If you’ve been following the 1099 spaces online, you must be familiar with the buzz surrounding a possible information return that is about to be the newest addition to the 1099 series. 

To give you a quick brief: Form 1099-DA, short for 1099-Digital Assets, is an IRS form that will specifically deal with digital asset and cryptocurrency information reporting. This new return is about to be the newest addition to the 1099 series. CPAs and tax experts are weighing in mixed opinions about this new move from the IRS.

It’s essential to note that the specimen copy of the new 1099-DA form is not released for public comment so far. 

Sources reveal that the IRS plans to delay the release of the new IRS Form 1099-DA. 

The new return is said to be released in the next few months, along with the regulatory reporting requirements. 

While there is a certainty of a 1099 return being introduced in the near future, tax experts are skeptical about 1099-DA because of the regulatory requirements it brings with it.

There’s a lot to unfold with the introduction of Form 1099-DA. We dig deeper and learn more about Form 1099-DA in the following discussions.

So, let’s get started.

1099-DA: What is it? 

President Biden signed the Infrastructure Act into law in 2021. This Act categorizes crypto exchanges and trading platforms as “brokers”, and as a result, they are now required to report customer gains and losses to the IRS annually. 

The Infrastructure Act talks about streamlining tax compliance through a variety of changes and reforms, and this includes creating a new form that will be dedicated to reporting digital asset transaction information.

Not much is known about this new information return, and sources say that the form will be introduced for public use sometime in 2024. 

Form 1099-DA is a brand-new information return that the IRS plans to introduce into the 1099 information reporting regime. Businesses, especially crypto exchanges and digital asset providers, will need to issue this form to their customers and file the return with the IRS.

Form 1099-DA will, on its release, exclusively deal with reporting crypto trading information. 

As of now, individuals and crypto enthusiasts are able to trade anonymously and hide the income, gains, and profits generated through such transactions. Keeping these complexities in mind, the IRS has recognized all digital assets as “property” and the tax consequences will be applied to virtual or digital assets as regulated by the IRS. 

Additionally, the IRS also requires all crypto exchanges to file 1099-Ks and 1099-Bs to customers who have bought or sold, and made a profit or loss on their crypto transactions (third party and otherwise). 

Despite the stringent measures taken by the IRS to curb the inconsistencies within the digital asset information reporting regime, the efforts did not render the results expected.

Why is the IRS keen on implementing Form 1099-DA? 

There are certain factors that have led the IRS to push for a new 1099 form that would specifically deal with digital asset information reporting. While tax experts speculate that the voluntary compliance program is a definite clue, others say that the 1099-DA form is here to streamline the KYC compliance process, and make crypto-related transaction reporting more transparent. 

• KYC compliance 

With the introduction of Form 1099-DA, the IRS plans to streamline the KYC ecosystem that has been deficient in the emerging markets, such as cryptocurrency. 

This would essentially mean validating the customer’s TIN and legal name before they’re onboarded by the crypto companies. 

If you’re a crypto exchange or a digital asset provider, you will need to verify your customers by obtaining their TINs or Social Security Numbers and their legal names, along with their addresses. 

This information must be validated against the IRS records in real-time to ensure that the information provided by the customer is valid. 

Popular TIN Matching solutions, particularly real-time TIN Matching solutions provided by IRS-authorized eFile providers like Tax1099, help address this concern. Many crypto companies, bitcoin trading platforms, and other crypto exchanges already manage their W9 collection, 1099 filings, and TIN matching with Tax1099. 

An alternative to Tax1099’s TIN Matching is Compliancely, which helps businesses verify the identities of their customers within seconds against the source records. 

Apart from TIN Matching, you can also conduct other verification checks using Compliancely’s OFAC watch list, European sanctions watch list, and other global sanctions watch lists. This will help you scale your KYC ecosystem with due diligence.

• Reporting transparency 

The IRS also aims to bring in more transparency with Form 1099-DA by dedicating an information return just for reporting information pertaining to digital asset trading, which would further boost the Voluntary Compliance Program. 

Form 1099-K and Form 1099-B are currently being used by crypto entities to report the payment information pertaining to crypto transactions. However, the cost basis on the purchase of digital assets is not being considered, which is leading to inappropriate taxation of the payees. 

According to the IRS, the information report on 1099-K and 1099-B forms may not be sufficient to tax those who are hiding their incomes generated through crypto trading. This is because the traders’ identities are not verified. And even when the IRS is taxing the crypto traders, the inconsistencies remain. 

How To Be Prepared For The New Form 1099-DA 

It’s only natural to worry about a new 1099 form that would require you to report new information, especially when you do not know the specifics of it. 

So, here’s what you can do to be prepared and report with Form 1099-DA when the IRS chooses to disclose the reporting requirements for the new return. 

Get your transactional data 

Crypto purchases, third-party transactions, re-sale, the cost basis of digital assets, identities of your customers, and other information must be obtained and stored in one place so that you have access to this information when you need it. 

Through this discussion, you’ve already been informed that Form 1099-DA will report transaction information pertaining to digital assets. So, make sure you have all the data needed to prepare and file your 1099-DA forms.

Verify your customers 

Verifying your customers and payees is no longer an optional practice. You have to incorporate TIN Matching into your regular tax prep practices and verify the identities of your customers, especially their TINs and legal names. Validate the TIN and legal name combinations before you report them on your 1099s. 

Validate transactions against the 1099 reports 

If you’ve previously reported crypto transactions and gross payments made on Form 1099-B and 1099-K, then you should re-validate the information reported before you start preparing your 1099-DAs. 

It can be observed that the IRS may make an exemption for transactions occurring in a certain tax year, and the new form might apply for transactions dating after a specific timeline as specified by the IRS. While all of this is interpretation and speculation at this point, the likelihood of such circumstances cannot be ignored.