Blockchain Legal Resource

On December 5, 2024, the IRS published a final draft of Form 1099-DA, which is set to go into effect on January 1, 2025. This form reflects the final IRS regulations (T.D. 10000) published July 9, 2024 implementing new cryptocurrency broker information reporting requirements. A few of the new requirements mark a significant change to the way the digital asset industry has traditionally operated. To avoid penalties for non-compliance, which can be substantial for failure to file information reports, players in the digital asset space should familiarize themselves with IRS information reporting rules to ensure smooth compliance in the new year.

Broad Definition of “Brokers”

Currently, multiple parties facilitating a single transaction may each be considered a custodial broker with a reporting requirement. This creates the potential for duplicative and possibly conflicting reports for the same transaction, which could lead to confusion in reporting digital asset activities.

Such confusion may increase the compliance burden on taxpayers who may struggle to reconcile the information provided. Moreover, the issue increases the regulatory burden on the IRS, which relies on accurate information reporting to identify potential tax evasion and ensure compliance. Duplicate reports could obscure the true nature of taxpayers' financial activities, complicating the IRS's ability to effectively monitor and enforce tax compliance within the digital asset ecosystem. Absent any guidance indicating changes, brokers should be prepared to comply with reporting requirements.

Box 1a Digital Token Identification Foundation Codes

Current IRS guidance fails to address industry concerns that digital assets do not have a universal or standard naming convention, and the fact that many digital assets may share the same name or ticker symbol, leaving it to Form 1099-DA to address these issues.

Form 1099-DA addresses this by requiring a unique nine-digit code issued by the Digital Token Identification Foundation (“DTIF”), a U.K.-based foundation. This DTIF code has not yet become a standard industry identifier like a CUSIP number for traditional securities. Therefore, immediate adoption of a DTIF code reporting requirement may cause confusion and difficulties. Filers should prepare their employees and customer bases for the use of this identifier and ensure assets are registered with DTIF before information reporting is due.

Method of Providing Form 1099-DA to Taxpayer-Recipient

While the cryptocurrency industry may be at the cutting edge of technology, the IRS cannot be accused of the same. No provision has yet been made for digitally providing Form 1099-DA to recipients, so the statement must presumably be mailed to the last known address under current IRS § 6045 regulations.

This raises concerns in a predominantly digital industry where service providers otherwise communicate electronically, and may not have the administrative or informational capability to send paper mail to customers whose address may not be known. Custodial brokers should insure that they have the capability to comply with paper mailing requirements on all Forms 1099-DA due to be furnished to recipients by January 31, 2026.

Compliance in 2025 and Beyond

Now that Form 1099-DA has been finalized, the digital asset industry should begin taking action to ensure a smooth transition into reporting under the new guidelines. Given the complexities and outstanding questions in this space, this is likely to be a topic that continues to develop as reporting requirements are refined and clarified. Taking steps to ensure compliance infrastructure is in place from day one can help clients in the digital asset space to be prepared.