The IRS Proposes New Crypto Tax Rules

TL;DR

• To improve crypto tax compliance, starting the 2025 tax year, the IRS has proposed crypto brokers issue a new tax form called Form 1099-DA (similar to stock brokers) showing capital gains and losses.
• 1099-DA forms will make crypto tax compliance easier if your transactions are contained within an exchange with no transfers in or out.
• Moderate and advanced crypto users will need CoinTracker to compute gains & losses and supplement 1099-DAs with data gaps.

The bipartisan Infrastructure Investment and Jobs Act passed in November 2021 required digital assets “brokers” to report users’ gain & loss information to the IRS in the way that stock brokers already do. On August 25, 2023, the IRS issued proposed regulations (Regs) defining the term “broker” and outlining requirements brokers must follow to comply with tax reporting rules related to cryptocurrency transactions.

Who are brokers?

According to the proposed Regs, a broker is “any person that in the ordinary course of a trade or business stands ready to effect sales to be made by others.” There are five potential categories of brokers.

• Digital asset platforms: This category includes centralized exchanges, cryptocurrency ATMs, and certain DeFi platforms where the operator is in a “position to know the identity of the party that makes the sale” and “maintains sufficient control or influence” over the service provided.
• Digital asset-hosted wallet providers: This category includes web3 wallet providers that allow users to swap digital assets directly. Note: If the wallet does not offer a swap feature, it is not a broker.  
• Digital asset payment processors: This category includes products and services that intake cryptocurrency, convert it into USD, and send it to merchants.
• Other brokers: This category includes stablecoin issuers.
• Real estate persons: This category includes middlemen involved in real estate transactions involving cryptocurrency payments.

Merchants who sell goods or services in exchange for digital assets, Proof of Work (PoW) and Proof of Staking (PoS) validation providers, and people who sell hardware and software wallets (without any crypto swap features), are not classified as brokers.

What transactions are subject to broker reporting?

The proposed regulations subject cryptocurrency sold for cash and crypto-to-crypto trades, including the payment of transaction fees in crypto, to broker reporting. Non-fungible token (NFT) transactions are also subject to reporting. Brokers are expected to report gains and losses generated from these activities to users and the IRS on a new tax form called Form 1099-DA.

Note that airdrops, hard forks, and gains & losses related to loan transactions, transferring assets into liquidity pools, and wrapping and unwrapping transactions are not addressed in the proposed regulations due to an absence of guidance in these areas.

It is possible, however, that these transactions will be included in future iterations of 1099-DAs or other tax forms. Note that these transactions are still reportable on your tax return and may be taxable even though they are not immediately reported on 1099-DAs.

Timing of the rules

The crypto community has a 60-day comment period ending on October 30, 2023, to respond to the proposed regulations published by the IRS and the Treasury. After the comment period ends, the IRS will take all comments into consideration, make whatever changes it deems appropriate based on those comments, and issue final regulations, most likely in 2024.

If the proposed Regs become finalized with no changes, for the 2025 tax year, brokers will be required to issue 1099-DA forms with only gross proceeds (sales) amount. For the 2026 tax year and onwards, brokers must issue complete 1099-DAs that report process, cost basis, and gains & losses to taxpayers.

Impact on you & why you need CoinTracker

Tax compliance will be easier for simple crypto users

If you are a single-exchange user, the proposed 1099-DAs will simplify your crypto tax compliance. If implemented effectively (similar to in the stock world), you can rely on the gains & losses reported on these forms to complete your tax return without relying on a crypto tax tool like CoinTracker. Expect to receive complete 1099-DAs for the 2026 tax year.

Moderate & advanced users will need CoinTracker

In the following scenario(s) you will need CoinTracker to reconcile your crypto transactions and compute gains & losses accurately.

1. You have crypto & NFT transactions in the 2023, 2024, and 2025 tax years
   Complete 1099-DAs will not roll out until at least the 2026 tax year. You will need CoinTracker to track your cost basis and gains & losses until you receive complete 1099-DAs from brokers.
2. You have transactions not reported on the early phases of 1099-DAs.
   For example, airdrops, hard forks, loan transactions, wrapping/unwrapping coins & adding/removing liquidity to/from liquidity pools will not be reported on early 1099-DAs. You will need to compute income and gains & losses related to these transactions using CoinTracker.
3. You have transferred assets from one broker to another broker.
   For example, Shehan buys 1 BTC on Coinbase, then transfers it to Gemini to sell it there because it offers cheaper trading fees. Under the current implementation of the proposed Regs, Coinbase is not required to share cost basis information with Gemini, so Gemini will not know the cost basis of your BTC unless you track it using CoinTracker. If you don’t keep track of the cost basis, you will likely inflate your capital gains and overpay taxes in this scenario.  
4. You have transferred assets from a broker to your self-custody wallet.
   For example, Shehan buys $100 of BTC every Friday on Coinbase. At the end of each month, he transfers these coins to his ledger wallet for long-term secure storage. To keep track of the cost basis for each coin and the date purchased (which is required for future capital gain calculations), Shehan will need CoinTracker.
5. You have transferred assets from your self-custody wallet to a broker.
   Continuing with the above example, Shehan transfers 0.1 BTC to Coinbase towards the end of the year and sells it for cash (or exchanges it with another coin). Shehan will need CoinTracker to compute the correct gain & loss by taking the right cost basis into account. Coinbase will not have the cost basis information in this scenario.
6. You have transferred assets from one self-custody wallet you own to another self-custody wallet you own.
   For example, Shehan transfers 0.1 BTC (cost basis $1,000) from self-custody wallet A to Self-custody wallet B. In order to properly maintain the cost basis lots on a per-wallet basis and accurately apply HIFO or LIFO identification methods, Shehan will need to use CoinTracker.
7. You have staking or mining income directly credited into your self-custody wallet.
   For example, Shehan stakes Cardano and receives rewards directly to his self-custodial wallet. Here, Shehan will need CoinTracker to compute income at the time of receipt and calculate gains & losses when he sells the rewards in the future.
8. You have transactions in non-broker platforms
   For example, Shehan trades cryptocurrency in an overseas exchange (like Binance.com) or a DeFi platform not classified as a broker. In this scenario, Shehan will not receive any 1099-DAs at all. He will need CoinTracker to reconcile his activity and compute gains & losses accurately.

The proposed Regs also require you to maintain cost basis lots on a per-wallet basis. CoinTracker already supports this feature. Moreover, Specific identification of lots such as Highest-in-First-Out (HIFO) or Lowest-in-First-Out (LIFO) is allowed as long as you keep detailed records of your lots held in your self-custodial wallet. You can already keep detailed track of your lots and identify them under HIFO or LIFO methods using CoinTracker. (If you don’t have CoinTracker or another way to accurately identify the lots, your tax lot ID method defaults to First-in-First-out (FIFO), which is not generally tax advantageous).

Overall, the IRS is planning to narrow the tax gap by requiring brokers to report your crypto gains and losses directly to the IRS and compare these reported amounts with the numbers you report on your Form 1040. If there is a discrepancy, the IRS system will automatically send you a notice to correct your error. This new system will ultimately allow the IRS to focus its audit efforts on bad actors while giving compliant good actors peace of mind with crypto taxes.

If you have any questions or comments about crypto taxes, let us know on Twitter @CoinTracker.

CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ cryptocurrencies and makes crypto tax calculations and portfolio tracking simple.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.