IRS Targets Unhosted Crypto Wallets in Draft 1099-DA Form, Raising Privacy Concerns

The Internal Revenue Service (IRS) has released a draft version of its new Form 1099-DA, which aims to simplify tax reporting for cryptocurrency transactions. The form, expected to come into use in 2025 for reporting in 2026, requires brokers to report details such as token codes, wallet addresses, and blockchain transaction locations for cryptocurrencies, non-fungible tokens (NFTs), and stablecoins.

However, the draft form has sparked controversy within the crypto community, particularly due to its focus on unhosted wallets. Unhosted wallets are cryptocurrency wallets that are not hosted by a third-party financial institution or custodian. The inclusion of these wallets as reportable entities has raised privacy and security concerns among experts.

Critics argue that the proposed reporting requirements demonstrate a fundamental misunderstanding of digital assets and decentralized technology. They point out that unhosted wallet providers lack knowledge about specific transactions and user identities, making it challenging to comply with the reporting obligations. Experts fear that the new form could compromise the privacy and security of cryptocurrency users, especially those using unhosted wallets for legitimate purposes.

Why this matters: The IRS's draft 1099-DA form represents a significant step in the agency's efforts to regulate and oversee the cryptocurrency industry. The inclusion of unhosted wallets as reportable entities could have far-reaching implications for privacy, decentralization, and the broader adoption of digital assets.

Despite the concerns, the draft form does include exceptions for certain types of data that may not be applicable to all users. For instance, brokers are allowed to skip providing addresses and transaction IDs if they are not relevant. The form also features a "Wash sale loss disallowed" section, which experts clarify does not bring crypto under wash sale rules but applies to other digital assets like stocks and securities.

The IRS has established a 60-day comment period for the draft form, allowing stakeholders to provide feedback and suggestions before the final version is released. The agency has also reminded individual crypto investors to report their transactions on various forms, including Form 1040, regardless of the outcome of the 1099-DA form.

As the IRS continues to develop rules for crypto brokerage reporting, which have been in progress since the Infrastructure Act of 2021, the crypto community remains vigilant. Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, emphasized the importance of the issue, stating, "Crypto tax reporting is the most important conversation happening in crypto right now. The IRS is not backing down from the expansive definition of a broker."

Key Takeaways

• IRS released draft Form 1099-DA to simplify crypto tax reporting by 2026.
• Form requires brokers to report details like wallet addresses, blockchain transactions.
• Inclusion of unhosted wallets raises privacy, security concerns among experts.
• IRS allows exceptions for certain data, but crypto tax reporting remains contentious.
• IRS seeks public feedback on draft form before finalizing, as crypto community remains vigilant.