Cryptocurrencies are still a relatively new asset class, and many investors and regulators were slow to acknowledge them as legitimate. However, as the market has matured and attracted more attention from developers and investors alike, the lack of regulatory guidance has become increasingly evident.
One key area of concern has been the reporting of cryptocurrency transactions. Until now, the U.S. Treasury has been surprisingly quiet on the matter. But in April 2024, the Treasury finally released a draft of the new 1099-DA form, aimed at providing more transparency in crypto transactions. This new form will require crypto brokers to report transaction details both to the Treasury and to traders starting with the 2025 tax year (for filing in 2026). The goal is to simplify tax filing for traders and ensure compliance by those who might not have been reporting their gains accurately.
So, what does this mean for current and future crypto investors?
Using Centralized Exchanges (CEX)
If you use a centralized exchange (CEX) like Coinbase, Binance, or Kraken, you can expect to receive a 1099-DA form. All centralized exchanges that do business in the U.S. will need to comply with this regulation. However, if you transfer assets into the exchange from an external wallet, the exchange might not have all the necessary details. It’s important to carefully check these transactions against your records to ensure the 1099-DA is accurate.
Trading on Decentralized Exchanges (DEX)
Decentralized exchanges (DEX), such as Uniswap or Curve, may also issue a 1099-DA, as they are considered crypto brokers. But there’s a catch—many DEXs lack know-your-client (KYC) protocols, which means they won’t be able to issue the form. This can raise red flags with the Treasury if the transactions aren’t properly reported.
If you regularly move assets between different exchanges (whether centralized or decentralized), you’ll need to pay close attention to ensure the information is consistent across platforms. Since not all exchanges share data in the same way, particularly between CEXs and DEXs, it’s critical to track your transactions and the cost basis of your assets.
Self-Custody of Assets
Many investors opt for self-custody of their cryptocurrencies using digital or hardware wallets, especially after the collapse of major exchanges in 2022. This approach helps mitigate the risk of losing funds due to hacking or bankruptcy. However, if you’re using a self-custody wallet, the reporting requirements around the 1099-DA remain unclear.
To play it safe, you should maintain detailed records of the cost basis for all assets transferred in and out of your wallet, as you may still need to reconcile these records with a 1099-DA form.
Simplifying Your Approach
If you want to minimize the burden of tracking crypto transactions, consider sticking to a single, reputable centralized exchange for all your activity. While there are risks to holding your funds on an exchange, it simplifies the process as the exchange will handle the necessary reporting for you.
Alternatively, if you prefer to manage your assets in a self-custody wallet, make sure you maintain meticulous records. You’ll need to reconcile your data with any 1099-DA forms issued by exchanges.
For investors who want exposure to cryptocurrency without the complexities of the new tax reporting requirements, crypto spot ETFs may offer a simpler solution. Currently, only Bitcoin and Ethereum have spot ETFs, but these can be traded like any traditional stock, with transactions reported via the standard 1099-B.
Navigating the Regulatory Landscape
As the regulatory environment for cryptocurrencies continues to evolve, staying compliant can be tricky. But that’s where we come in. At Hauser Jones & Sas, our team of experts is here to guide you through the complexities of crypto reporting and help you maintain compliance with the latest regulations.
If you have any questions or need assistance, don’t hesitate to reach out to us. We’re here to help you succeed in the ever-changing world of cryptocurrency.
