IRS Releases Draft Tax Form for Digital Assets — Expert Raises ‘Major Privacy and Security Concerns’

IRS Issues Preliminary Tax Form for Digital Assets — Concerns Arise Over Privacy and Security

The Internal Revenue Service (IRS) in the United States has unveiled a preliminary tax Form 1099-DA, designed for reporting proceeds from digital asset transactions facilitated by brokers. This includes unhosted wallet providers. However, concerns have been raised by a crypto tax expert, who asserts that the collection of specific information, such as wallet addresses, by the IRS raises significant privacy and security issues.

IRS Unveils Tax Form 1099-DA for Digital Assets

On Thursday, the IRS released the long-awaited preliminary tax form, which will be applicable for tax filings from 2025. Named 1099-DA, this form is solely for reporting “Digital Asset Proceeds From Broker Transactions.”

According to the instructions found on the form, “Brokers must report proceeds from (and in some cases, basis for) digital asset dispositions” to the IRS and taxpayers through Form 1099-DA. Brokers filling out this form need to specify whether they function as “a kiosk operator, digital asset payment processor, hosted wallet provider, unhosted wallet provider, or other digital asset filer,” as detailed in the IRS document.

The form also stipulates that “If you received a Form 1099-DA, you generally sold, exchanged, otherwise disposed of a financial interest in a digital asset and should check the ‘Yes’ box next to the question on page 1 of Form 1040.”

Tax Expert Raises Concerns Over Privacy and Security

On X platform, Shehan Chandrasekera, who serves as the head of tax strategy at Cointracker, a crypto tax firm, shared his thoughts regarding the IRS tax form on Friday. He expressed his skepticism, stating that “I don’t think crypto will be pseudo-anonymous or privacy-preserving anymore, at least in the US.”

Chandrasekera described Form 1099-DA as “the first tax form specifically designed to collect your ID and detailed transaction data at scale from ‘brokers.'” He highlighted that centralized exchanges, certain decentralized exchanges, and wallets will soon be mandated to generate this form for every sale transaction and provide this information to both the IRS and individual users, similar to how stock brokers operate. This new requirement will come into effect from January 1, 2025.

While acknowledging that the 1099-DA form gathers predictable data points such as acquisition and sale dates, proceeds, and cost basis of the sold crypto assets, Chandrasekera emphasized that the collection and reporting of additional data points, especially wallet addresses, could potentially lead to significant privacy and security concerns.

He went on to outline the specific data points required by the IRS for sales and transfers. Sales-related data points include the sale transaction ID (TxID), the digital asset address from which the units were sold, and the number of units sold. For transfers, the tax authority requires the declaration of the transfer-in TxID number, the transfer-in digital asset address, and the number of units transferred in.

Chandrasekera drew attention to the fact that the IRS now includes “unhosted wallet provider” as an option to check on the new draft Form 1099-DA. He stressed that this signals the IRS’s intention to classify unhosted wallets under the definition of a broker, despite receiving feedback from industry participants. According to him, this new IRS form signifies that users may need to provide know-your-customer (KYC) information when creating unhosted wallets or when engaging with platforms through unhosted wallets.

“This could significantly change how users interact with crypto platforms,” Chandrasekera added, stating that it could transform decentralized finance (defi) as it is currently known.