The IRS recently released its proposed 1099-DA form. The 1099-DA form is the IRS’s proposed broker reporting form for brokers dealing with digital assets. This proposed form is based off of the IRS’s August 29, 2023, proposed digital asset reporting requirements. Like the underlying proposed regulation, this proposed 1099-DA form has a myriad of problems that will not only harm taxpayers but threaten the growth of the digital asset market. As such, NTUF filed a comment with the IRS on the proposed 1099-DA form last week, urging the IRS to reconsider the proposed tax form and its overall approach to the taxation of digital assets.
The proposed 1099-DA form incorrectly applies early twentieth-century securities reporting requirements to digital assets. This 1099-DA form is based off of the Department of Treasury and IRS’s August 29, 2023, proposed digital asset reporting requirements. NTUF previously submitted comments on the Department of Treasury and IRS’s proposed rule digital asset reporting requirements. We explained the proposed rule’s reliance on traditional market rules was outdated given the modernized nature of digital assets, it places burdensome taxation on crypto users, it poses significant litigation risks, it threatens a growing industry, and it ignores that neither the cryptocurrency sector nor IRS has the infrastructure necessary to complicity with the proposed requirements. Despite the numerous concerns raised by commentators, the IRS still published the proposed 1099-DA form. In our comment, we pointed out that since the proposed 1099-DA form is based on the IRS’s earlier proposed rule, it shares the same flaws. As we explained, this approach is “outdated from the beginning and ignores the fact cryptocurrency is a wholly virtual, digital currency.”
The IRS’s approach of broadly defining all cryptocurrency as stock misses the mark. Not only can cryptocurrency be used as cash, but also the proposed 1099-DA form does not clearly define who is a broker, indicating a digital asset payment process may be a broker. This is a dangerous statement. Since cryptocurrency can be used as cash, if a goods or service provider allows customers to pay in cryptocurrency, these providers may have to fill out the proposed 1099-DA broke requirement form. Categorizing these providers as brokers is a far cry from the IRS’s goal of taxing digital assets utilized as stocks and sets a dangerous precedent for what the IRS may tax.
The IRS also grossly understates the time and money that will be required to comply with the proposed 1099-DA form’s reporting requirement. Aside from the fact the IRS tries to apply outdated rules to the digital asset sector, the cryptocurrency industry needs time to develop the infrastructure and professional expertise necessary to comply. Moreover, the IRS itself is not ready to handle this proposed taxation scheme. It is estimated that the IRS’s taxation of cryptocurrency will cause it to receive 8 billion in information returns. Given that as of 2023, the IRS had 4.2 million unprocessed returns, additional returns will be troublesome for the agency.
Since the proposed 1099-DA form is fraught with issues, we urge the IRS to wait until Congress passes laws categorizing and regulating digital assets. The IRS also needs to recognize that digital assets are not always stocks. These simple steps would help ensure a better digital asset taxation scheme for taxpayers and the IRS.
Digital asset taxation represents a new frontier for taxation purposes. As taxpayer advocates, we are on the frontlines, working to protect taxpayers' rights. We will keep you updated as subsequent digital asset taxation schemes develop.