# New IRS Digital Asset Tax Form: Experts Warn of Potential Taxation Errors

The Internal Revenue Service's (IRS) introduction of Form 1099-DA for reporting digital asset transactions has stirred concerns among industry experts about potential taxation errors. Issues primarily arise due to incomplete cost basis data from cryptocurrency exchanges, which could lead to inaccurate tax filings and financial risks for investors.

A recent report from Bitcoin.com (dated October 22) highlights expert commentary on the matter. Nick Slettengren, founder of the digital asset accounting platform Count On Sheep, pointed out the inherent challenges that incomplete data within the cryptocurrency ecosystem presents, potentially undermining the accuracy the IRS aims to achieve with the form.

Slettengren explained, “Many exchanges lack the ability to accurately track a user's full historical asset transfer activity across platforms. Often, these exchanges report the cost basis at the time of sale as ‘zero,’ which inflates taxable gains.” For example, when a user purchases Bitcoin (BTC) on Exchange B but transfers it to Exchange A before selling it, Exchange A would not have access to the original purchase price and might report the cost basis incorrectly as zero. This oversight creates "phantom gains," forcing taxpayers to pay taxes on overestimated profits that never actually existed.

# Fragmented Data Between Cryptocurrency Exchanges Creates Complexities

One of the key challenges is the absence of mandatory data-sharing standards among exchanges, which leads to discrepancies in transaction reporting. Slettengren explained, “When a user transfers assets between two exchanges, one exchange may categorize it as a sale while the receiving exchange treats it as a new purchase. These inconsistencies may cause the IRS to misinterpret transactions, resulting in double taxation or assumptions of unreported income.”

To counter these issues, Slettengren advises users to consolidate their transaction records across all wallets and exchanges. This ensures accurate determination of the cost basis for tax purposes. However, he warns against a reliance on conventional tax preparation software or general accountants. “Navigating the complexities of digital asset transactions requires accountants and experts who specialize in cryptocurrency ecosystems and can analyze transaction data at a forensic level,” he stated.

# The Need for Expert-Driven Digital Asset Accounting

Slettengren stressed that the inability of exchanges to maintain precise transaction data could lead to erroneous tax filings, exposing investors to risks such as unknowingly paying taxes on phantom gains or triggering IRS audits. He highlighted the role of digital asset accounting specialists in restoring transaction records and implementing strategies to ensure compliance with IRS regulations, which ultimately reduces exposure to these risks.

# Optimizing Tax Strategies for High-Net-Worth Cryptocurrency Investors

Digital asset accounting isn’t only about compliance—it can also be leveraged for proactive tax planning. For high-net-worth cryptocurrency investors, Slettengren advocated for tax minimization strategies, such as tax loss harvesting and specific identification methods.

Tax loss harvesting involves selling depreciated assets deliberately to offset gains from more profitable investments, thereby reducing overall tax liabilities. Meanwhile, specific identification allows taxpayers to strategically select which asset lots to sell, maximizing tax savings by controlling which gains or losses are realized. These strategies are particularly beneficial for investors aiming to minimize liabilities in volatile markets.

# Proactive Tax Planning Is Key for Cryptocurrency Investors

As the cryptocurrency market continues to expand alongside evolving tax regulations, accountants and investors must prioritize proactive tax strategies. Accurate reporting, meticulous record-keeping, and professional expertise in digital asset accounting are essential for avoiding regulatory pitfalls—such as audits or excessive taxes—and optimizing financial outcomes. By adhering to these principles, cryptocurrency investors can ensure compliance while positioning themselves for growth in an increasingly regulated environment.

With the IRS formalizing reporting requirements through Form 1099-DA, Slettengren’s insights underscore the importance of understanding the nuances of digital asset taxation. Whether for everyday investors or high-net-worth individuals, staying informed and working with experts familiar with cryptocurrency transactions will be essential for navigating this complex landscape effectively.