Executive Summary

The digital asset landscape has grown into a significant asset class, encompassing cryptocurrencies, stablecoins, and other tokens.¹ The IRS introduced Form 1099-DA to impose a formal third-party reporting regime.² This was a response to rapid growth and concerns over a significant “tax gap” from underreporting.³

However, this report presents a forensic analysis of the new framework. It concludes that the framework, in its 2025–2026 transitional iteration, is a systemically compromised structure. It is fundamentally unfit for its stated purpose.

Instead of enhancing tax compliance, the framework’s combination of phased-in implementation, critical omissions, and legislative repeals creates a safe harbor for tax evasion. Worse, it creates a novel, state-sanctioned tool for legitimizing large-scale financial fraud.

Core Findings:

1. Critical ‘Proceeds-Only’ Reporting Gap Enables Fraud: The 2025 transitional rule mandates that brokers report “Proceeds” but not “Cost Basis”.⁴ This information-incomplete form is designed to fail the IRS’s automated matching system. It will create a chaotic environment of erroneous tax notices, providing cover for malicious actors.⁵
2. Weaponization of the 1099-DA as a ‘Madoff 2.0’ Tool: This reporting gap creates a powerful vector for fraud. A Ponzi scheme operator, acting as a “broker,” can file an official 1099-DA showing large, fabricated “Proceeds” to an investor.⁶ This document, co-signed by the U.S. government, serves as definitive “proof” of phantom gains. It lulls victims and perpetuates the scheme in a way Bernard Madoff’s counterfeit statements could not.⁷
3. Legislated Loopholes Create Untraceable Blind Spots: The entire framework is nullified by any transaction that bypasses a centralized U.S. broker. This includes all peer-to-peer (P2P) and self-custody wallet transactions.⁸ This gap is exacerbated by two critical failures. First, the intentional omission of any requirement to report wallet addresses, which severs the IRS’s forensic trail.⁹ Second, the legislative repeal of Decentralized Finance (DeFi) broker rules (H.J. Res. 25).¹⁰ This has created a permanent, legal safe harbor for an untraceable, non-reportable parallel financial system.¹¹

Key Recommendations:

This report urgently recommends immediate administrative and legislative countermeasures.

• Suspending automated tax notices based on 2025 forms.
• Issuing emergency guidance to add a “Warning Label” to 2025 forms.
• Initiating new rulemaking to mandate wallet address reporting for transfers.
• Repealing H.J. Res. 25 to close the DeFi loophole.
• Using FinCEN authority to target illicit DeFi activity.¹²

This document serves as a detailed breakdown of these vulnerabilities and the immediate countermeasures required.

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Confidential Report: A Forensic Analysis of Systemic Vulnerabilities in the IRS Form 1099-DA Digital Asset Reporting Framework

I. The 1099-DA Framework: A Foundation of Ambiguity, Omission, and Exploitable Complexity

A. Introduction to the Framework: A Belated and Compromised Response

The IRS has introduced Form 1099-DA, Digital Asset Proceeds From Broker Transactions.¹³ This form represents a long-overdue attempt to impose a third-party reporting regime on the digital asset class.

The framework originates from the 2021 Infrastructure Investment and Jobs Act (IIJA).¹ It was finalized in 2024-2025.¹⁴

The framework mandates that “brokers”—including exchanges and kiosk operators—must report all digital asset dispositions.¹⁵ This applies to all dispositions occurring on or after January 1, 2025.¹⁵

The stated public purpose is to enhance tax compliance and close the “tax gap”.³ This gap—the difference between taxes owed and paid—is projected at $696 billion for tax year 2022.¹⁶

Estimates for the digital asset portion of this gap range from $50 billion to $1 trillion.³ The Joint Committee on Taxation (JCT) estimated the 1099-DA provision alone would generate $28 billion over ten years.⁹

However, the final rules are a product of significant compromise. They include phased-in requirements, broad penalty relief, and critical omissions that resulted from intense industry lobbying.¹⁷

This has created a system that is not merely imperfect. This analysis will demonstrate that the 1099-DA framework is riddled with systemic vulnerabilities, procedural ambiguities, and exploitable loopholes. In its 2025-2026 iteration, it creates a fertile ground for sophisticated financial crime.

B. The “Original Sin”: The 2025 “Proceeds-Only” Reporting Gap

The single greatest structural vulnerability is the phased-in implementation of basis reporting.

For all digital asset transactions in Tax Year 2025, brokers must report Box 1f, “Proceeds.” However, they are expressly not required to report any cost basis information.⁴

The final instructions are unequivocal: “Brokers are not required to report basis information with respect to sales effected in 2025”.¹⁸ This omission includes Box 1d “Date acquired,” Box 1g “Cost or other basis,” and other fields needed for gain/loss calculation (Boxes 1h, 1i, 2, and 6).⁴

This transitional rule relegates the entire burden of basis calculation to the taxpayer.¹⁹ Taxpayers must find and report this data themselves, often by relying on crypto tax software or specialized accountants.²⁰

The forensic implication of this gap is catastrophic. A core function of the IRS’s 1099 program is its automated matching system. This system programmatically compares third-party reports (like 1099s) against a taxpayer’s filed return (Form 1040/Schedule D).²¹

When the system detects a mismatch, it automatically generates an underreporter notice. This is typically a CP2000—an automated, system-generated letter proposing a tax change based on a mismatch.²²

The 2025 1099-DA is designed to fail this automated matching. The IRS system will receive billions of forms reporting, for example, $50,000 in “Proceeds” with a blank “Basis”.²³

The system’s default protocol in this scenario is to assume a $0 basis. It will therefore calculate the entire $50,000 proceed as a taxable capital gain.²⁴

This design will inevitably trigger a tidal wave of erroneous CP2000 notices against millions of compliant taxpayers.⁵

The National Taxpayer Advocate already identifies automated notices as a “most serious problem” for taxpayers due to confusion and delays, even under normal conditions.²⁵

Industry groups project the new rules could generate as many as 8 billion new 1099-DA forms.²³ This will flood an error-prone system and overwhelm both taxpayers and IRS resources.

A taxpayer who had a $49,000 basis and only $1,000 in actual gain will face an automated notice demanding tax on $50,000.

This administrative chaos creates a “noise” environment. The high volume of false-positive alerts provides perfect cover for malicious actors. IRS enforcement resources will be overwhelmed by disputes from honest taxpayers. A fraudster’s 1099-DA, as will be demonstrated, becomes a needle in a haystack of system-generated errors.

The stark contrast between the mature reporting for traditional securities and the neutered 2025 digital asset reporting is detailed below.

Table 1: Comparison of Reporting Frameworks (Form 1099-B vs. Form 1099-DA)

Feature	Form 1099-B (Traditional Securities)	Form 1099-DA (Digital Assets – Tax Year 2025)	Forensic Implication
Asset ID	CUSIP (Committee on Uniform Security Identification Procedures) [26]	Digital Token Identifier (DTI) Code [26]	New, unproven identifier system.
Gross Proceeds	Mandatory	Mandatory 15	Only point of parity.
Cost Basis	Mandatory (for covered securities)	Voluntary / Not Required 4	CRITICAL VULNERABILITY. Creates an information-incomplete form, breaking automated matching.
Acquisition Date	Mandatory (for covered securities)	Voluntary / Not Required 4	Prevents automated gain/loss calculation (Short vs. Long-Term).
Wash Sale Loss	Mandatory (Box 1g) [26]	Voluntary (Box 1i) [26], as rule doesn’t currently apply to crypto (classified as property).[27]	Ambiguous, as rule doesn’t currently apply to crypto (classified as property).
Automated Matching	High (Proceeds + Basis)	Low / Impossible (Proceeds only)	2025 form is designed to fail automated IRS matching, creating administrative chaos.5

This comparison highlights the core problem: the 2025 1099-DA is an incomplete form that cannot be programmatically verified by the IRS, creating the administrative chaos on which fraudsters thrive.

Works Cited

1. Gordon Law. “Form 1099-DA: The Ultimate Guide to the IRS’s New Crypto Tax Form.” February 24, 2025. https://gordonlaw.com/learn/form-1099-da/
2. Internal Revenue Service (IRS). “Digital Assets: Broker compliance.” Last updated October 30, 2025. https://www.irs.gov/filing/digital-assets
3. Baker Institute for Public Policy. “The Debate over New Digital Asset Broker Reporting Rules: Striking the Right Balance.” 2024. https://www.bakerinstitute.org/research/debate-over-new-digital-asset-broker-reporting-rules-striking-right-balance
4. Internal Revenue Service (IRS). “Instructions for Form 1099-DA (Draft).” 2025. https://www.irs.gov/instructions/i1099da
5. U.S. Government Accountability Office (GAO). “Tax Compliance: IRS Needs to Better Manage Risks with New Reporting Requirements.” October 2024. https://www.gao.gov/products/gao-24-107028
6. U.S. Securities and Exchange Commission (SEC). “Investor Alert: Ponzi Schemes Using Virtual Currency.” June 23, 2014. https://www.sec.gov/files/ia_virtualcurrencies.pdf
7. University of Michigan Law School. “Hiding in Plain Sight: The Madoff Scandal and Regulatory Failure.” Michigan Journal of Economics, April 4, 2025. https://sites.lsa.umich.edu/mje/2025/04/04/hiding-in-plain-sight-the-madoff-scandal-and-regulatory-failure/
8. Crypto Tax Calculator. “1099-DA FAQs for Investors.” 2025. https://cryptotaxcalculator.io/us/guides/1099-da-faqs-for-investors
9. Koinly. “IRS Guidance on Crypto Brokers Reporting.” October 2023. https://koinly.io/blog/irs-guidance-crypto-brokers-reporting/
10. Congress.gov. “H.J.Res.25 – 119th Congress (2025-2026).” 2025. https://www.congress.gov/bill/119th-congress/house-joint-resolution/25
11. Current Federal Tax Developments. “The Demise of DeFi Broker Reporting: An Analysis of H.J. Res. 25 and the Overturned T.D. 10021.” April 11, 2025. https://www.currentfederaltaxdevelopments.com/blog/2025/4/11/the-demise-of-defi-broker-reporting-an-analysis-of-hj-res-25-and-the-overturned-td-10021
12. Thomson Reuters. “IRS asks for help with combatting digital asset fraud.” August 15, 2025. https://tax.thomsonreuters.com/news/irs-asks-for-help-with-combatting-digital-asset-fraud/
13. Internal Revenue Service (IRS). “About Form 1099-DA.” Last updated March 25, 2025. https://www.irs.gov/forms-pubs/about-form-1099-da
14. EY. “IRS finalizes Form 1099-DA and instructions with further details.” February 13, 2025. https://taxnews.ey.com/news/2025-0213-irs-finalizes-form-1099-da-and-instructions-with-further-details-adds-digital-asset-reporting-to-draft-2025-general-instructions-for-certain-information-returns
15. Internal Revenue Service (IRS). “Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets.” FS-2024-23, June 2024. https://www.irs.gov/newsroom/final-regulations-and-related-irs-guidance-for-reporting-by-brokers-on-sales-and-exchanges-of-digital-assets
16. Internal Revenue Service (IRS). “IRS: The Tax Gap.” Last updated October 15, 2024. https://www.irs.gov/statistics/irs-the-tax-gap
17. Baker Tilly. “Final digital asset broker reporting regulations have arrived.” July 16, 2024. https://www.bakertilly.com/insights/accounting-insights-5
18. Internal Revenue Service (IRS). “Instructions for Form 1099-DA (Draft).” 2025. https://www.irs.gov/pub/irs-pdf/i1099da.pdf
19. Internal Revenue Service (IRS). “Tax professionals can prepare now to assist their clients with reporting proceeds from certain digital asset transactions.” September 25, 2025. https://www.irs.gov/newsroom/tax-professionals-can-prepare-now-to-assist-their-clients-with-reporting-proceeds-from-certain-digital-asset-transactions
20. Chainwise CPA. “Form 1099-DA Explained.” 2024. https://chainwisecpa.com/form-1099-da-explained/
21. U.S. Government Accountability Office (GAO). “Tax Compliance: IRS Needs to Better Manage Risks with New Reporting Requirements (GAO-24-107028).” October 2024. https://www.gao.gov/assets/gao-24-107028.pdf
22. Internal Revenue Service (IRS). “Accessible Publication 4444: Guide to the Taxpayer Advocacy Panel.” 2024. https://www.irs.gov/pub/irs-access/p4444_accessible.pdf
23. The Block. “IRS’s controversial tax reporting ‘broker rule’ punts on DeFi.” July 2024. https://www.theblock.co/post/302679/irs-controversial-tax-reporting-rule-brokers-punts-defi
24. Koinly. “Form 1099-DA Explained: The New Crypto Tax Form.” October 2024. https://koinly.io/blog/form-1099-da/
25. Taxpayer Advocate Service (TAS). “2024 Annual Report to Congress: Most Serious Problems.” 2025. https://www.taxpayeradvocate.irs.gov/reports/2024-annual-report-to-congress/most-serious-problems/
26. Internal Revenue Service (IRS). “Draft Form 1099-DA.” 2024. https://www.irs.gov/pub/irs-dft/f1099da–dft.pdf
27. Cryptoworth. “Understanding the IRS Form 1099-DA Draft: An In-Depth Analysis.” 2024. https://blog.cryptoworth.com/understanding-the-irs-form-1099-da-draft-an-in-depth-analysis/