Even an expert says: Digital asset reporting creates headaches

Nik Fahrer, CPA, opened his session on digital assets at the AICPA National Tax Conference with five polling statements, including this one: “You really dislike the complexity of working with clients that own digital assets.”

He was not at all surprised that 78% of online and in-person participants responded affirmatively, that yes, they really do dislike dealing with digital asset reporting. Digital asset reporting may become even more complicated now that digital asset exchanges are required to report certain 2025 transactions on new Form 1099-DA, Digital Asset Proceeds From Broker Transactions.  

For some tax practitioners, the language of digital assets, with words such as staking and airdrop, could be a barrier, Fahrer, director in Forvis Mazars’ national office and leader of the firm’s digital asset practice, said in an email to the JofA.

But the crux of the issues involves clients. “Many taxpayers with significant digital asset transactions do not keep good records. This can create additional headaches for practitioners,” he said.

His best advice: “Encourage your clients to keep the records and, in the absence of that, push them to sign up for a third-party software that you have vetted that has SOC (System and Organization Controls) reports and that you believe to make your life easier, because these 1099-DAs are probably going to make your life more difficult,” he said during the session, “Prepare to Help Clients With 2025 Forms 1099-DA.”

Background

The IRS released proposed regulations [Reg-122793-19] for digital asset reporting in August 2023, almost two years after passage of the Infrastructure Investment and Jobs Act, P.L. 117-58, which required information reporting for digital assets in Sec. 6045. The mandate is estimated to raise $28 billion over 10 years, according to the Joint Committee on Taxation.

Final regulations [T.D. 1000] came in July 2024, but more changes followed.  

In June 2025, the IRS extended and modified transition relief for digital asset brokers who must report certain digital asset sales and exchanges by customers on Form 1099-DAafter hearing from brokers that they need more time to comply. And in July, the Congress invoked the Congressional Review Act to remove the portion of the regulations that included reporting requirements for decentralized finance brokers.

Fahrer stressed that the IRS wasn’t trying to make life easier for taxpayers and tax practitioners when it published  the final regulations for digital asset reporting. It did so to raise revenue, he said, pointing to statistics from a 2022 survey commissioned by CoinLedger as evidence.

That CoinLedger survey showed that 58% of investors said they reported cryptocurrency on their taxes, 31% said they did not report crypto on their taxes, and 11% declined to answer.

Between 13 million and 16 million taxpayers are expected to receive one or more Forms 1099-DA, the IRS said in its final regulations, which also note the results of the 2019 tax gap analysis. That analysis shows that net misreporting as a percentage of income for income with little to no third-party information reporting is 55%. In comparison, misreporting for income with some information reporting, such as capital gains, is 17%, the analysis said. With substantial income reporting, such as dividend and interest income, it is just 5%, the IRS said.

“So that’s the goal of the IRS here: raise revenue, reduce the under-reporting,” said Fahrer, a member of the AICPA Digital Asset Tax Task Force and Wall Street Blockchain Alliance.

Reporting digital assets

Fahrer went through several scenarios on the reporting of digital assets. In general, digital assets are treated as property, not currency. In some instances, some transactions involving digital assets could generate ordinary income, as is the case with mining bitcoin.

A common misconception he hears is that exchanging one digital asset for another one is not a reportable event. But it is, because of the description of digital assets as property.

The 2025 Form 1099-DAs must report a taxpayer’s gross proceeds, not necessarily cost basis, of certain digital asset transactions. Starting on Jan. 1, 2026, brokers will have to track cost basis — but only for certain transactions involving digital assets acquired on or after that date. Further, cost basis reporting requirements apply only to the sale or exchange of digital assets that were held in an account provided by the broker account until the broker effects the disposition of the digital asset.

“So that means, if a customer buys a digital asset on, let’s say Feb. 1, 2026, and they send it to their own wallet or to another broker, and then they send it back and liquidate it in a future year, they still don’t have to report cost basis,” he said. “Isn’t this fun?”

In the past, a taxpayer with the same type of virtual currency in different exchanges would choose the most advantageous cost basis, regardless of whether the sale occurred in that wallet, Fahrer said. The IRS nipped that method, called the universal method, in Rev. Proc. 2024-28, and taxpayers now must use the “wallet-by-wallet or account-by-account basis.”

The IRS gave taxpayers a safe harbor to transition with a deadline of Jan. 1, 2025, although some narrow exceptions are available, he said.

Best advice and a warning

If a tax practitioner isn’t already doing this, they should add a question to their tax organizer that’s almost verbatim to the one on Form 1040, U.S. Individual Income Tax Return, Fahrer said. That question:  At any time during [the year], did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

“From there, documentation is very key,” he said, noting that the IRS began cracking down in the digital asset space several years ago. For example, IRS Criminal Investigation saw a 113% increase in digital asset cases between  fiscal years 2018 and 2023.

The IRS contracts with software providers to trace customers who are under-reporting, he said. “They will recalculate taxpayers’ gains and losses, and then the burden of proof is on the taxpayer to say, ‘No, my cost basis and proceeds are actually something else than what you’re calculating.’ … In the absence of any sort of cost-basis data, they assume zero,” he said. “So, if the taxpayers don’t have any records that show it’s not zero, well, that’s really unfortunate.” — To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com