Digital Asset Information Reporting: Top 10 things to consider

January 2025

The Internal Revenue Service (IRS) has recently published Form 1099-DA, and the Organization for Economic Cooperation and Development (OECD) has issued a schema for Crypto Asset Reporting Framework (CARF) reporting.  With information reporting for digital assets beginning for sales in 2025, there are many questions and concerns surrounding the new form and the rules.

Here are the top ten things to know:

1.      Time is of the essence

Although the reporting date for brokers providing custodial services was postponed to 2026 for the tax year 2025, that doesn’t mean it’s time to relax implementation efforts.  The IRS has granted this delay to acknowledge the significant time and effort required for business to implement and test the new tax form. You don’t want to find yourself scrambling to gather the necessary data for Form 1099-DA at the last minute. We’d recommend preparing now to ensure a smooth transition.

2.      What about DeFi brokers?

IRS reporting is only required for US Persons(opens in a new tab) for certain types of digital assets.  Only covered securities are reportable, which include digital assets acquired after 2025 that a broker is required to report and for which the broker provided custodial services. Additionally, for the tax year 2025, the digital asset must be held in that account from purchase until the broker effects the disposition of the digital asset.

On December 27, 2024, the IRS released it’s much anticipated guidance on DeFi brokers (or “digital asset middleman”), requiring DeFi “front-ends” to report gross proceeds from 2027 on Form 1099-DA. It is worth noting that the requirement to extend broker reporting to DeFi is somewhat aligned to the OECD’s CARF which does not explicitly exclude DeFi transactions. It’s also important to highlight the IRS has included a broad interpretation on the “position to know” requirements which determine broker reporting.  You are considered be in a position to know where you maintain “control or sufficient influence” over the trading front-end services to have the ability to determine whether and the extent to which the transfer of digital assets involved in a transaction gives rise to gross proceeds. Notably, validation services and licensing of software/selling of hardware are excluded activities outsider the scope of the DeFi broker reporting rules.

3.      Though the rules are final, changes may still occur as the IRS provides further guidance and clarification of the regulations, including where duplicate reporting may occur.

Basis calculations have always been required for a taxpayer supporting their own income tax filings. Starting in tax year 2025, Form 1099-DA will only provide the broker calculation of basis for some dispositions. However, if the new rules for specific identification result in lost basis on positions previously sold, relief is available. Transitional relief outlined in Notice 2025-07 requires taxpayers to make a reasonable reallocation of the basis by December 31, 2025 (previously January 1, 2025).  Note: There is no requirement for the reporting broker to accept these adjustments, even for covered positions.

Transfers and gifts of positions will be accounted for, and basis from these positions will need to be tracked.  They will not be included in the first year of reporting, as the positions will not have been held by the broker in the account from purchase to sale.  This means that taxpayers will have to track their own basis for positions long held positions and should continue to verify even once they become reportable. This adds complexity to basis tracking, and mistakes do happen, so vigilance is key.

For now, DeFi brokers operating as trading front-end service providers will only need to report gross proceeds starting 2027.

4.      Due Diligence Requirements and the importance of TIN matching

Reporting is the final step in the due diligence process that starts when you open an account.  All the investor information that needs to be reported must go through proper validation if it hasn’t already. Key questions to consider include: Do you have a valid tax form on file?  Is it current?  Has the account information changed since it was open?  Was the tax identification number (TIN) matched against the IRS database? 

No one wants to receive B-Notices from the IRS, and no one wants to find out that they are missing CARF data that will need to be reported either.  Taking the time now, before any reporting is due, to ensure you start with reliable data will make the reporting process much smoother.

5.      Specific Identification is not a method of accounting

The rules specify that specific identification must be used on each sale, prior to the sale or disposition. This identification can only be made for positions held in the wallet making the sale. This does not mean the taxpayer must direct every position sale to their broker; they can establish a standard relief methodology with the broker. 

This means that an account currently being sold on a First In, First Out (FIFO) or a High-Cost relief method can change its relief method at any time. Alternatively, the account can choose to sell a specific lot once, and then return to the previous methodology for all other sales. 

It is important to note that this does not mean that a broker must accept all types of relief methodologies. While it is expected that most will eventually become flexible, there may be some time before all brokers can accept specific instructions.

6.      The Form 1099-DA

The Form 1099-DA remains complex, although it has been slimmed down from the original draft.  Notably, wallet addresses are no longer required on the form.  It still includes fields for wash sales and market discount, but these apply only in specific situations.  For example, a tokenized security would be subject to the same wash sale rules as the actual security.

7.      What about CARF?

On October 2, 2024 the OECD published a reporting framework XML schema for CARF reporting.  The key takeaway here is that the schema is part of the framework, which should make so reporting more uniform across jurisdictions compared to the current CRS.  The United States is expected to participate in CARF, so reporting to and from the US will commence, slightly after the Form 1099-DA filings.  While similar, the information required for CARF is not identical to that on the Form 1099-DA. Expect the rules for both reporting regimes to be fluid for a few years as the reporting standards are finalized.

8.      Other positions in digital assets

Just because a position is not being reported doesn’t mean it isn’t taxable.  Additionally, if the basis is not reported by a broker, that doesn’t mean it doesn’t exist.  The advantage of broker-reported basis is that it provides the taxpayer with the broker’s basis calculation.  Without the basis on a Form 1099-DA, expect to show your math and provide receipts to justify your basis calculation.

9.      Tax reporting is not tax treatment

Though there are some tax adjustments that are included in the regulations reported on the Form 1099-DA, these are exceptions to the rule. There are many open questions regarding the tax treatment of digital assets. For example, do wash sales apply more generally? Does Section 988 apply to stablecoin?  Will traders be able to make a Section 475(f)-type election? These and many other questions will be addressed in the coming years, making it imperative to keep good records of your basis.

10.   What happens when facts differ?

If you receive a Form 1099-DA and believe it does not accurately reflect your basis correctly, what are your options?  You may ask if your broker can correct it, but unless there is a clear error by the broker, do not expect a change. Brokers are responsible for the basis they report, so they are only going to report basis amounts they can verify and support.  A taxpayer can claim a different basis calculation, but they are more likely to receive a request from the IRS to support the basis claim if it differs substantially from the broker reported basis.

Conclusion

Navigating the complexities of digital asset taxation demands a comprehensive understanding of the evolving regulations and reporting requirements. The top ten digital asset information reporting issues outlined here are critical for taxpayers to consider.

If there are any items you believe we missed or if you would like to see additional discussion on any of the listed points, please let us know. Your feedback is invaluable as we strive to provide the most relevant and up-to-date information to help you stay compliant and informed.