Treasury proposed Form 1099-DA reporting for digital-asset brokers

The U.S. Treasury Department and Internal Revenue Service released proposed regulations on August 25, 2023 that would require covered digital-asset brokers to report customers’ sales and exchanges to the government and provide customers with a new Form 1099-DA.

The proposal, designated REG-122793-19, was Treasury’s long-awaited attempt to implement digital-asset provisions in the Infrastructure Investment and Jobs Act of 2021. It mattered because the agencies were moving cryptocurrency activity toward the third-party information-reporting system already used for securities, while also proposing a broad test for determining which crypto businesses and protocol operators qualified as brokers.

The August 25 action was a proposal, not a final rule. It did not create an immediate filing obligation or alter the underlying principle that taxable gains and deductible losses were already governed by federal tax law.

A phased reporting architecture

For covered sales and exchanges occurring on or after January 1, 2025, brokers would report gross proceeds on Form 1099-DA and furnish corresponding statements to customers. The first forms covering those transactions would therefore be filed and delivered in 2026.

In certain circumstances, brokers would also report adjusted basis and the resulting gain or loss for sales occurring on or after January 1, 2026. The delayed schedule acknowledged that platforms would need systems for collecting customer information, classifying transactions and maintaining asset-level basis records.

The proposal reached beyond trades for dollars. Exchanges of one digital asset for another could constitute reportable sales, as could some broker-facilitated payments involving digital assets. It also proposed reporting requirements for specified real-estate transactions closing on or after January 1, 2025 when purchasers transferred digital assets as consideration.

Treasury described Form 1099-DA as a way to give taxpayers information comparable to what conventional brokers provide. That could reduce calculation uncertainty, but a broker’s form would not necessarily capture a customer’s complete history when assets had moved between platforms or self-hosted wallets.

The disputed broker boundary

The proposal expressly covered digital-asset trading platforms, payment processors, certain hosted-wallet providers and issuers that regularly redeemed digital assets they had created. Its more consequential boundary concerned noncustodial trading services.

An operator could be treated as a “digital asset middleman” when it provided services facilitating sales and ordinarily knew—or was in a position to know—the seller’s identity and the transaction information needed to determine gross proceeds. The agencies said that test could reach operators providing access to automatically executing contracts, order matching, market making or similar services, even when smart contracts completed transactions without further intervention.

That did not mean every software developer, miner or validator was automatically a broker. The proposed text excluded persons solely providing distributed-ledger validation through proof-of-work, proof-of-stake or a similar consensus mechanism without other functions. It also excluded businesses solely selling hardware or licensing software whose only function was enabling users to control private keys.

The distinction placed control and influence at the center of the analysis. A platform operator able to change service terms, transaction fees or an executing protocol might be considered capable of collecting customer information, while an unaffiliated developer of open-source software could fall outside that test.

Why the proposal mattered

Information reporting was an institutional issue rather than a token-classification decision. The proposal covered qualifying digital assets, including assets commonly described as stablecoins or non-fungible tokens, but cautioned that reportability did not determine an asset’s treatment under other substantive law.

Treasury cited the Joint Committee on Taxation’s estimate that the Infrastructure Investment and Jobs Act’s digital-asset reporting provisions would raise almost $28 billion over ten years. That was a legislative revenue estimate, not observed collections, a cryptocurrency-market valuation or a forecast attributable solely to the August 25 proposal.

The immediate consequence was a compliance-design and policy debate. Exchanges, wallet providers and noncustodial interfaces had to evaluate whether the proposed definition reached their activities, while taxpayers and industry groups had until October 30, 2023 to submit comments.

Record limits

The proposed text was released on August 25 and subsequently published in the Federal Register on August 29, 2023 as 88 FR 59576. Its definitions, dates and obligations remained subject to revision through the rulemaking process. Nothing available on August 25 established the eventual final scope, implementation performance or legal durability of the proposal.