The IRS recently released a draft version of its 1099-DA reporting form, stirring up controversy by targeting unhosted crypto wallets. On April 19, the IRS included unhosted wallet providers as part of its reporting requirements, drawing criticism from industry experts.
Ji Kim, Chief Legal and Policy Officer at the Crypto Council for Innovation, expressed disappointment with the IRS’ approach, stating that unhosted wallet providers lack knowledge about crypto transactions and the parties involved. Shehan Chandrasekera, Head of Tax at CoinTracker, also voiced concerns about the form, suggesting that end users could be impacted and may need to undergo KYC verification when using unhosted wallets.
Despite the criticism, Chandrasekera noted that enforcement efforts are likely to target unhosted wallet providers rather than individual users. Unhosted wallets, also known as non-custodial wallets, do not hold crypto balances with a third party and differ from custodial wallets typically used by exchanges.
Form 1099-DA requires brokers to provide on-chain data, including transaction IDs and wallet addresses related to each sale. While some experts have raised privacy and security concerns about collecting and reporting this data, others have noted exceptions in the form to address certain situations where providing such information may not be applicable.
The rules outlined in the draft form are still subject to finalization, with a 60-day comment period currently underway. This development follows previous efforts to regulate crypto brokerage reporting, including the categorization of certain crypto services as brokers under President Joe Biden’s Infrastructure Act.
Individual crypto investors are also reminded to report their activities on various forms, including Form 1040, as the IRS cracks down on potential tax avoidance in the crypto space. The IRS continues to refine its regulations to ensure proper reporting and compliance within the industry.
