The IRS’ new digital asset form will make its debut this upcoming tax season for 2025 transactions. Nik Fahrer, director of tax at Forvis Mazars, presented at an American Institute of Certified Public Accountants conference on what crypto traders and practitioners should keep in mind when preparing for upcoming digital asset transaction reporting requirements.
Fahrer warned that although the IRS hopes new reportable information on Form 1099-DA, Digital Asset Proceeds From Broker Transactions, will be a “revenue generator” by improving compliance, there will be growing pains that will prove complicated for crypto brokers and customers alike, as well as the IRS itself.
Background
According to Fahrer, the new digital asset broker reporting mandate under IRC § 6045 as modified by the Infrastructure Investment and Jobs Act of 2021 (IIJA, P.L. 117-58) was meant to be a key revenue raiser to offset the costs of other provisions of the act. He said this is estimated to raise $28 billion in tax revenue over 10 years by closing the tax gap on digital assets.
After the IIJA was passed, it took nearly two years for the IRS to issue proposed regulations in August 2023, which garnered over 44,000 public comments before the final regulations were released in July 2024.
This framework builds upon the IRS’ long-standing position first established in Notice 2014-21, that virtual currency is treated as property for federal tax purposes, not currency. Consequently, every disposition — including trading one cryptocurrency for another — is a taxable event that can result in a capital gain or loss.
What Will be Reported?
A central challenge for practitioners will be understanding the scope of the new reporting rules, Fahrer expects. The requirements principally target “brokers,” a term that the IIJA expanded to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” In practice, this applies mainly to custodial brokers that take possession of a client’s assets to facilitate trades.
Even though custodial exchanges handle the vast majority of trading volume, Fahrer detailed how the new rules will not capture the full picture. The final regulations, along with subsequent guidance like Notice 2024-57, explicitly scope out several complex transaction types pending further study, including decentralized finance, or DeFi, activities and transactions from un-hosted or self-custodial wallets.
De minimis thresholds exempt certain sales from reporting. After accounting for these exemptions and out-of-scope activities, the reporting gap becomes substantial, said Fahrer. “So now we’re only about half of transactions that are going to be covered by these 1099-DAs.”
Cost Basis Chaos and Other Gray Areas
The absence of cost basis information will be the most immediate hurdle for the 2026 filing season, Fahrer predicted. For the 2025 tax year, brokers are only required to report gross proceeds from sales on the new Form 1099-DA. Mandatory basis reporting will be phased in, applying only to “covered securities,” a term narrowly defined as digital assets acquired on or after January 1, 2026, and held continuously in a broker’s account. Any asset acquired before that date or transferred into a broker’s platform is considered a “noncovered security,” for which brokers are not required to report basis.
This complexity is compounded by a fundamental change in how taxpayers must track basis. As Fahrer explained, the IRS, through Rev Proc 2024-28, officially disallowed the “universal method” of aggregating cost basis across all wallets. The agency now mandates a “wallet-by-wallet or account-by-account method.”
Beyond basis, practitioners must navigate other compliance gray areas. For instance, while the wash sale rules under IRC § 1091 generally do not apply to digital assets (with an exception for tokenized securities), Fahrer cautioned against aggressive tax-loss harvesting strategies, warning that the economic substance doctrine could still be invoked by the IRS.
Similarly, foreign bank and financial account (FBAR) reporting remains a nuanced issue. FinCEN previously clarified that holding digital assets alone does not trigger an FBAR filing, but the requirement may apply if those assets are commingled with U.S. dollars or other foreign currencies in an account that exceeds the $10,000 threshold, Fahrer cautioned.
Action Plan for Practitioners
Given the reporting gaps and basis complexities, Fahrer stressed that proactive preparation is essential. He warned that the IRS is actively using technology to identify underreporting, pointing to a 113% increase in digital asset cases from the agency’s Criminal Investigation division between fiscal years 2018 and 2023. “The IRS actually contracts with a couple of different software providers … to help them trace, track down customers that are underreporting,” he said.
Fahrer’s top recommendation for practitioners is to guide clients toward meticulous record-keeping, ideally using specialized software. “I think the best piece of advice is to encourage your clients to keep good records, and in the absence of that, push them to sign up for a third-party software that you have vetted, that has SOC reports, and that you believe can make your life easier,” he advised.
These tools are valuable for reconciling client data with the new Form 8949, Sales and Other Dispositions of Capital Assets, which will feature new checkboxes to categorize transactions. These checkboxes will reflect transactions reported on a 1099-DA including basis, without basis, or not reported on a 1099-DA at all, as well as transactions resulting in short- or long-term gains.
Fahrer concluded with a stark warning for those who might be tempted to simply total the gross proceeds from the new forms without performing a detailed reconciliation. “Remember, they won’t have cost basis on them,” he said. “So your client might be very surprised at the bill that they get at the end of the year if you do that.”
For more on the determination of gross proceeds reportable under digital asset broker rules, see Checkpoint’s Federal Tax Coordinator 2d ¶ S-3716.
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