The Internal Revenue Service (IRS) is currently contemplating the creation of a new tax form that would require the recording of transactions involving certain crypto assets. The proposed Digital Asset Proceeds from Broker Transactions draft suggests that taxpayers would need to complete Form 1099-DA, which would collect the account holder’s identification and detailed transaction data from crypto brokers. Shehan Chandrasekera, the Head of crypto accounts, believes that implementing a system for collecting trader data could be a game changer in the crypto industry, potentially eliminating tax privacy.
The IRS is now targeting crypto transactions, mandating that brokers (including custody organizations, certain decentralized finance exchanges, and wallets) provide Form 1099-DA for every transaction they are involved in. Beginning on January 1, 2025, brokers will be required to submit this information to the IRS, similar to how stock brokers currently operate.
The form will encompass basic information such as the date, photo, sale, sale proceeds, and cost basis. This article serves as a valuable resource for tax developers as they work to finalize the crypto tax filing process. However, certain additional data, particularly wallet addresses, cannot be collected and reported by the federal administration on a large scale due to the potential privacy and security risks it poses.
In an attempt to broaden its definition of “broker,” the IRS has added “unhosted wallet provider” to the form. This move has raised skepticism among opponents, as it seeks to include unhosted wallets within the scope of the term “broker.”
The clash between privacy and tax compliance is evident in this development. Gordon Law LLC, a firm specializing in tax and crypto law, will examine Form 1099-DA to determine what entities might fall under the IRS’s definition of a broker. According to the firm, both custodial and non-custodial exchanges, wallets that facilitate the buying and selling of Bitcoin, Bitcoin ATMs, and other physical counters will be classified as brokers.
Gordon Law anticipates opposition from the crypto community regarding the new form of Broker, particularly in relation to decentralized exchanges (DEXes) being classified as brokers. However, the IRS is unlikely to be flexible in this regard. DEXes are currently unable to collect any tax information from their users, which could lead the IRS to argue that DEXes should have known their customers’ identities. Consequently, an order may be issued, compelling DEXes to verify their customers’ identities using the Know Your Customer (KYC) process.
It is worth noting that mining equipment, node operators, hardware e-wallets, software developers, and programmers are not considered brokers according to Gordon Law’s interpretation of the IRS notice.
