Revolutionary Form 1099-DA Unveiled: A Game-changer for Digital Asset Brokers and Customers

"New IRS Regulations Extend 1099 Reporting to Digital Asset Brokers, Significantly Impacting the Industry"

One of the most significant developments in the digital asset industry this year is the implementation of proposed regulations by the Department of the Treasury and the Internal Revenue Service (IRS). These regulations extend Form 1099 information reporting by securities brokers to digital asset brokers. The broad scope of these regulations will impact many businesses in the digital asset ecosystem, requiring them to establish systems for collecting and reporting information to the IRS and their customers. While final regulations are not expected until next year, companies will have limited time to set up their systems.

The Infrastructure Investment and Jobs Act of 2021 introduced amendments to section 6045, which previously required brokers to file information returns on Form 1099-B for customers involving the sale of stocks, commodities, regulated futures contracts, and other specified financial instruments. The purpose of this reporting is to increase voluntary tax compliance by matching the Form 1099-B with the customer’s tax return. The U.S. Government Accountability Office found that voluntary compliance significantly increases when third-party information reporting is required. In response to concerns about nonreporting of cryptocurrency transactions, Congress expanded information reporting to digital asset brokers.

The amendments made by the Infrastructure Act were effective for information returns filed after December 31, 2023. Brokers would have been required to start collecting information on January 1, 2023, for Forms 1099 to be filed in early 2024. However, the proposed regulations for digital asset brokers were only issued on August 29, 2023. As a result, information collection has been delayed until January 1, 2025, for Forms 1099 to be filed in early 2026. The IRS plans to introduce a new form, Form 1099-DA, specifically for digital assets.

The proposed regulations introduce the term “digital asset middleman” to refer to brokers involved in the sale of digital assets. The definition of this term is broad and includes any person providing a facilitative service for a sale of digital assets. This definition encompasses digital asset trading platforms, wallet providers, digital asset payment processors, digital asset kiosk operators, and issuers who regularly offer to redeem digital assets. However, there are exceptions for validators, hardware and software wallet providers, retailers accepting digital assets as payment, and artists selling NFTs.

The broad definition of digital asset middlemen means that multiple brokers can be involved in the same transaction. For example, if a user connects their self-hosted wallet to a decentralized finance (DeFi) platform and engages in a token swap, both the wallet provider and the DeFi platform could be considered digital asset middlemen. Ancillary participants, such as liquidity providers and holders of governance tokens, may also fall under this definition. Unlike the securities broker reporting rules, there is no multiple broker rule for digital asset middlemen. Each digital asset middleman involved in a sale must send their own Form 1099-DA to the IRS and the taxpayer, potentially causing confusion and burden for taxpayers.

These regulations have caught some companies off guard, as they did not anticipate falling within the definition of a digital asset broker. It is hoped that the Treasury and the IRS will revise the definition to provide more clarity and alleviate the burden on potential brokers. In the meantime, businesses in the digital asset industry will need to prepare their systems for the collection and reporting of information to comply with these proposed regulations.

In conclusion, the proposed regulations for digital asset reporting have far-reaching implications for businesses in the digital asset ecosystem. The broad definition of digital asset middlemen and the requirement for each middleman to file their own Form 1099-DA could create confusion and burdens for taxpayers. Companies will need to act swiftly to set up systems to comply with these regulations, despite the limited time available before final regulations are expected to be issued. It is crucial for the Treasury and the IRS to provide further guidance and clarification to ensure a smooth transition for the digital asset industry.

Martin Reid

Martin Reid

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