IRS releases draft form to report certain crypto transactions

The Internal Revenue Service released an early draft of a tax form for brokers and exchanges to report certain sales of digital assets, giving insight into how the IRS may categorize brokers. 

In the Form 1099-DA draft posted on Thursday, the IRS lists broker types: kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider and others. The form also asks for a "digital asset address" and whether the asset is a "noncovered security." 

The form stems from rules proposed last year that say crypto brokers would be treated similarly to brokers for more traditional investments such as stocks and bonds. Currently, taxpayers owe tax on gains and can deduct losses on digital assets when sold, but the Treasury said it is hard for taxpayers to calculate those gains. 

The proposed rules are part of the Infrastructure Investment and Jobs Act passed in 2021 that included crypto language to increase reporting made by brokers on customers’ crypto activity. 

The proposed rules' impact

Ji Kim, chief legal and policy officer at the Crypto Council for Innovation, posted on X on Friday that it was "unfortunate" that unhosted wallet providers were listed as brokers.

"This fails to recognize, among other things, that a wallet provider, as a software tech provider, does not have knowledge of the nature of transactions processed, nor the identity of the parties to transaction," Kim said. 

If the rule is finalized, digital asset brokers will issue the form to investors annually, according to an April 9 post from law firm Gordon Law Group. Brokers would include centralized and decentralized exchanges, wallets that allow users to trade digital assets and bitcoin ATMs. 

"Although the crypto community is likely to push back against decentralized exchanges (DEXes) having to report to the IRS, we anticipate that the IRS will not be flexible on this requirement. DEXes do not currently collect tax information about their customers, but the IRS is likely to argue that they are, in fact, 'in a position to know” users’ identities and will enforce Know Your Customer (KYC) requirements," Gordon Law Group said in the post.