The U.S. Internal Revenue Service (IRS) released the long-awaited draft tax form for reporting digital asset transactions on Thursday, April 18, 2024, applicable for tax filings in 2025. The form, designated as Form 1099-DA, is titled 'Digital Asset Proceeds From Broker Transactions' and requires brokers to report proceeds from digital asset dispositions to both the IRS and taxpayers.
Broker Requirements and Data Collection
According to the form instructions, brokers include kiosk operators, digital asset payment processors, hosted wallet providers, unhosted wallet providers, and other digital asset filers. The form mandates that if a taxpayer receives a Form 1099-DA, they must check 'Yes' on the digital asset question on page 1 of Form 1040. This effectively integrates blockchain transactions into the traditional tax reporting framework.
Shehan Chandrasekera, head of tax strategy at crypto tax firm Cointracker, shared his analysis on social media platform X on Friday. He described the 1099-DA as 'the first tax form specifically designed to collect your ID and detailed transaction data at scale from brokers.' He noted 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 that information to the IRS and the taxpayer, similar to how stock brokers operate.
Privacy and Security Concerns
While the form captures expected data points such as date acquired, date sold, proceeds, and cost basis, Chandrasekera highlighted several additional data points that could raise significant concerns:
- Sale transaction ID (TxID) — the blockchain transaction hash for each sale.
- Digital asset address from which the units were sold — the on-chain address holding the assets.
- Number of units sold — the quantity of digital assets disposed of.
- Transfer-in TxID number — the hash of the inbound transaction.
- Transfer-in digital asset address — the address from which assets were received.
- Number of units transferred in — the count of units received.
Chandrasekera stressed: 'However, the collection and reporting of the following additional data points (especially wallet addresses) to the IRS at scale could lead to major privacy and security concerns.' He emphasized that the inclusion of wallet addresses essentially removes the pseudonymous nature of cryptocurrency transactions, as the IRS can now link addresses to identifiable individuals through the broker’s KYC information.
Unhosted Wallets Under Broker Definition
A particularly contentious aspect is the inclusion of 'unhosted wallet provider' as a check box in the form. Chandrasekera noted: 'This further signals the IRS’s intention to include unhosted wallets under the broker definition despite the industry feedback.' In practice, this could mean that software wallet providers and hardware wallet manufacturers may be considered brokers, compelling them to collect and report user transaction data.
He added: 'Going forward, you will likely have to provide KYC information before creating an unhosted wallet and/or when interacting with platforms via unhosted wallets.' This could fundamentally change how users interact with cryptocurrency platforms and decentralized finance (DeFi) protocols. 'I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US,' he concluded.
Industry Implications
The draft form represents a significant shift in U.S. digital asset regulation. While traditional financial institutions already report stock and bond transactions, applying similar requirements to decentralized and self-custodial wallets poses unique challenges. Critics argue that requiring wallet providers to report on-chain addresses could create a massive honeypot for hackers and government surveillance. The IRS is currently accepting public comments on the draft, and the final version is expected to be finalized in early 2025.
The move aligns with broader global trends toward increased transparency in digital asset transactions, but it also raises fundamental questions about financial privacy in the blockchain era. Industry observers will be watching closely to see how the IRS balances compliance with privacy in the final form.