October is a spooky season and nothing has been murkier than figuring out crypto reporting for taxes. With the IRS slow to provide guidance, and brokerages even slower to provide clear reporting, tax preparers have been left with more questions than answers. New proposed regulations reveal the IRS plans for form 1099-DA.
But will it be helpful? Right now the form and its associated regulations are just a proposal.
The deadline for public comment ends Oct. 30, 2023.
The key component included in the proposed regulation changes is the expanded definition of “broker.” The expanded definition would essentially result in crypto brokerage firms and online exchange providers being required to file form 1099-DA. The form itself would be similar to form 1099-B currently required for stock transactions.
Among the more harrowing of crypto challenges is the issue of basis and when transactions constitute a realized gain/loss. Currently crypto wallet keepers like Coinbase do not have a requirement to track basis when buyers purchase coins.
What’s further frustrating for tax preparers, is coins often undergo “splits” in a sense. In other words, if I hold X amount of coins in crypto No. 1, I may generously receive Y coins in crypto No. 2 that could potentially be related to the makers of crypto No. 1 etc. T
hese splits and gifts are not tracked well and the value on the day received is difficult to determine.
More importantly, tax preparers want to ask clients detailed questions about cryptocurrency transactions. Make sure you ask for the documentation that supports buy, sell, and any other unusual transactions. Taxpayers should be picking up income when splits and gifts happen. Doing so not only protects them from future liability but can also help to establish a historical basis for their coins.
The current draft of form 1099-DA would require purchase date, sold date, asset type, gross profit and cost basis to be reported. These categories are almost identical to the current 1099-B form used for stock sales.
As of today, the predicted start date for this form is not until 2026 with the first tax season affected being 2027. While that seems a way out, preparers should watch the regulations closely as they move from public comment into becoming more solidified.
The direction that this form and its regulations will go over the next few years will be a good indication of where the IRS stands on crypto and how you should be talking to your clients about reporting requirements.