The IRS released a draft version of its 1099-DA reporting form on April 19, which caused controversy by including unhosted cryptocurrency wallets.
Ji Kim, Chief Legal Policy Officer, Crypto Council for Innovation, said: wrote that The IRS’ approach is “unfortunate” because it fails to recognize that non-hosted wallet providers lack knowledge about cryptocurrency transactions and the parties involved in each transaction.
Shehan Chandrasekera, head of tax at CoinTracker, similarly criticized the form.he claimed The impact can also spill over to end users, who must undergo KYC verification when creating non-hosted wallets or using non-hosted wallets on services such as DeFi platforms. may need to be done.
However, Chandrasekera said authorities are likely to target unhosted wallet providers rather than end users.
Unhosted or non-custodial wallets do not store your cryptocurrency balances with third-party services. These are different from custodial wallets, which is the category that most exchange wallets fall into.
Form 1099-DA
Form 1099-DA requires brokers to provide certain on-chain data, such as the transaction ID and wallet address associated with each sale. The broker must report the transaction ID and address that issued the sold virtual currency, as well as his second address if he “transferred” funds from another address of the hosted wallet.
Experts had different reactions to this requirement. Chandrasekera warned that the collection and reporting of data, particularly wallet addresses, “could lead to significant privacy and security concerns.”
However, says Jessalyn Dean, vice president of tax information reporting at Ledgible: I got it. exception to the rule. He said the form allows brokers to not provide addresses or transaction IDs if they are not applicable. He said the exception was “necessary” because brokers often conduct trades in internal record-keeping systems rather than on-chain.
Another important section says, “Wash sale losses are not allowed.” According to Dean, this does not apply wash sale rules to cryptocurrencies. Instead, this section applies to digital assets that are currently subject to wash sale rules, such as stocks, securities, and tokenized shares.
Rules not yet finalized
Cryptocurrency intermediary reporting rules have been in development for some time. President Joe Biden's Infrastructure Act of 2021 classified certain virtual currency services as brokers in 2021. In August 2023, the Treasury Department and IRS released a 1099-DA proposal that is largely similar to what is in today's draft form.
However, the text of the draft form indicates that brokers should not use the form in their current tax reports because the IRS has not finalized the form.
According to Ledgible, the form has a 60-day comment period.
The IRS has separate rules for individual cryptocurrency investors. On April 11, regulators issued a reminder that crypto investors must report in a variety of formats, including Form 1040. A top member of the IRS also recently warned about tax avoidance by crypto investors.
