Form 1099-DA could mean more income transparency for crypto investors and a regulatory nightmare for digital asset entities. Here’s why.
After the re-introduction of Form 1099-NEC and making drastic changes to Form 1099-K reporting, the IRS is now crafting a new 1099 form, called 1099-Digital Assets or simply, 1099-DA.
Ever since it was revealed that the IRS is working on the new tax return, taxpayers and tax experts were having mixed feelings about it.
The fact that the new 1099-DA form would specifically deal with crypto-sensitized tax information is what’s fanning the flames for many.
While the timeline of Form 1099-DA’s implementation is yet to be defined by the IRS, crypto trading platforms are keen on learning more about Form 1099-DA and how it could impact crypto tax reporting.
The following will discuss all the information pertaining to Form 1099-DA and how cryptocurrency exchange platforms must be prepared for what’s about to come.
So, let’s get started.
Form 1099-DA (Digital Assets)
This form exclusively deals with reporting information related to cryptocurrency and digital assets. Hence, the name 1099-DA (Digital Assets).
The IRS plans to release this brand-new tax form sometime in the next few months.
There are reports that the implementation could be delayed.
Sources reveal that the 1099-DA reporting will be in effect from the 2023 tax year and may require filing in 2024.
Why Is The IRS Keen On Implementing Form 1099-DA?
It’s important to note that the IRS has previously acknowledged in its publication that virtual and digital assets and cryptocurrencies will be treated as “property”.
It doesn’t stop there.
In a bid to drive more transparency and accountability from crypto brokers and entities, the IRS revamped the 1099-K reporting regime, reducing the minimum reportable transaction amount from $20,000 to just $600 with no limits on the transaction volume (previously, it was 200 transactions).
The IRS even encouraged taxpayers to detail their transaction information by reporting it on Form 1099-B.
To summarize, you have two 1099 forms that are barely reporting what the IRS intends to obtain from the taxpayers – transparency.
So, of course, a new 1099 form was on the cards. Even the Infrastructure Bill focused heavily on “digital assets”.
With the implementation of Form 1099-DA, the IRS aims to address the inconsistencies within the crypto market and streamline crypto-related tax information reporting.
The Uncertainty Of Form 1099-DA Reporting Requirements
For now, we do not know what exactly Form 1099-DA looks like.
The IRS has not released a specimen copy of the 1099-DA form.
However, tax experts speculate that some key aspects of the 1099-DA will be resonating with other forms in the 1099 series, such as payer and recipient TINs, legal name of the filer, address of the business, and other mandatory fields.
This information would be essential in the new 1099-DA form narrative because the IRS also plans to streamline the KYC inconsistencies within the crypto market.
People can still trade anonymously, and that would mean hidden incomes and capital gains that are going unreported on 1099s.
With 1099-DA, the KYC information (primarily, the real identities of the users) reporting would become mandatory.
This means both crypto enthusiasts and crypto trading platforms have to come out of the shadows and report the identities of the parties involved in the transaction accurately.
Why Crypto Enthusiasts Are Worried About 1099-DA?
Crypto has a certain appeal to it.
Call it optics or the advertising surrounding the virtual currency.
Crypto investors are drawn to it because of its “get rich quick” schemes, and most importantly, the inherently secure blockchain technology that protects the identities of the users.
This meant you can make capital gains on your virtual assets and digital currencies, and you didn’t even have to report it on your 1099s.
Of course, this sweet dream was quickly squashed by the IRS with the overhaul of 1099-K reporting requirements.
But consequently, the changes to 1099-K reporting not only impacted crypto exchanges but instant payment apps like Venmo and Cash App, which were also required to issue 1099-Ks to their users.
Form 1099-DA: What To Expect?
To say the least, taxpayers are both happy and anxious about this new form.
Not much is known about this form yet except that it specifically revolves around cryptocurrencies, digital assets, virtual currencies, and their reporting.
Here’s what you can do.
- Crypto exchanges should prepare for all kinds of possibilities by reaching out to their CPAs.
- Obtain all the crypto transaction data on your platform (you will need it to report it on Form 1099-DA).
- Prioritize due diligence and incorporate the KYC environment into your business ecosystem (if you haven’t already).
- Use real-time TIN matching from Tax1099 to verify your users and validate their legal name and TIN combinations.
- Use Tax1099’s USPS Address Validation tool to verify the addresses of your users for compliance purposes.
We will catch hold of this new tax form in the next few months.
Stay tuned for more updates on Form 1099-DA.
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