The Internal Revenue Service (IRS) has recently made tremendous changes towards crypto-taxation. This is principally demonstrated by a new draft of Form 1099-DA for both brokers and investors in digital assets, with the objective of easing the tax return process. The changes would effectively bring an end to the much-ironed out critique by the cryptocurrency industry, which has consistently decried the obscurities and strains of the previous tax filing requirements.
Background on Cryptocurrency taxation
Cryptocurrency has made waves in popularity for the past decade, which has initiated tax authority scrutiny. The IRS classifies digital assets as property. This means that transactions in cryptocurrencies are subjected to capital gains and thus require taxpayers to declare their transactions from digital assets. This, however, is a very intimidating task provided the volatile nature of the cryptocurrencies.
In 2021, the IRS signaled it would be tightening up reporting requirements through such means as cryptocurrency broker reporting of transactions to the agency. That effort was but one step the Service was taking to try to reign in tax evasion and noncompliance in the rapidly growing crypto space. However, the first drafts that were published for public comment were soundly criticized for being overly complex and unclear, and needed a re-write.
Summary of major revisions
The recently published Form 1099-DA draft, entitled “Digital Asset Proceeds From Broker Transactions,” responds to numerous industry stakeholder concerns, the major changes included being:
- Plain language and format: The rewritten document is much better organized, making it easier to follow. Tax practitioners found the original overwhelming and somewhat unclear leading to a number of confusing interpretational issues both for brokers and investors. The simplified update was designed for ease in reading and understanding.
- Reduced reporting burdens: The IRS has removed some features from the draft, which it considered were far too onerous for companies in cryptocurrency. Foremost among these are adjustments for the types of transactions that need to be reported, which could reduce the compliance load of a number of brokers. The IRS confirmed that investors no longer to disclose their wallet address and transaction ID
- Industry input: During the entire process of drafting, the IRS has been consulting with stakeholders from the industry in one way or another. This kind of partnership may be able to yield a more realizable and efficient reporting structure that is in line with the conditions under which digital asset transactions realistically take place.
Implications to Taxpayers and brokers
The new Form 1099-DA is expected to go into effect for tax filings starting in 2025, leaving ample time for brokers and taxpayers to ease into the changes. These changes will have different implications:
- More transparency and lower errors: When the process of filing reports can be clear, it becomes thereby much easier, and brokers and individual investors are consequently enabled to comply with their obligations on taxation with much ease regarding cryptocurrency transactions. This could bring increased transparency and fewer errors in tax filings.
- Incentivize participation: With an overall easier process for tax reporting, the IRS is going to encourage more people to participate in the cryptocurrency market. The clear framework of taxing is only going to reduce the concerns over legal implications of trading digital assets.
- Monitoring and adjustments: The new draft is definitely in the right direction, but it is important that stakeholders keep discussing with the IRS as the final form of the draft approaches.
Continuous feedback is going to be important as well to ensure that the tax framework changes in line with the fast-changing cryptocurrency landscape.
The recent changes made by the IRS on the Form 1099-DA mark a pivotal move in the IRS’s taxation of cryptocurrencies. The IRS’s attempt to simplify reporting and involve industry players in the big picture actually lessens the potential tax-filing burden on brokers and investors. Through adjustments such as these, as the cryptocurrency market continues to increase in size, greater compliance and participation may foster benefits for both taxpayers and the general financial ecosystem.
