Form 1099-DA: IRS Proposes New Regulations for Sales and Exchanges of Digital Assets
The Biden-Harris administration has made it clear that its goal is to increase the transparency of tax filing and decrease the amount of tax fraud that the IRS experiences annually.
One of the first ways they have gone about accomplishing this is by setting in motion new regulations for reporting electronic payments on Form 1099-K. When reporting information for the 2023 tax year, payment platforms and Payment Settlement Entities will be required to report all electronic transactions of $600 or more.
According to a recent press release from the U.S. Department of the Treasury, the next step in this goal comes in the form of proposed regulations for the sales and exchanges of digital assets.
Keep reading for an overview of these proposed regulations and what this could mean for future tax reporting.
How does the IRS define Digital Assets?
The IRS defines digital assets as any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology. A digital asset is not real currency, as it is not minted by the U.S. treasury in the way that traditional money is. It is also not digitally issued by a bank.
An example that most people are familiar with is cryptocurrency. Even though it is not traditional money, it has an equivalent value and can be purchased, used for the payment of goods and services, traded digitally, and exchanged. For these reasons, cryptocurrency is required to be reported on tax returns. The IRS requires information about the gains, losses, and exchanges of this currency as income.
Currently, in terms of IRS reporting, digital assets are “slipping through the cracks”. To learn more about the IRS guidelines on digital assets, check out their website, here.
Proposed Changes to Reporting Digital Assets to the IRS
It is important to note that the conversation surrounding these proposed regulations is still open for discussion. The topic is open for public discussion until October 30, 2023. The proposed solution for capturing more information about the largest source of unreported income, the sale and trade of digital assets, is the introduction of a new 1099 form. This form would be 1099-DA, for digital assets.
The proposed timeline for releasing and incorporating Form 1099-DA would be in 2026, for the sales and exchange of digital assets during the 2025 tax year.
Who Would Be Required to File Form 1099-DA?
Brokers that deal in the exchange of digital assets will be required to file a 1099-DA. This form should be filed by brokers for taxpayers, to help them calculate the actual gains and losses related to the acquisition of digital assets. This process is currently handled by individual taxpayers, and they typically have difficulty understanding the actual amounts that they need to report on their personal tax returns.
The goal of the 1099-DA is for brokers to provide transparent information to eligible taxpayers, so in turn taxpayers can report this source of income accurately. According to the press release from the U.S. Treasury, this could lead to the generation of $28 billion over the course of 10 years.
This topic will continue to be discussed, as the first public hearing is scheduled for November 7, 2023. TaxBandits will continue to track the status of these regulations and keep you updated on the latest from the IRS!
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