Federal Tax Guidance for Crypto: What the IRS Rules…

KEY TAKEAWAYS

1. The IRS requires crypto brokers to report gross proceeds on Form 1099-DA for sales and exchanges of digital assets on or after January 1, 2025, subject to temporary exceptions for certain transaction categories.
2. Mandatory cost basis reporting begins in 2026 but applies only to covered digital assets acquired and held within one broker account.
3. The final regulations ended universal accounting and require wallet-by-wallet tracking beginning January 1, 2025. Revenue Procedure 2024-28 provided a one-time safe harbor to help taxpayers transition to the new allocation rules.
4. Six transaction types, including staking, wrapping, and lending, remain temporarily exempt from broker reporting under IRS Notice 2024-57 guidance.
5. Coinbase VP of Tax Lawrence Zlatkin questioned the reporting of stablecoin transactions such as USDC trades that may not generate taxable income events.

Crypto tax enforcement entered a new phase in January 2025 when the IRS activated Form 1099-DA for digital asset transactions.Brokers filed the first batch of these forms in early 2026, covering gross proceeds from the 2025 tax year. The new system enables automated matching between exchange data and individual tax returns, increasing the IRS's ability to identify discrepancies between broker-reported proceeds and taxpayer filings.This article covers the specific IRS rules now in effect, the cost basis expansion arriving in 2026, and enforcement risks ahead. Patrick Camuso, founder of Camuso CPA, described the shift as a move into the Digital Asset Compliance Era.

What Form 1099-DA Reports and Who Must File It

Form 1099-DA captures gross proceeds from digital asset dispositions handled by custodial brokers. The IRS defines brokers broadly to include exchanges, hosted wallet providers, payment processors, and digital asset kiosks. Decentralized and non-custodial platforms remain excluded from the current reporting mandate under the final regulations.For the 2025 tax year, brokers report only gross proceeds without cost basis information attached. Jonathan Cutler, Senior Manager at Deloitte, stated that disposal data accuracy should not be an issue. He noted that reliable transaction logging on custodial platforms makes proceeds reporting straightforward, according to Thomson Reuters.Seth Wilks, Managing Director at Deloitte, offered a different perspective on the rollout. He warned that taxpayers frequently move assets between wallets, creating basis tracking challenges. Wilks noted that traditional securities reporting began around 2011 and took nearly five years to implement fully.Coinbase VP of Tax Lawrence Zlatkin criticized aspects of the form's scope in public comments reported by CoinDesk and TheStreet. He questioned the reporting of stablecoin transactions, including USDC trades that may not generate taxable income. The company also flagged gas fee reporting as a source of unnecessary complexity.Ian Unger, Tax Reporting Information Director at Coinbase, highlighted infrastructure gaps. He stated that crypto brokers lack the transfer tracking systems comparable to traditional securities firms. His comments were reported by CoinDesk and TheStreet, which covered Coinbase's concerns about the difficulty of tracking transfers across crypto platforms.

Cost Basis Rules Expanding in 2026 and the Covered Asset Distinction

Starting with the 2026 tax year, brokers must report both gross proceeds and adjusted cost basis. This expansion applies exclusively to covered digital assets acquired on or after January 1, 2026. The asset must also remain within the same broker account continuously to qualify.Assets acquired before 2026 or transferred between platforms fall into the non-covered category. Brokers have no obligation to report the basis for these holdings under current IRS guidance. Taxpayers remain solely responsible for tracking and substantiating their own cost basis.The IRS permits only two accounting methods for digital asset dispositions going forward. First In, First Out serves as the default method when no valid pre-disposal identification exists. Specific identification requires documented lot selection before the sale is executed, per IRC Section 1.1012-1(c).Optimization strategies such as Highest In, First Out work only as valid specific identification. For 2026 and later transactions, taxpayers generally must identify the specific units being disposed of before the sale.For 2025, Notice 2025-7 provides transitional relief allowing taxpayers to make certain lot identifications through their own books and records. Retroactive lot selection to minimize tax liability is explicitly prohibited under the rules applicable after the transition period.Patrick Camuso noted that Form 1099-DA introduces standardized proceeds data matchable against filings. He emphasized that algorithmic detection now replaces voluntary compliance as the primary enforcement mechanism. Camuso collaborated with a former IRS Office of Digital Assets head on this policy analysis.

Wallet-by-Wallet Accounting and the Safe Harbor That Closed

The final regulations ended universal accounting effective January 1, 2025, requiring taxpayers to track digital assets on a wallet-by-wallet and account-by-account basis.Revenue Procedure 2024-28 provided a one-time safe harbor to help taxpayers allocate existing basis among their digital assets during the transition. Taxpayers cannot mix lots across different wallets or platforms when calculating gains and losses.The same revenue procedure offered a one-time safe harbor for transitioning to the new system. Eligible taxpayers could allocate unused basis across remaining digital asset units before the deadline. The IRS has not extended or reopened the election period.Without the safe harbor, taxpayers could face basis discrepancies for transactions from 2025 onward if assets were not properly allocated under the new wallet-by-wallet rules. Notice 2024-56 provides separate penalty relief for brokers filing Form 1099-DA with good faith efforts.Brokers may issue forms up to 12 months late without penalty under this transitional provision, for 2025 sales only, when the broker acts in good faith. The relief generally runs until the later of the IRS's first contact with the broker or one year after the form's due date.Late forms arriving months after taxpayers file their returns create automated mismatch notices. The IRS issues CP2000 notices when reported data conflicts with information on filed returns. Resolving these discrepancies requires amendments or exam-level substantiation from the taxpayer.Brokers may report transaction timestamps in Coordinated Universal Time rather than the taxpayer's local time. A sale on December 31 at 10 PM Eastern could therefore appear as January 1 depending on the timestamp convention used by the broker.

Regulatory Implications and International Reporting Alignment

Notice 2024-57 temporarily exempts six transaction categories from broker reporting obligations. These include wrapping and unwrapping, liquidity provider transactions, staking, lending, short sales, and notional principal contracts. The exemptions remain active until the IRS issues further guidance on how to classify these events.The Guiding and Establishing National Innovation for U.S. Stablecoins Act was passed by Congress in July 2025. This legislation requires stablecoin issuers to maintain a one-to-one reserve backing with monthly attestations. The Crypto Asset Reporting Framework takes effect internationally in January 2026, with data exchanges starting in 2027.Every taxpayer must answer the digital asset question on Form 1040 regardless of activity. Answering no when transactions occurred remains a significant compliance risk with 1099-DA matching active. The IRS integrates this data with blockchain analytics and existing DIF scoring models for audit selection.

What's Next?

Full cost basis reporting launches for the 2026 tax year, with 1099-DA forms issued to taxpayers in early 2027. Congress repealed the IRS's DeFi broker reporting rule under the Congressional Review Act in April 2025, so the rule is no longer in effect. Taxpayers should maintain transaction timestamps in both UTC and local time where available to help prevent mismatch notices going forward.

FAQs

What is Form 1099-DA, and when did it take effect? Form 1099-DA reports digital asset gross proceeds from broker transactions and applies to sales and exchanges of digital assets on or after January 1, 2025, subject to certain temporary reporting exceptions.Do decentralized exchanges have to file Form 1099-DA with the IRS? The IRS final regulations exclude decentralized and non-custodial platforms from the current 1099-DA broker reporting requirements under existing published guidance.When does mandatory cost basis reporting start for crypto assets? Mandatory cost basis reporting begins for the 2026 tax year and applies only to covered assets acquired and held within one broker account.What accounting methods does the IRS allow for crypto dispositions now? The IRS permits First In First Out as the default method and specific identification with documented lot selection under the applicable rules. For 2025, Notice 2025-7 provides transitional relief allowing certain lot identifications through taxpayers' own books and records.What happened to the universal accounting method for crypto tax reporting? The final regulations ended universal accounting effective January 2025, requiring separate cost basis tracking for each wallet and exchange account. Revenue Procedure 2024-28 provided a one-time safe harbor for taxpayers transitioning to the new allocation rules.Which crypto transactions are temporarily exempt from broker reporting requirements? Notice 2024-57 exempts wrapping and unwrapping, liquidity provider transactions, staking, lending, short sales, and notional principal contracts from broker reporting until the IRS issues further guidance.Does the digital asset question on Form 1040 apply to all taxpayers? All taxpayers must answer the digital asset question on their Form 1040 return regardless of whether they completed any crypto transactions that year.

References

1. IRS Final Regulations for Reporting by Brokers on Sales and Exchanges of Digital Assets, Internal Revenue Service
2. Crypto Tax Updates: What You Need to Know in 2026, TaxPlanIQ
3. Form 1099-DA Debut Will Test Broker Taxpayer Readiness in Transition Year, Thomson Reuters
4. 1099-DA Guide: The Definitive 2025-2026 Guide to Crypto Tax Reporting Compliance, Camuso CPA