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Crypto Tax Changes: Navigating the New Form 1099-DA Reporting

As the digital asset landscape rapidly evolves, the introduction of Form 1099-DA, "Digital Asset Proceeds from Broker Transactions," marks a significant change in tax compliance for cryptocurrencies and digital assets. Mandated by the Internal Revenue Service (IRS), this form is specifically designed to enhance transparency and ensure accurate reporting of transactions involving not just cryptocurrencies but also non-fungible tokens (NFTs) and other digital assets.

The implementation of Form 1099-DA reporting officially starts with the 2025 tax year, with brokers required to distribute these forms to taxpayers and the IRS by early 2026. This new regulation aims to address inconsistencies from the previous reliance on self-reported data, which often resulted in underreporting.

The Purpose and Impact of Form 1099-DA: By requiring brokers to detail digital asset transactions, Form 1099-DA seeks to improve tax compliance and reporting accuracy. This facilitates standardized reporting, potentially simplifying tax filing for investors but also emphasizing the need for meticulous record-keeping.

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Issuers of Form 1099-DA: This responsibility extends to "brokers," as broadly defined by the IRS, including digital asset trading platforms, payment processors, and hosted wallet providers. Notably, decentralized finance (DeFi) platforms and non-custodial wallets generally fall outside this requirement.

Recipients of Form 1099-DA: U.S. taxpayers engaging in the sale or transfer of digital assets via a qualifying broker will receive this form in early 2026 (for 2025 transactions). This is applicable to individuals and businesses involved in digital asset dealings, including real estate transactions using digital currencies.

Contents of Form 1099-DA: The form details are comprehensive, capturing:

  • Payer and Recipient Identification

  • Specific transaction details such as asset name, quantity, date, time, and gross proceeds

  • Cost basis (mandated for "covered securities" from January 1, 2026); voluntary for the 2025 tax year

  • Holding period

  • Transaction type

  • Fair Market Value (FMV)

  • Transaction fees

  • Wash sales for tokenized securities

The disclosure on Form 1099-DA shifts per tax year:

  • 2025 Tax Year (forms issued in early 2026) – For 2025, brokers must report gross proceeds related to digital assets. Reporting the cost basis remains optional for that year.

  • 2026 Tax Year and Beyond (forms issued from early 2027 onwards) – Commencing in 2026, more detailed reporting includes gross proceeds, cost basis (for "covered securities"), and comprehensive transaction details like dates, types, and quantities.

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Addressing the Cost Basis Challenge for 2025: A crucial aspect of 2025 is the voluntary nature of cost basis reporting by brokers. Absence of this on Form 1099-DA may lead the IRS to assume a zero cost basis, triggering potential underreporting notices. Taxpayers must maintain detailed personal transaction records, essential for correctly completing Forms 8949 and Schedule D.

Special Reporting Provisions for Stablecoins and NFTs: Specific digital assets come with tailored reporting rules:

  • Qualifying Stablecoins: For 2025 onwards, brokers can report transactions exceeding $10,000 annually in aggregate.

  • Specified NFTs: Beginning in 2025, sales of specified NFTs totaling over $600 need to be reported, possibly in aggregate.

Utilization of Form 1099-DA for Tax Filing: Information from Form 1099-DA aids in tax return preparation, akin to the reporting of stock transactions via Form 1099-B and its transfer onto Form 8949 and Schedule D. This involves aligning the 1099-DA data with personal records to calculate capital gains or losses, subsequently reported on Form 1040.

Best Practices for Digital Asset Investors: Given these regulatory changes, maintaining comprehensive transaction records is imperative for digital asset investors. Utilizing crypto tax software for tracking and calculations, understanding broker reporting limitations—especially the cost basis challenge in 2025—and seeking professional guidance can aid in navigating this evolving tax terrain.

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Accurately Responding to the IRS Digital Assets Question: The Form 1040 query regarding digital asset activities continues, probing whether taxpayers engaged in receiving, selling, or disposing of digital assets. With Form 1099-DA implementation, the IRS gains a tool to verify responses, emphasizing the need for truthful answering under perjury penalties.

If you have questions or require assistance in accurately incorporating digital asset transactions on your tax return, feel free to contact our office.

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