How Crypto Traders Can Stay Ahead of the Problems in Form 1099-DA

The IRS’s new Form 1099-DA is supposed to bring clarity to crypto tax reporting. But as discussed in a recent episode of Block Order featuring crypto tax expert Mark DiMichael, the form may do the opposite.

DiMichael, who leads the digital assets practice at Citrin Cooperman, made the issue clear: the form reports proceeds, not gains. Without cost basis, the 1099-DA does not tell taxpayers what they actually owe.

“If you were hoping to use that form to figure out what you owe, it’s not going to do it,” DiMichael explained.

Why the 1099-DA Falls Short

One of the more useful takeaways from the conversation with DiMichael is that the shortcomings of the 1099-DA are not accidental, but rather reflect the underlying structure of crypto markets.

Unlike traditional brokerage accounts, where a single intermediary tracks the full lifecycle of an asset, crypto transactions are inherently fragmented. Assets move between exchanges, wallets, and decentralized platforms, often without any single entity maintaining a complete record.

DiMichael emphasized this point when explaining why exchanges cannot reliably report cost basis. If assets pass through a wallet, or originate from staking rewards, mining, or payment for services, there is simply no consistent way for a platform to know what a user originally paid.

The result is a reporting system where the IRS receives only part of the picture. It sees proceeds from sales, but not the underlying cost. That creates a structural mismatch, whereby taxpayers must supply the missing data themselves, and any discrepancy between their reporting and the IRS’s records will invite scrutiny.

What the Form Is Actually Telling You

A key theme from the episode is that the 1099-DA should not be treated as a calculation tool. Instead, it functions more like a checkpoint.

DiMichael described his own approach when handling client filings. He does not rely on the form to determine tax liability. Instead, he uses it to confirm that his internally calculated numbers align with what exchanges have reported to the IRS.

In practice, that means starting with the total proceeds listed on the 1099-DA and working backward. “That’s the number I’ve got to get to,” he said, describing how he extracts the aggregate proceeds figure before reconciling it against his own accounting data.

If the internally calculated proceeds match the exchange-reported figures within a reasonable margin, the reporting will be mostly consistent. Small differences are expected, particularly given variations in pricing methodologies across platforms, but the numbers shouldn’t be far off

But the process does not end there. As DiMichael noted, not all activity is captured by the form. Transactions conducted through decentralized exchanges, private wallets, or peer-to-peer transfers often fall outside the 1099-DA framework entirely.

That means taxpayers are effectively stitching together two separate datasets — one reported to the IRS, and one that exists only in their own records.

The Real Shift: Recordkeeping Becomes Central

If there was a single throughline in DiMichael’s comments, it is that crypto tax compliance is moving away from form-based reporting and toward record-based reporting.The IRS is not relying solely on taxpayer disclosures. Instead, the agency is using the same blockchain analytics tools and accounting software as private practitioners.

That parity matters. It means the IRS has increasing visibility into transaction activity, even if it does not yet have complete cost basis data. Over time, that gap is likely to narrow.

In the meantime, the burden remains on taxpayers to maintain accurate, defensible records. DiMichael’s broader advice throughout the episode reinforces this point: waiting until tax season to reconstruct activity is no longer viable, particularly for active traders or anyone engaging in DeFi.

FIFO, HIFO, and New IRS Constraints

The discussion also touched on an area that many crypto investors have historically taken for granted: how gains are calculated. For years, accounting methods like HIFO (Highest In, First Out) have been widely used, and often promoted by tax software providers as a way to minimize liability. But as DiMichael explained, the IRS is now imposing clearer rules around how these methods can be applied.

Most notably, the agency is requiring a shift to wallet-by-wallet accounting. Assets held on one exchange or wallet cannot be treated as interchangeable with those held elsewhere. Taxpayers who want to use specific identification methods like HIFO must document those decisions contemporaneously. One needs to identify which asset they are selling at or before the time of the transaction, not months later when preparing their return.

DiMichael noted that many investors had previously relied on software to make these decisions retroactively, but that approach is no longer defensible. The shift effectively eliminates the ability to optimize tax outcomes after the fact.

What This Means in Practice

Taken together, these changes create a more demanding compliance environment.

The 1099-DA introduces standardized reporting, but it does not simplify the underlying task. Instead, it increases the importance of independent recordkeeping and reconciliation. Taxpayers must now ensure that their own calculations align with what the IRS sees, while also accounting for activity that falls outside formal reporting channels.

The risk is not necessarily immediate enforcement based on the form itself. Rather, it is the potential for mismatches over time. If the IRS sees proceeds and a taxpayer reports a lower gain based on a higher cost basis, that discrepancy may eventually require explanation.

DiMichael’s broader warning during the episode applies here as well: tax issues tend to compound, not resolve themselves. Ignoring gaps in reporting or failing to maintain proper documentation only makes the problem harder to fix later.

The Bottom Line

The introduction of Form 1099-DA is a meaningful development in crypto regulation, but it is not a complete solution.

For now, the most effective approach is to treat the 1099-DA as a reconciliation tool, not a definitive statement. The real work happens elsewhere: in tracking transactions, documenting decisions, and maintaining a clear, consistent accounting methodology.

That may not be the simplification many were hoping for. But it reflects the reality of a market where transparency exists on-chain, while reporting remains fragmented off-chain, and where, at least for the moment, the responsibility for bridging that gap still falls on the taxpayer.