, officially titled “Digital Asset Proceeds From Broker Transactions,” mandates that brokers—including operators of kiosks, digital asset payment processors, hosted wallet providers, unhosted wallet providers, and other digital asset filers—report the proceeds from digital asset dispositions to both the IRS and taxpayers.
Key Data Points: Wallet Addresses and Transaction IDs
According to the form instructions, brokers must specify their type and report proceeds (and in some cases cost basis) for each digital asset disposition. The form also notes that recipients who receive a 1099-DA generally sold, exchanged, or otherwise disposed of a financial interest in a digital asset and should check the “Yes” box on their Form 1040. Notably, the draft includes a checkbox for “unhosted wallet provider,” signaling the IRS’s intent to include such entities under the broker definition despite industry pushback.
The form requires several transaction-level data points: for sales, it demands the sale transaction ID (TxID), the digital asset address from which units were sold, and the number of units sold. For transfers, it requires the transfer-in TxID number, the transfer-in digital asset address, and the number of units transferred in. These details go beyond traditional financial reporting and have sparked significant debate within the crypto community.
Expert Warning: Privacy and Security at Risk
Shehan Chandrasekera, head of tax strategy at crypto tax firm Cointracker, shared his analysis on social media platform X, stating: “I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US.” He described Form 1099-DA as the first tax form designed specifically to collect user identity and detailed transaction data at scale from brokers. Chandrasekera emphasized that centralized exchanges, certain decentralized exchanges, and wallets will be required to generate this form for each sale transaction starting January 1, 2025, and submit the information to the IRS and the taxpayer—similar to how stock brokers operate.
While acknowledging that the form captures “unsurprising data points such as date acquired, date sold, proceeds, and cost basis,” Chandrasekera warned that the collection of wallet addresses and other additional data could lead to major privacy and security concerns. He pointed out that the IRS's ability to correlate wallet addresses with individual taxpayers could undermine the pseudonymity that cryptocurrencies offer, potentially exposing users to surveillance, hacking, or misuse of data.
Implications for DeFi and Unhosted Wallets
The inclusion of unhosted wallet providers in the broker definition is particularly contentious. Chandrasekera stressed: “This further signals the IRS’s intention to include unhosted wallets under the broker definition despite the industry feedback.” He predicted that going forward, users will likely have to provide KYC (Know Your Customer) information before creating an unhosted wallet or when interacting with platforms via unhosted wallets. “This could drastically change how users interact with crypto platforms,” he said, adding that it will change decentralized finance (DeFi) as we know it today.
The IRS’s move represents a significant tightening of digital asset tax regulation in the United States. While aimed at improving tax compliance and transparency, the requirement to collect and report sensitive data such as wallet addresses has raised alarms among privacy advocates and crypto users. Many fear that the new rules could drive users away from the U.S. market and stifle innovation in the DeFi space. The crypto industry is now watching closely for any updates to the draft form and potential legal challenges over privacy concerns.