Decentralized finance (DeFi) has gone from being a fringe concept to a major player in global financial markets. As a finance professional, you must ensure that your organization understands the implications of DeFi on corporate finance.
Fortunately, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury are providing some much-needed clarity on the issue of digital asset reporting. In mid-2024, the IRS finalized T.D. 10000, a set of regulations that implement new digital asset reporting requirements.
This rule governs the reporting of exchanges and sales of digital assets. The IRS released a new form as part of this initiative. Form 1099-DA, Digital Asset Proceeds From Broker Transactions, is required when reporting any applicable digital asset transactions that occur on or after January 1, 2025.
Here’s everything you need to know to help your business navigate these new rules.
What’s Form 1099-DA?
Form 1099-DA captures detailed information about digital asset transactions to promote tax compliance and transparency. Several entities are required to report digital asset trades and sales on the form. Some of the entities that will be required to use Form 1099-DA include:
- Brokers
- Certain hosted wallet providers
- Digital asset kiosks
- Specific processors of digital asset payments
- Operators of custodial asset trading platforms
These entities will need to begin using the new form in the 2025 tax year. It must be submitted to the IRS by the 2026 filing deadline, along with other tax documents. While the new document is meant to provide clarity regarding digital asset reporting, there are concerns that the broad nature of the regulations will cause confusion.
For example, multiple parties may facilitate a single crypto transaction and might be considered a broker. This could lead to duplicate Form 1099-DAs being completed for the same transaction.
Implications for Controllers and CFOs
As a controller or CFO, you’ll need to ensure that your organization is compliant with the new digital asset reporting regulations. Here are some steps you can take to simplify the process.
Identify Applicable Transactions and Entities
Step one involves determining whether your organization qualifies as a “broker” under the new regulations. Most entities that facilitate digital asset transactions or take possession of assets on behalf of customers will be considered brokers.
Carefully review any dealings that involve cryptocurrency or other digital assets. Did your organization or one of its entities facilitate the deal or take possession of the assets on behalf of the buyer? If so, your company will likely need to report the transaction using Form 1099-DA.
Implement New Reporting Rules and Systems
Accurate reporting of digital asset transactions requires sophisticated tracking and documentation systems. If necessary, you should upgrade your existing financial tools to capture the required data, including details such as transaction dates, gross proceeds, and cost. You’ll need this information to complete Form 1099-DA.
You’ll also have to implement new rules for documenting and reporting digital asset transactions. Make sure your employees are aware of the latest IRS provisions and how they impact their day-to-day work.
Train Your Team
Ensure that your accounting and finance personnel are well-versed in the new reporting requirements. Organize training sessions to familiarize staff with Form 1099-DA so that they can complete the documentation accurately and efficiently. Periodically send out reminders or refreshers about the types of transactions that need to be reported.
If your internal team lacks expertise in digital asset tracking and reporting, consider bringing in outside tax professionals to assist in creating new policies and training programs. They can help your staff interpret regulations and implement effective compliance strategies.
Monitor Regulatory Updates
The financial world is still adapting to decentralized finance and digital assets. That’s why it’s vital for you and your finance team to closely monitor the regulatory situation surrounding cryptocurrency and other digital assets. More regulatory changes are likely imminent, and they could drastically impact your company’s reporting requirements.
Federal entities are still playing catch-up when it comes to cryptocurrencies and DeFi markets. When regulators fall beyond the curve, there is a tendency to implement extremely strict reporting requirements and then gradually relax regulations as they gain a better understanding of the market. Make sure your company is prepared.
Is Engaging in the DeFi Market Worth It?
With all of the uncertainty and new regulations swirling around the DeFi market, you may wonder whether your organization should just stay out of the digital asset sector altogether. While that could be an option for your team in the current business environment, it appears that DeFi is here to stay.
Therefore, you should respond accordingly by staying apprised of the regulatory changes that are shaping decentralized finance — even if the current reporting requirements don’t apply to your business. You want to be prepared to embrace DeFi as new opportunities emerge.