The Internal Revenue Service has released an early draft of a tax form for brokers and exchanges to report certain sales of digital assets, providing insight into how the IRS may categorize brokers.
In the form 1099-DA provisional version Posted Thursday, the IRS lists broker types: kiosk operator, digital asset payment processor, hosted wallet provider, non-hosted wallet provider and others. The form also asks for a “digital asset address” and whether the asset is an “unbacked security.”
The shape comes from regulations proposed last year stating that crypto brokers would be treated the same as brokers for more traditional investments such as stocks and bonds. Currently, taxpayers owe taxes on the gains and can deduct losses on digital assets when they are sold, but the Treasury Department says it is difficult for taxpayers to calculate those gains.
The proposed rules are part of the Infrastructure Investments and Jobs Act passed in 2021 including crypto language to increase broker reporting on clients’ crypto activity.
The impact of the proposed rules
Ji Kim, head of legal and policy at the Crypto Council for Innovation, posted on X Friday that it was “unfortunate” that non-hosted wallet providers were listed as brokers.
“This, among other things, fails to recognize that a wallet provider, as a provider of software technology, has no knowledge of the nature of the transactions processed nor the identity of the parties to the transaction.Kim said.
If the rule becomes final, digital asset brokers will provide the form to investors annually, according to an April 9 report after from law firm Gordon Law Group. Brokers would include centralized and decentralized exchanges, wallets that allow users to trade digital assets and bitcoin ATMs.
“While the crypto community will likely oppose requiring decentralized exchanges (DEXs) to report to the IRS, we expect the IRS will not be flexible on this requirement. DEXs do not currently collect tax information on their customers, but the IRS will likely argue that they are in fact ‘in a position to know the identities of users’ and will enforce Know Your Customer (KYC) requirements,” according to Gordon Law Group in the mail.
