Cryptocurrency Tax Update: Form 1099-DA, Backup Withholding Relief, and New Federal Changes

Cryptocurrency reporting is entering a new phase beginning with the 2025 taxable year. The IRS has introduced Form 1099-DA (Digital Asset Proceeds from Broker Transactions), expanded broker reporting rules, issued transitional relief for backup withholding, and — in a significant development — Congress has rolled back part of the digital asset reporting regulations.

At Velin & Associates, Inc., CPA Los Angeles, we are helping clients prepare now for these changes so that 2026 filing season does not become unnecessarily complicated.

Whether you are a YouTuber, TikToker, Shopify store owner, Amazon seller, healthcare professional, high-net-worth investor, or business owner accepting crypto, these updates may directly affect you.

Form 1099-DA: What Is Changing in 2026?

Beginning with the 2025 tax year (forms issued in early 2026), brokers will begin issuing Form 1099-DA to report digital asset transactions.

This form is similar to Form 1099-B, which reports stock and securities transactions.

According to IRS guidance (FS-2025-06):

• 2025 Forms 1099-DA must be issued by February 17, 2026
• Brokers must report:
  • Date of acquisition
  • Date of sale
  • Gross proceeds
  • Character of gain (short-term, long-term, or ordinary)
  • Certain basis information (in limited cases)
  • Wash sale information (if applicable in specific circumstances)

This is a major shift toward standardized crypto reporting.

Important Details Taxpayers Must Know

1. The “Virtual Currency” Question on Form 1040

If you receive a Form 1099-DA, you must check “Yes” to the digital asset question on Page 1 of Form 1040.

This question applies if you:

• Sold crypto
• Exchanged crypto
• Used crypto to pay for goods or services
• Received crypto as income
• Received crypto from staking or mining

Failure to answer this accurately increases audit exposure.

2. Cost Basis Reporting — But Not Yet for Everyone

Form 1099-DA will eventually include acquisition date and cost basis information.

However, this is only required for digital assets classified as “covered securities” — meaning digital assets acquired after December 31, 2026.

That means:

• For 2025 and 2026 sales, basis reporting may be incomplete.
• Taxpayers remain responsible for tracking their own basis.

📌 Practice Tip:
Now is the time to organize wallet records, exchange statements, and transfer history. Waiting until busy season in 2026 to reconstruct basis could be extremely difficult — especially for high-volume traders.

3. Why Is There a Wash Sale Box?

Cryptocurrency is generally not subject to wash sale rules under current law because it is not classified as a security.

However, the form includes a wash sale box because:

• Some digital assets may be classified as securities in certain cases.
• If a digital asset is legally treated as a security, wash sale rules could apply.

This signals possible future enforcement developments.

Backup Withholding Relief Extended

Under final regulations adopted in 2024, digital asset brokers must:

• Report digital asset sales on Form 1099-DA
• Perform backup withholding in certain situations

Backup withholding generally applies when a taxpayer fails to provide a correct TIN (Taxpayer Identification Number).

However, Notice 2025-33 extends transitional relief:

Extended Through 2026:

• General exemption from backup withholding requirements

Extended Through 2027:

• Relief if brokers use the IRS TIN Matching Program for preexisting customers
• Ability to treat certain preexisting customers as exempt foreign persons based on non-U.S. addresses
• Ability to limit backup withholding when crypto is exchanged for other crypto

Important:
This relief applies only to backup withholding, not reporting. Reporting requirements remain in place.

Major Legislative Change: Digital Asset Reporting Rule Scaled Back

On April 10, 2025, President Trump signed a joint resolution disapproving a portion of the IRS’s final digital asset reporting regulations (P.L. 119-5).

In plain English:

The IRS’s rule requiring certain digital asset trading platforms providing front-end services to file Form 1099-DA was invalidated.

This effectively narrows who qualifies as a “broker” required to file the form.

This reduces reporting burdens for certain platforms — but does not eliminate reporting requirements for traditional brokers and exchanges.

For taxpayers, this means:

• Some platforms may issue Form 1099-DA.
• Others may not.
• You are still responsible for reporting all taxable crypto transactions.

What This Means for Our Clients

Let’s break this down using real-world examples relevant to our audience.

Example 1: YouTuber Paid in Crypto

A content creator receives sponsorship payments in cryptocurrency.

Tax implications:

• Crypto received as payment is taxable as ordinary income at fair market value on the date received.
• Later sale triggers capital gain or loss.
• If sold in 2025, a Form 1099-DA may report gross proceeds.
• Basis tracking remains the taxpayer’s responsibility.

Without organized records, income could be overstated or understated.

Example 2: Shopify or Amazon Seller Accepting Crypto

An online commerce business accepts Bitcoin as payment.

Tax considerations:

• Each transaction is taxable at the USD value on receipt.
• Subsequent conversion creates capital gain or loss.
• Business bookkeeping must properly reflect both revenue and crypto disposition.

Failure to track basis accurately could result in double taxation.

Example 3: High-Net-Worth Investor Trading Across Multiple Exchanges

A high-income investor trades crypto on several exchanges and decentralized platforms.

Challenges include:

• Inconsistent reporting between exchanges
• Partial basis reporting
• Wallet-to-wallet transfers not reflected correctly
• Potential short-term vs. long-term classification errors

Form 1099-DA will increase visibility for the IRS, but incomplete basis reporting means taxpayers must maintain independent records.

Example 4: Doctor or Dental Practice Investing in Crypto Through an S-Corp

If crypto is held inside an S-Corporation:

• Gains flow through to shareholders.
• Character matters (short-term vs long-term).
• Reporting mismatches between entity and personal return can trigger notices.
• Backup withholding and broker reporting may apply at the entity level.

Proper coordination between entity bookkeeping and personal tax planning is essential.

California Considerations

California generally conforms to federal income recognition principles for digital assets.

However:

• California does not offer preferential long-term capital gain rates.
• All gains are taxed at ordinary state income tax rates.
• High earners may face combined federal and California marginal rates exceeding 45%.

Strategic timing of gains and losses is critical.

Planning Considerations for 2025 and 2026

1. Organize historical cost basis records now.
2. Reconcile exchange data with wallet transfers.
3. Monitor which platforms will issue Form 1099-DA.
4. Prepare for increased IRS matching starting in 2026.
5. Evaluate entity structure for crypto holdings.
6. Consider loss harvesting opportunities (where appropriate).

The era of informal crypto reporting is ending.

Documentation and compliance now matter more than ever.

The Bottom Line

Form 1099-DA represents a significant step toward standardized crypto reporting.

While backup withholding relief provides temporary breathing room, reporting requirements are expanding.

Congress has scaled back part of the broker definition — but taxpayers remain fully responsible for reporting digital asset income accurately.

For creators, online entrepreneurs, healthcare professionals, and high-net-worth investors in Los Angeles, proactive planning is critical to avoid:

• IRS notices
• Mismatched reporting
• Basis errors
• Overstated taxable income
• Penalties and interest

For more information about our tax planning services, contact us today: visit ourwebsite.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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