IRS lightens crypto reporting requirements for tax filings

The Internal Revenue Service has simplified reporting requirements in the latest iteration of Form 1099-DA, which cryptocurrency brokers and taxpayers will use to report digital asset transactions.

According to the Aug. 9 update, the new draft has removed several requirements that were included in the April version when the IRS first introduced the form.

Taxpayers no longer need to provide wallet addresses and transaction IDs along with the exact time of day for each transaction, just the date. This revision comes in response to feedback from the cryptocurrency industry.

In April, the IRS first unveiled draft Form 1099-DA, which would require brokers to disclose not only detailed transaction information but also whether they are a kiosk operator, digital asset payment processor, hosted wallet provider, non-hosted wallet provider or “other.”

The draft was met with criticism for specifically listing unhosted wallet providers as intermediaries, which critics noted would not have access to the nature of transactions or the identities of the parties involved.

I don’t think cryptocurrencies will ever have a pseudo-anonymity or privacy-preserving nature, at least not in the US.

The IRS yesterday released the long-awaited draft Form 1099-DA. It’s the first tax form specifically designed to collect your identity and detailed transaction data from “middlemen” on a large scale. picture.twitter.com/H4aTtm5fp9

— Shehan (@TheCryptoCPA) April 19, 2024

The latest update removes the requirement for taxpayers to state “type of intermediary” and other changes to better align with the realities of the digital asset industry.

The crypto community welcomed the change, with some calling it a step in the right direction.

Drew Hinkes, an attorney at law firm K&L Gates, said the updated form is “substantially improved” because it requires “significantly less” data reporting.

The Blockchain Association, an industry advocacy group, had previously warned that the requirements could lead to compliance costs of up to $254 billion.

If approved, the form would go into effect in tax year 2025, with filings expected to be due in April 2026. The IRS also requested public comments on the draft form within 30 days.

Form 1099-DA stems from reporting rules initially proposed by the IRS and Treasury Department in August 2023 as part of the Infrastructure Investment and Jobs Act, passed in 2021. The goal was to treat crypto brokers like their traditional counterparts.

IRS Commissioner Danny Werfel said at the time that the rules were designed to close the tax gap and ensure consistent tax treatment across different asset classes.

The proposal’s definition of broker was broad enough to include trading platforms, payment processors, and certain hosted wallets. Decentralized exchanges were also included in the reporting requirements.

At the time, the Treasury explained that the real issue was not how a platform operated, but the reporting of all digital asset transactions, regardless of the platform.

Critics in the crypto industry were quick to voice concerns about the potential impact on defi platforms like Uniswap. Then, in the final draft published in June 2024, decentralized exchanges and self-custody wallets were exempted from reporting requirements.