Everything you need to know about the new IRS tax form 1099-DA.
At first, it was the restoration of Form 1099-NEC to replace Box 7 on Form 1099-MISC, and then there were unexpected regulatory changes in 1099-K reporting, and now the IRS is introducing a brand-new form called 1099-DA.
Clearly, the IRS is on a spree to drastically change the way tax information is reported with 1099s.
So, what exactly is this new form 1099-DA used for?
And should you be worried?
We’re putting together everything we know, so far, about Form 1099-DA in the following discussion.
By the end of this read, you will have a brief understanding of IRS tax return 1099-DA.
So, let’s get to it.
1099s: An Overview
To give a little background, 1099 forms are IRS information returns used for reporting a variety of business tax-sensitized information, as follows.
- Compensations made to independent contractors (1099-NEC)
- Miscellaneous payment information (1099-MISC)
- Payments made to brokers (1099-B)
- Third-party transaction information (1099-K)
- Other information (1099-DIV, 1099-S, 1099-R, and so forth)
Each of these forms is used specifically for one purpose – making business income information more transparent.
So, Why Is The IRS Introducing A New Form 1099-DA Now?
Crypto is one of the fastest emerging industries globally. With many being interested in the appeal of “get rich quick” schemes advertised by crypto entities, the industry is booming.
The IRS officially acknowledging digital assets as “property” further added to this frenzy and enabled millions of Americans to invest in a plethora of digital currencies.
So, when a lot of money is moving around through different digital channels, the IRS wants to know where it’s coming from, and thereby tax the individuals who are generating income and/or making a profit.
As a result, 1099-K reporting was overhauled by the IRS.
But it’s not just digital asset transactions, though.
The IRS also wanted to know how much money was moving through instant payment apps like Venmo and PayPal.
1099-B forms, in addition to 1099-Ks, were used by crypto exchanges to report certain capital gains and losses made by their customers.
Since there is no dedicated form to report digital asset information exclusively, the inconsistencies in reporting became more apparent.
Even though the 1099-K reporting regime was updated to bring in more clarity in third-party transaction reports (specifically transactions reported by crypto entities), the changes weren’t enough to drive home voluntary tax compliance like the IRS had hoped.
Tax experts speculate that the current practice may not be viable for long because it lacks certain KYC or Know Your Customer aspects, which help the IRS identify who is paying and who is earning through these transactions.
The new form should be able to fix these issues since the current reporting practices do not provide clarity on the source cost basis of the crypto buyers.
When president Joe Biden signed the Federal Infrastructure Bill into effect in 2021, tax practitioners and taxpayers were bracing themselves for an overhaul in 1099 reporting.
The bill specifically focuses on improving the regulatory practices within the tax narrative.
And this meant a lot of changes in tax reporting regulations. And of course, a new form.
1099-DA: A New IRS Tax Return On The Block
1099-DA, which stands for 1099-Digital Assets, is a new IRS tax return, which is yet to be introduced into official use for taxpayers and preparers.
Sources say that there could be a delay in the implementation of the form.
The tentative timetable for the new 1099-DA tax return is 2024, which requires taxpayers to report the digital asset information from the previous year, 2023.
1099-DA: What Does The New IRS Form 1099-DA Report?
As the name suggests, Form 1099-DA will exclusively report information pertaining to “Digital Assets”.
The specimen copy of Form 1099-DA has not been made available for public comment yet, so it’s hard to speculate what could essentially be reported on the new 1099-DA form.
However, right now, we have the TIN reporting mandate in place to identify the payor and the payee with their legal name, address, and social security information. So, we can expect this to be a critical part of the return. And since the IRS is keen on retaining KYC-centric information from crypto exchanges, this will likely be an unignorable aspect of the form.
In addition to this, crypto-related transaction information and capital gains/loss details are likely to go on the new IRS tax return 1099-DA. This is because the IRS is aiming for transparency and is working to accelerate transparency in crypto-sensitized tax information reporting.
Who Is Required To File Form 1099-DA?
According to the Infrastructure Act, exchanges (payors) are required to follow the information reporting rules for 1099-DA starting January 1, 2023.
If you own a crypto exchange entity, then you must issue Form 1099-DA to your customers in the first quarter of 2024 for the previous tax year.
But since the reporting instructions have not been published by the IRS, the reporting and filing timelines could be extended.
When Will The IRS Form 1099-DA Be In Effect?
Tax and compliance experts are speculating that the IRS Form 1099-DA is likely to be in effect from the 2023 tax year. Taxpayers would be required to file a 1099-DA form with the IRS in 2024.
However, nothing is locked in from the IRS’ side so far.
Brace Yourself: How To Be Prepared For The New IRS Tax Return 1099-DA
The return exclusively focuses on digital asset information. So, make sure that you have all your transaction data in place.
It’s possible that the IRS will also make reasonable exceptions for transactions in tax years prior to the year in effect, just the way it was done for 1099-K reporting instructions.
However, it’s essential to note that the scope of reporting has not been disclosed by the IRS so far.
The IRS has not provided any information or instructions on the new tax return. Expect an update on the new Form 1099-DA in the next few months.
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