Introduction
The IRS has released long-awaited regulations for digital asset brokers, requiring them to report taxable crypto transactions on Form 1099-DA. Starting January 1, 2025, custodial crypto exchanges like Coinbase will be required to report taxable sales and exchanges of digital assets directly to the IRS. While the goal is to simplify crypto tax reporting for investors, these changes also signal a massive increase in IRS audits and enforcement actions.
Understanding these new regulations is crucial for crypto investors to avoid penalties and stay compliant.
What Will Be Reported on Form 1099-DA?
The IRS will receive information about taxable crypto transactions conducted through custodial brokers, including:
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Cashing out cryptocurrency for fiat (USD, EUR, etc.).
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Swapping crypto (e.g., exchanging ETH for BTC).
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Using crypto to purchase goods and services.
What’s NOT Included?
For now, the IRS will not require brokers to report:
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DeFi transactions (staking, liquidity providing, lending, short sales).
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Wrapping and unwrapping tokens.
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Transactions through decentralized brokers (regulations to be released later).
These exclusions mean that investors must still track and report DeFi earnings and self-custody transactions on their own.
How Does This Affect Crypto Taxpayers?
Increased IRS Scrutiny
The new rules don’t change the fact that crypto has always been taxable, but they eliminate anonymity and make it easier for the IRS to detect unreported crypto gains. Audits and criminal tax investigations are expected to rise as a result.
If you have unreported crypto income from past years, now is the time to act before enforcement ramps up.
IRS Cost Basis Reporting Challenges
While Form 1099-DA will report crypto sales, it may not include cost basis information, which is essential for calculating capital gains. Investors must accurately track their cost basis using accepted IRS methods:
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First In, First Out (FIFO).
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Specific ID (identifying exact purchases for tax purposes).
The IRS has introduced temporary flexibility in how taxpayers allocate cost basis, but accurate record-keeping is still crucial.
What Should Crypto Investors Do Now?
1. Ensure Full Crypto Tax Compliance for 2024
Since Form 1099-DA won’t cover trades before 2025, 2024 is a critical tax year. Filing accurate 2024 tax reports will make future compliance easier.
2. Correct Past Crypto Tax Mistakes
If you haven’t reported crypto transactions in previous years, fixing them before the IRS finds them can save you from hefty penalties. Options include:
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Amending prior tax returns.
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Using the IRS Voluntary Disclosure Program for willful noncompliance.
3. Track All Crypto Transactions, Including DeFi
Even with Form 1099-DA, taxpayers must report earnings from non-custodial wallets, DeFi platforms, staking rewards, and self-custody transactions.
Conclusion
The new IRS crypto reporting regulations mark a major shift in tax enforcement for digital assets. While they simplify compliance for some investors, they also increase audit risks for those who fail to report their crypto gains properly.
Block3 Finance can help you stay ahead of these regulations by ensuring accurate reporting and strategic tax planning.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.