Don't Mess With Taxes

UPDATE, June 28, 2024: Today, the Internal Revenue Service and Treasury Department issued final regulations and other guidance related to reporting digital assets. Beginning with the 2025 calendar year, brokers may be required to report certain information regarding digital asset transactions as outlined in the new regulations set forth by the IRS. This includes filing information returns, providing statements to payees, and withholding on certain digital asset transactions. You can find more in the IRS announcement, and this Marcum analysis.

Just days after tax season 2024 wrapped on April 16 for most filers, the Internal Revenue Service already alerted some taxpayers of changes coming for certain future filings.

Specifically, the tax agency is expanding its efforts to track taxable digital asset transactions.

That will be done in part via Form 1099-DA, with the appended initials designating digital assets. The IRS on April 19 released a draft version of the information return, dated 2025, for reporting digital asset transactions that will be furnished by brokers.

The draft form is based on proposed IRS digital asset regulations issued last year.

Tied to digital assets 1040 question: Form 1099-DA generally will apply to taxpayers who answer “yes” to the digital asset question that’s been on Form 1040 since 2020. For 2019 filings, the question was on the 1040’s Schedule 1.

In case you forgot, regardless of whether you answered “yes” or “no,” the latest tax return digital asset question is — 

At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.)

Common examples of digital assets to be reported typically are cryptocurrencies, stablecoins, and non-fungible tokens.

Confirmation via third-party reporting: While the IRS expects filers to answer the question truthfully, it also knows that’s accomplished more often when there’s third-party reporting of taxable income on the various 1099 forms already in the agency’s library.

Tax examiners compare the 1099 copies they get to what the recipient taxpayers report on their returns. Any discrepancies will result in the taxpayer getting a notice and a change to revisit their apparent erroneous, or neglected, entry.

Starting with the 2025 tax year, this tax backstopping will be part of the digital transactions world. Under the crypto reporting provision amendments in the 2021 Infrastructure Investment and Jobs Act, the IRS is expecting to initially receive around 8 billion Form 1099-DA information returns.

That year, the IRS will require digital asset brokers to send 1099-DA to investors who have engaged in certain digital asset transactions.

The key word here is brokers.

Per the IRS’ proposed regulations, brokers will include digital asset trading platforms, digital asset payment processors, certain digital asset hosted wallet providers, and persons who regularly offer to redeem digital assets that were created or issued by that person. These entities will be required to issue Form 1099-DA to clients who engaged in sales or exchanges of digital assets on or after Jan. 1, 2025.

Form 1099-DA will include gross proceeds and, in certain circumstances, gain, loss, and cost-basis information.

A look at the proposed form: As the draft Form 1099-DA reproduced below shows, the document at least for now looks to collect crypto transaction information including —

• Digital asset broker identification,
• Account number,
• Transaction dates,
• Transaction type (e.g., buy, sell, exchange),
• Transaction amount, and
• Fair market value of the digital assets for each transaction.

Click image for a larger view. See more tax forms and more about them at Tax Forms 2024.

More changes possible after public comment: The 1099-DA draft already has generated a lot of questions from crypto aficionados and their tax professionals.

The wash sale question in Box 1i, for example, was noted by crypto investors. The form’s instructions at the end of the various 1099-DA draft copies, note that this box is where the reporting entity, “Shows the amount of nondeductible loss in a wash sale transaction involving digital assets that are also stock or securities for tax purposes.”

But the wash sale rule, which is intended to prevent investors from claiming tax losses on assets they continue to own, does not currently apply to cryptocurrency since the IRS considers virtual currencies to be property rather than securities.

That information request is among the many observations made by the global accounting firm EY in its initial overview of the draft 1099-DA. That company is not alone. And they all have the chance to tell the IRS what they think.

The IRS has announced via the Federal Register a request for comments on the information collection requirements for digital asset proceeds from broker transactions.

It is looking for input on —

• Whether the collection of information is necessary for the IRS to perform its functions, including whether the information will have practical utility;
• The accuracy of the IRS' estimate of the burden in collecting the information;
• Ways to improve the "quality, utility, and clarity" of the information collected;
• How to minimize the burden of collecting the information, including comments on the use of automated collection techniques or other technology; and
• The costs of providing the information, for example, estimates of capital, start-up costs, costs of operation, and maintenance.

Comments should be submitted by June 21, 2024.

1099 or not, digital taxes still due: The goal of Form 1099-DA is to make crypto tax filing easier and more accurate by providing a centralized record of digital asset transactions.

But that’s still a ways away. Optimists are hoping that happens later this year. Until then, however, still earns this weekend’s By the Numbers designation.

Meanwhile, even without a new reporting form, taxpayers who make money via digital transactions must continue to report and pay tax on those amounts.

Since crypto is treated for tax purposes as capital gains property, not currency, that’s usually done on Form 1040, Schedule D, where capital gains or losses are entered.

These can be either short term gains, which are taxed at ordinary income tax rates, or long-term capital gains if the sold assets, including digital ones, are held for more than a year. The long-term capital gains tax rate usually is less than ordinary rates, sometimes even zero.

Form 8949, Sales and Other Dispositions of Capital Assets, also is used to report details of cryptocurrency transactions that produced capital gains or losses.

You can find more on such filings in the instructions for Schedule D and 8949. Tax software also can provide some guidance.

But as the digital asset world and its tax implications continue to evolve, your best bet is to find a tax professional whose specializes in the digital tax area. They can help you comply with your crypto responsibilities now and when Form 1099-DA is official.

You also might find these items of interest:

• Current capital gains tax rates and Biden's proposed changes
• IRS offers guidance on how to answer the tax return digital assets question
• Texas man charged in apparent first-ever criminal crypto capital gains tax case

Advertisements

🌟 Search Amazon Business and Money Books 🌟
The text link above is an affiliate ad. If you click through and then buy a product, I receive a commission.