The IRS recently made headlines by publishing a draft version of its 1099-DA reporting form, sparking controversy within the crypto community. The form includes unhosted crypto wallets as one of its targets, drawing criticism from industry experts.
Ji Kim, Chief Legal and Policy officer at the Crypto Council for Innovation, expressed disappointment with the IRS’ approach, noting that unhosted wallet providers lack essential information about crypto transactions and the parties involved. She emphasized the need for a more nuanced understanding of the complexities surrounding unhosted wallets.
Shehan Chandrasekera, Head of Tax at CoinTracker, also raised concerns about the form, warning that it could impact end users who may need to undergo KYC verification when using unhosted wallets with services like DeFi platforms. However, Chandrasekera suggested that enforcement efforts would likely target unhosted wallet providers rather than individual users.
Unhosted wallets, also known as non-custodial wallets, do not rely on third-party services to store crypto balances, distinguishing them from custodial wallets typically used by exchanges.
Form 1099-DA requires brokers to provide specific on-chain data, including transaction IDs and wallet addresses associated with each sale. While some experts voiced privacy and security concerns over collecting and reporting such data, others pointed out exceptions that allow brokers to omit certain information if not applicable.
Despite the draft form’s release, the IRS has not finalized the rules, and brokers are advised not to use the form for tax reporting purposes. A 60-day comment period is currently open for feedback on the proposed reporting requirements.
President Joe Biden’s Infrastructure Act in 2021 laid the groundwork for crypto brokerage reporting rules, categorizing certain crypto services as brokers. The current draft form aligns closely with the initial proposal from the Treasury and the IRS in August 2023.
Individual crypto investors are subject to separate reporting rules, with the IRS reminding them to report their crypto activities on various forms, including Form 1040. The IRS has also issued warnings about potential tax avoidance within the crypto space.
As the crypto industry navigates evolving regulatory landscapes, stakeholders must stay informed and engaged to ensure compliance and transparency within the digital asset ecosystem.