The IRS now requires crypto brokers to report gross proceeds from digital asset sales on a brand-new form, but most of those forms will arrive without the one number that actually determines how much tax you owe: your cost basis. That gap between what the government knows you sold and what you actually paid creates a trap. Traders who file based solely on what their Form 1099-DA shows, without calculating their own basis, could end up reporting phantom gains and sending the IRS far more than they legally owe.
What Form 1099-DA Reports and What It Leaves Out
Starting with transactions on or after January 1, 2025, custodial platforms and hosted wallet providers must file the new information return with the IRS, reporting gross proceeds from digital asset sales under the final rules described in the agency’s digital asset guidance. That means if you sold $50,000 worth of Bitcoin through a U.S. exchange during 2025, the IRS will receive a document showing that $50,000 figure. But here is the problem: the form will generally not include your cost basis for 2025 sales. According to the official instructions for 1099-DA, basis reporting is phased in and only becomes mandatory for certain covered digital assets acquired on or after January 1, 2026.
The practical result is that most 1099-DA statements reflecting 2025 transactions will show how much you received but stay silent on how much you originally spent. The IRS has stated plainly in its guidance for practitioners that taxpayers must determine their basis before filing. If you bought that Bitcoin for $40,000 and sold it for $50,000, your taxable gain is $10,000, not $50,000. But a trader who simply plugs in the gross proceeds number from the form without subtracting basis could report the full sale amount as gain, resulting in a tax bill four or five times larger than it should be and potentially locking in an overpayment that may be difficult to unwind later.
Why the Phased Rollout Creates Confusion
The IRS designed this system to mirror how securities brokers have reported stock and bond transactions for years. The U.S. Department of the Treasury has described the rationale as aligning digital asset reporting with existing information-reporting standards to improve overall compliance. Treasury also emphasized that the final rules do not change underlying tax obligations for digital assets. You already owed tax on crypto gains; the new form simply tells the IRS about those transactions in a standardized way. But the staggered timeline, with proceeds reported now and basis arriving later for only a subset of assets, introduces a year-long blind spot that could catch less experienced filers off guard and leave them unsure how much of their sale is actually taxable.
The phase-in structure means that for the 2025 tax year, the IRS will have one side of the equation (what you sold for) but not the other (what you paid). When the agency’s automated matching systems compare your return to the 1099-DA data, any mismatch could trigger a notice. A trader who omits the form entirely risks an audit flag, while one who reports gross proceeds as if it were all gain risks overpaying. Neither outcome is good, but the overpayment scenario is the one that quietly costs people real money without ever generating an IRS letter. The confusion is heightened by the fact that some digital assets acquired after 2026 may eventually be “covered” with reported basis, while older holdings remain “noncovered,” forcing taxpayers to juggle two different documentation regimes in parallel.
Foreign Brokers and Coverage Gaps
The reporting requirement applies to brokers operating within the U.S. regulatory perimeter, including custodial exchanges and hosted wallet providers. But the IRS has acknowledged that foreign platforms may not issue a 1099-DA at all. That does not mean those transactions are tax-free or invisible. The same IRS explanation makes clear that taxpayers must report all taxable digital asset transactions, whether or not they receive an information return. Traders who use offshore platforms and assume silence from the IRS equals permission to skip reporting are making a separate and potentially costly mistake that could compound over multiple years of unreported activity.
This coverage gap also means that some traders will receive a 1099-DA from one exchange but not from another, creating a patchwork of information that makes accurate filing harder. A person who traded on a U.S. exchange and a foreign platform would need to reconcile both sets of records manually, combining on-chain data, exchange exports, and any personal logs they kept. The burden falls entirely on the taxpayer, and the IRS has offered no automated consumer-facing tool to help bridge that divide. Instead, the agency’s broader digital asset resources stress that individuals are responsible for tracking their own transactions, including transfers between wallets and platforms, and for correctly classifying each disposition as a sale, exchange, or other taxable event.
Transition Relief Adds Flexibility but Also Complexity
Recognizing the difficulty of a first-year rollout, the IRS announced transition relief for brokers that extends or modifies some of the initial requirements for 1099-DA reporting and backup withholding. Separately, the agency has referenced temporary exceptions under Notice 2024-57 and a basis-allocation transition safe harbor under Revenue Procedure 2024-28 as part of its wider digital asset guidance. These measures give brokers more time to build compliant systems and reduce the risk of early reporting errors, but they also mean that the forms taxpayers receive in early 2026 may vary significantly in completeness depending on which platform issued them and how quickly each broker implemented the optional safe harbors.
Adding another wrinkle, Form 1099-DA is not part of the federal-state combined filing program for tax year 2025. Brokers must file the form directly with the IRS, and separate state filing obligations remain. For taxpayers in states with their own capital gains or income taxes, this could mean receiving inconsistent information at the federal and state levels, or receiving federal forms with no corresponding state copy. The administrative friction is real, and it falls disproportionately on individual filers who lack professional tax help and may not realize that a state return can still require full reporting of crypto gains even if no state-level information return ever shows up in their mailbox.
The Cost Basis Problem in Plain Terms
Cost basis is simply what you paid for an asset, including fees and certain acquisition costs. When you sell, your taxable gain or loss equals the sale price minus that basis, adjusted for any prior taxable events like airdrops or forks where income was recognized. For a stock purchased through a traditional brokerage, the broker tracks and reports both numbers and sends a consolidated statement that feeds directly into your tax software. Crypto has operated without that infrastructure for over a decade, and the 1099-DA is the government’s attempt to close that gap by bringing digital assets into the same reporting framework that already applies to securities. But because basis reporting does not kick in until transactions involving assets acquired on or after January 1, 2026, anyone selling crypto they bought before that date will need to dig through their own records, or through third-party portfolio tools, to establish what they paid.
This is where the overpayment risk becomes tangible. Consider a trader who bought Ethereum at various prices over several years and sold a portion in 2025. The 1099-DA will show the gross proceeds from that sale. Without basis, the entire sale amount looks like profit on paper. If that trader files a return reflecting only the proceeds figure, the IRS will assess tax on the full amount. The trader would effectively be paying tax on money they already had, not just on the gain. For someone with tens of thousands of dollars in transactions, the difference could be substantial. In addition, if the trader later finds better records and wants to correct the mistake, they may need to amend prior returns, potentially across multiple years, which can be time-consuming and may require professional assistance.
How the Reporting Infrastructure Is Taking Shape
The Federal Register regulations established the legal framework for broker reporting on digital assets, covering both gross proceeds and, over time, basis for covered assets. The rules also include provisions for certain decentralized finance intermediaries and front-end service providers, though those requirements have drawn significant industry pushback and may evolve as implementation unfolds. Within the IRS’s broader information reporting system, the general instructions for information returns for 2025 now list Form 1099-DA alongside other familiar forms, complete with due dates, electronic filing thresholds, and penalties for noncompliance. In other words, the form is being woven into the same infrastructure that handles long-standing returns like 1099-B for securities and 1099-INT for interest.
That integration signals where the IRS is heading: a world where crypto transactions are reported with the same granularity as stock trades, and where the agency’s matching algorithms can quickly compare what brokers report with what taxpayers file. The legislative authority behind these rules is rooted in the Infrastructure Investment and Jobs Act, which expanded the definition of “broker” to capture certain digital asset intermediaries and directed the Treasury and IRS to create implementing regulations. Over time, as more assets become covered and more brokers refine their systems, taxpayers can expect 1099-DA forms to grow more detailed, potentially including basis for newer holdings, adjusted proceeds, and indications of short-term versus long-term treatment. Until then, however, the gap between gross proceeds and actual gain remains, and the responsibility for filling it correctly rests squarely on individual filers.
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*This article was researched with the help of AI, with human editors creating the final content.
Julian Harrow specializes in taxation, IRS rules, and compliance strategy. His work helps readers navigate complex tax codes, deadlines, and reporting requirements while identifying opportunities for efficiency and risk reduction. At The Daily Overview, Julian breaks down tax-related topics with precision and clarity, making a traditionally dense subject easier to understand.
