The U.S. Internal Revenue Service (IRS) released the long-awaited draft tax Form 1099-DA on April 18, 2024, specifically designed for reporting digital asset proceeds from broker transactions. This regulatory move aims to increase transparency in cryptocurrency reporting but has ignited a heated debate over privacy and security implications.
Core Content: Brokers Must Report Detailed Transactions
According to the draft form instructions, Form 1099-DA—titled “Digital Asset Proceeds From Broker Transactions”—must be used by brokers to report proceeds from digital asset dispositions to both taxpayers and the IRS. The form requires brokers to specify their type by checking a box: kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider, or other digital asset filer. The IRS also notes: “If you received a Form 1099-DA, you generally sold, exchanged, or otherwise disposed of a financial interest in a digital asset and should check the ‘Yes’ box next to the question on page 1 of Form 1040.”
Shehan Chandrasekera, head of tax strategy at crypto tax firm Cointracker, shared his insights on social media platform X on Friday, describing the 1099-DA as “the first tax form specifically designed to collect your ID and detailed transaction data at scale from ‘brokers.’” He explained that starting January 1, 2025, centralized exchanges, certain decentralized exchanges, and wallet providers will be required to generate this form for each sale transaction and submit that info to the IRS and the taxpayer—similar to how stock brokers operate.
Privacy and Security Concerns: Wallet Addresses and Transaction IDs Collected
Chandrasekera highlighted that while the form captures expected data points such as date acquired, date sold, proceeds, and cost basis, it also requires the collection and reporting of additional sensitive data: “sale transaction ID (TxID)”, “digital asset address from which the units were sold”, “number of units sold”, “transfer-in TxID number”, “transfer-in digital asset address”, and “number of units transferred in.” He stressed: “The collection and reporting of these additional data points (especially wallet addresses) to the IRS at scale could lead to major privacy and security concerns.”
“I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US,” Chandrasekera wrote. He noted that the inclusion of “unhosted wallet provider” as a checkbox in the draft form signals the IRS’s intention to treat unhosted wallets as brokers despite industry pushback. “Going forward, you will likely have to provide KYC information before creating an unhosted wallet and/or when interacting with platforms via unhosted wallets,” he added, predicting that this could drastically change how users interact with crypto platforms and potentially reshape decentralized finance (DeFi) as we know it.
Industry Impact: A Potential Game-Changer for DeFi
Chandrasekera believes this move will fundamentally alter user interaction with crypto platforms, especially in DeFi. The requirement for KYC data before using an unhosted wallet challenges the permissionless nature of DeFi. Some market participants worry that this could drive users toward privacy coins or decentralized mixers, ironically complicating regulatory oversight. Meanwhile, the IRS emphasizes that the form aims to combat tax evasion and improve digital asset tax compliance. However, experts caution that mass storage of sensitive transaction data—such as wallet addresses—poses a significant security risk; any data breach could expose users’ complete on-chain activity trails.
The draft form is currently open for public comment, and a final version is expected by the end of 2024, with mandatory use starting in the 2025 tax season. Industry participants are advised to closely monitor regulatory developments and assess their compliance obligations proactively.