The controversial tax schedule has not yet been finalized.

The United States Internal Revenue Service (IRS) released a draft version of its 1099-DA reporting form on April 19, and controversially included non-custodial cryptocurrency wallets in its target range.

Ji Kim, chief legal and policy officer at the Crypto Innovation Council, said the IRS’s move was unfortunate because it failed to recognize that non-custodial wallet service providers have limited knowledge of cryptocurrency transactions and the parties involved in each transaction.

Shehan Chandrasekera, head of tax at CoinTracker, also criticized the form, noting that it could have an impact on regular users, who may need to undergo a Know Your Customer (KYC) verification process when creating a non-custodial wallet or using it with services such as decentralized finance (DeFi) platforms.

However, Chandrasekera said authorities will likely target enforcement efforts at non-custodial wallet providers rather than end users.

Non-custodial or non-custodial wallets do not store your cryptocurrency balances on a third-party service. They are different from custodial wallets, which include most exchange wallets.

Form 1099-DA

The 1099-DA form also requires brokers to provide certain on-chain data, including the transaction ID and wallet address associated with each sale. Brokers should report the transaction ID and address that initiated the sale of cryptocurrency, and if they "transferred in" funds from their own other custodial wallet addresses, they also need to report a secondary address.

Experts responded to the request in different ways. Chandrasekera warned that collecting and reporting data, especially wallet addresses, “can lead to significant privacy and security issues.”

However, Jessalyn Dean, vice president of tax information reporting at Ledgible, pointed out an exception to the rule. She said the form allows brokers to not provide addresses and transaction IDs if the relevant circumstances do not apply. She believes this exception is also "necessary" because brokers often trade in their own internal bookkeeping systems rather than directly on the blockchain.

Another key section reads, “Impermitted Wash Sale Losses.” According to Dean, this does not make cryptocurrencies subject to the wash sale rule. Instead, this provision targets digital assets that are currently subject to the wash sale rule, including stocks, securities, and tokenized equity.

Rules not yet finalized

Cryptocurrency broker reporting rules have been in the works for some time.

In 2021, President Joe Biden’s infrastructure bill defined certain cryptocurrency service providers as brokers. Then in August 2023, the U.S. Treasury Department and the Internal Revenue Service (IRS) released a proposal for Form 1099-DA that largely matches the current draft form.

However, the text of the draft form indicates that the IRS has not yet finalized the form and brokers should not use it for current tax reporting.

According to Ledgible, there is a 60-day comment period on the form.

The U.S. Internal Revenue Service (IRS) has created separate rules for individual cryptocurrency investors. The regulator issued a reminder on April 11 that cryptocurrency investors should report on various forms, including Form 1040. Recently, a senior member of the IRS also warned about tax evasion among cryptocurrency investors. #IRS #加密货币税表