Form 1099-DA Is Here: What California Crypto Investors Need to Know About the New Reporting Rules

The era of reporting cryptocurrency on the honor system is over. Starting with tax year 2025, custodial crypto brokers — Coinbase, Kraken, Gemini, and others — are issuing Form 1099-DA (Digital Asset Proceeds) to both the IRS and taxpayers, reporting gross proceeds from the sale, exchange, or disposal of digital assets. The IRS now has the same automated matching capability for crypto that it’s had for stocks and bonds for decades.

At The Law Office of Pietro Canestrelli, we’ve helped crypto investors across Temecula, San Diego, Riverside, San Bernardino, and throughout California navigate tax reporting since the early days of Bitcoin. With 1099-DA now live, here’s what you need to know — and what’s coming next.

What Is Form 1099-DA?

Form 1099-DA is the IRS’s new information return for digital asset transactions. It requires custodial brokers (centralized exchanges that hold customer assets) to report:

Gross proceeds from the sale or exchange of digital assets
Date of sale for each transaction
Cost basis (for assets acquired on or after January 1, 2026 — see below)
Gain or loss (when cost basis is available)

The form is structurally similar to Form 1099-B used for stock and securities sales. It covers all taxable dispositions: selling crypto for cash, exchanging one crypto for another, using crypto to purchase goods or services, and certain DeFi transactions conducted through custodial platforms.

The Cost Basis Gap: The Biggest Problem for 2025 Filing

Here’s the critical issue for crypto investors filing their 2025 returns in 2026: cost basis reporting is only mandatory for assets acquired on or after January 1, 2026. For assets acquired before that date — which includes most long-term holdings — exchanges may report gross proceeds without cost basis, or report cost basis as zero or unknown.

This creates a dangerous mismatch. If your 1099-DA shows $100,000 in gross proceeds and no cost basis, the IRS’s automated matching system treats the entire $100,000 as gain. If your actual basis was $80,000 (meaning the true gain was only $20,000), you’ll receive a CP2000 notice assessing tax on $80,000 of phantom gain — unless you properly report your basis on your return.

To protect yourself:

Maintain your own records of acquisition dates and costs for all crypto acquired before 2026
Use crypto tax software (CoinTracker, Koinly, TaxBit, etc.) to reconcile exchange records with on-chain activity
Report full cost basis on Form 8949 and Schedule D, even if the 1099-DA doesn’t include it
Keep documentation supporting your basis claims (exchange purchase confirmations, bank transfer records, wallet histories)

Our earlier crypto reporting guide covers this issue in detail, and our broader crypto tax guidance provides foundational context.

What the IRS Can See Now

With 1099-DA in place, the IRS now has automated visibility into:

Every sale or exchange conducted through a custodial broker
The identity of the taxpayer making the transaction (via KYC verification)
The date and gross proceeds of each disposition
Patterns of trading activity that can be matched against reported income

The IRS’s AI enforcement tools can now cross-reference 1099-DA data with your tax return in near real-time. Discrepancies — unreported transactions, understated gains, or missing 1099-DA income — will trigger automated notices.

DeFi, Non-Custodial Wallets, and What’s Not Reported (Yet)

The current 1099-DA rules apply to custodial brokers only. Several categories of crypto activity are not yet subject to broker reporting:

Non-custodial wallets: MetaMask, Ledger, Trezor, and other self-custody wallets don’t report to the IRS (they don’t hold your assets or conduct transactions on your behalf)
DeFi protocols: Decentralized exchanges (Uniswap, SushiSwap), lending platforms (Aave, Compound), and yield farming protocols are not classified as brokers under current rules
Peer-to-peer transactions: Direct wallet-to-wallet transfers and trades
NFT sales: Generally not reported on 1099-DA unless conducted through a custodial platform

Important: The absence of broker reporting does not mean these transactions are not taxable. All crypto dispositions are taxable events regardless of whether a 1099-DA is issued. The IRS has access to blockchain analytics tools that can trace transactions across wallets and protocols. Not reporting taxable DeFi income because no 1099-DA was issued is a common — and dangerous — mistake.

California’s Treatment of Crypto Gains

California taxes cryptocurrency gains as ordinary income — the state does not offer a preferential capital gains rate. This means crypto gains in California can be taxed at rates up to 13.3%, on top of federal long-term capital gains rates of 15-20% (plus the 3.8% NIIT for high earners).

The combined federal and California tax rate on crypto gains for high-income California investors can exceed 37%. This makes loss harvesting, holding period management, and basis optimization even more important for California crypto investors than for investors in lower-tax states.

Common Taxable Events That Investors Miss

Crypto-to-crypto exchanges: Swapping Bitcoin for Ethereum is a taxable event — you’ve disposed of Bitcoin and must recognize gain or loss
Staking rewards: The IRS considers staking rewards as taxable income at the time they’re received (not when sold), valued at fair market value on the date of receipt
Airdrops: Free tokens received via airdrop are taxable as ordinary income at fair market value when received
Mining income: Crypto received from mining is ordinary income, valued at fair market value when received
Liquidity pool rewards: Tokens earned from providing liquidity are generally taxable as ordinary income
Wrapped tokens: Wrapping and unwrapping tokens (e.g., converting ETH to wETH) may or may not be taxable depending on the specific mechanism — the IRS has not provided definitive guidance

Responding to a CP2000 Notice for Crypto

If the IRS sends you a CP2000 notice asserting that you underreported income from crypto transactions, it means the automated matching system found a discrepancy between your 1099-DA data and your tax return. This is not an audit — it’s a proposed adjustment.

How to respond:

If the IRS is correct: Pay the additional tax, or request a payment arrangement
If the IRS is wrong: Respond with documentation showing your cost basis, holding periods, and correct gain/loss calculations. This is where good record-keeping pays off.
If you need help: A tax attorney experienced in crypto cases can prepare your response and negotiate with the IRS if the proposed adjustment is incorrect

Visit our IRS letters guide for general guidance on responding to IRS notices.

Planning for 2026 and Beyond

Starting January 1, 2026, cost basis reporting becomes mandatory for newly acquired assets. This means exchanges will track your basis automatically for future purchases — but assets acquired before 2026 remain your responsibility to track.

Action items for the rest of 2026:

Reconcile all pre-2026 holdings with your own basis records
Set up crypto tax software if you haven’t already
Consider tax-loss harvesting before year-end (crypto is not subject to wash sale rules under current law, though this may change)
Document all DeFi activity, staking rewards, and airdrops contemporaneously
If you have unreported crypto income from prior years, consider voluntary disclosure before the IRS discovers it through 1099-DA matching

Get Expert Help with Crypto Taxes

At The Law Office of Pietro Canestrelli, we represent crypto investors across Temecula, San Diego, Riverside, San Bernardino, and throughout California in tax planning, compliance, and IRS disputes. Whether you need help reporting complex DeFi activity, responding to a CP2000 notice, or resolving unreported crypto income from prior years, our team understands both the technology and the tax law.

Have crypto tax questions? Contact our office for a consultation.

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