Last updated: October 2026
Digital asset reporting changed materially in the last two years, and the change runs in one direction. U.S. brokers now report customers’ digital asset sales to the IRS on Form 1099-DA, and from 2026 transactions they report cost basis as well. The practical consequence is that the IRS increasingly receives a record of what you sold and, going forward, what you paid — which makes the gap between broker records and taxpayer records the thing to resolve before it becomes an examination. Bay Legal, P.C. advises California holders and businesses on the legal side of digital asset tax.
Definition: Digital assets are treated as property for federal tax purposes, so disposing of them is generally a taxable event producing a capital gain or loss.
What does Form 1099-DA report, and when?
It reports digital asset dispositions from custodial brokers to the IRS and to you, transaction by transaction, in the way Form 1099-B has long reported securities sales. The rollout is phased, and the two dates matter. Full details are published by the Internal Revenue Service.
| Transactions occurring | What the broker reports | You receive the form |
|---|---|---|
| 2025 | Gross proceeds only — basis reporting was not required | Early 2026, with the basis box generally blank |
| 2026 onward | Gross proceeds, plus cost basis for covered assets | Early 2027 onward |
A covered asset for this purpose is broadly one acquired on or after 1 January 2026 in an account where the broker holds custody. Assets bought earlier, or transferred in from a self-custody wallet or another platform, are non-covered — the broker reports what you sold but not what you paid, and calculating basis remains entirely your problem.
Several categories fall outside the reporting regime altogether, which is a trap rather than a relief. Sales on non-U.S. exchanges, sales of assets transferred in from elsewhere, and transactions on non-custodial platforms may generate no form at all. The obligation to report the income does not depend on receiving one.
Did the rules for decentralised platforms change?
Yes, and in the opposite direction to everything else. Regulations finalised in late 2024 would have swept non-custodial decentralised finance platforms into the definition of broker. Congress repealed those rules by joint resolution in April 2025, so DeFi front-ends are not subject to the broker reporting obligation.
This is worth stating clearly because it is widely misunderstood in both directions. Non-custodial platforms do not report — but the taxpayer’s obligation to report income and gains from activity on them is unchanged. The absence of a form is not an absence of a liability, and with custodial reporting now in place the contrast between the two is more visible to the IRS than it used to be.
Which digital asset events are taxable?
More than most holders assume. Because digital assets are property rather than currency, disposing of them realises gain or loss even when no dollars are involved.
- Selling for fiat — the obvious one.
- Trading one asset for another — a disposal of the first asset, taxable on the difference between its basis and its value at the time, whether or not anything was cashed out.
- Spending crypto on goods or services — also a disposal.
- Receiving staking or mining rewards — generally ordinary income at fair market value when received, with that value becoming the basis for a later disposal.
- Receiving payment in digital assets — income at fair market value, with the same basis consequence.
Transferring assets between your own wallets is not a disposal, though it frequently breaks the broker’s basis record, which is how a non-taxable event still causes a reporting problem.
California conforms to the federal treatment of digital assets as property for state income tax purposes, so a federally taxable disposal is generally taxable here too. The Franchise Tax Board publishes the state position. California imposes no separate digital asset tax and does not distinguish long-term from short-term gain at state level.
What if past years were not reported correctly?
This is a common position and it has an ordinary route out. Many holders traded across several platforms over several years, lost access to records, or did not appreciate that a token-for-token swap was a taxable disposal. Others reported what a platform told them without checking it.
The available responses depend on the facts. An amended return corrects an error in a filed year. Where a filing was not made at all, or the position is more serious, the IRS operates a voluntary disclosure practice for taxpayers coming forward before an examination begins. Which route fits is a legal judgment turning on what was known and when, and it is a judgment worth taking before contact is made rather than after.
The relevant change is that waiting is now less attractive than it was. Broker reporting means the IRS increasingly holds independent records of disposals, so a discrepancy that was previously invisible is now a matching problem. Acting before an examination opens preserves options that closing it does not.
Assets held through non-U.S. exchanges may also raise foreign account reporting questions, which sit under a separate regime administered by FinCEN and carry their own penalties. That analysis should be done alongside the income tax position rather than after it.
Where does legal advice end and accounting begin?
Worth stating plainly, because the two are frequently conflated on this subject.
| Legal work | Accounting work |
|---|---|
| Whether a transaction is a taxable disposal | Computing gain and loss across a transaction history |
| Entity structure for a digital asset business | Preparing and filing returns and amended returns |
| Representation in an IRS or FTB examination | Reconciling exchange records and cost basis |
| Voluntary disclosure strategy and privilege | Bookkeeping and ongoing compliance |
| Securities and regulatory questions on a token | Preparing the numbers a return depends on |
Bay Legal, P.C. does the work in the left column and works alongside the client’s certified public accountant on the right. One practical reason the division matters: communications with an attorney may attract privilege that communications with an accountant generally do not, which is relevant where a past position is being reviewed.
Who advises on digital asset matters at Bay Legal?
Managing attorney Jayson R. Elliott leads the firm’s business practice, including entity structure for digital asset businesses and the transactional and regulatory questions that arise around them. Where a matter becomes contested, it moves to the litigation group under lead litigation attorney Evan Livingstone.
Scope. Bay Legal, P.C. does not provide accounting, bookkeeping, tax preparation, or tax filing services, and does not compute gains from transaction histories. The firm advises on the legal treatment of digital asset transactions, entity structure, and regulatory questions, and works alongside the client’s certified public accountant. Regulatory questions concerning tokens, exchanges, and money transmission may also involve the Department of Financial Protection and Innovation.
Bay Legal, P.C. serves clients statewide from offices in Palo Alto and Los Angeles, including across San Francisco and the wider Bay Area.
Frequently Asked Questions
Will I receive a Form 1099-DA for my crypto?
If you sold or exchanged digital assets through a U.S. custodial broker, yes. For 2025 transactions brokers reported gross proceeds only, so the basis box is generally blank. From 2026 transactions they also report cost basis for covered assets. Sales on foreign exchanges or non-custodial platforms may generate no form at all.
Do I owe tax if I only traded one coin for another?
Generally yes. Digital assets are treated as property, so exchanging one for another is a disposal of the first, taxable on the difference between its basis and its value at the time — even though no dollars were involved. This is the single most common misunderstanding, and it compounds across an active trading history.
What is a covered asset, and why does it matter?
Broadly, one acquired on or after 1 January 2026 in an account where the broker holds custody. For covered assets the broker reports both proceeds and cost basis. For anything bought earlier or transferred in from another wallet or platform, the broker reports only what you sold and calculating basis remains your responsibility.
Do decentralised platforms report to the IRS?
No. Regulations finalised in late 2024 would have treated non-custodial DeFi platforms as brokers, but Congress repealed them in April 2025. Your obligation to report income and gains from that activity is unchanged. The absence of a form is not the absence of a liability, and the contrast is now more visible than it was.
I did not report crypto in past years. What are my options?
It depends on the facts. An amended return corrects an error in a filed year; where returns were not filed or the position is more serious, the IRS operates a voluntary disclosure practice for taxpayers coming forward before an examination begins. Take advice before making contact — the route chosen has consequences.
Does Bay Legal prepare my crypto tax returns?
No. The firm does not provide accounting, bookkeeping, or tax preparation and does not compute gains from transaction histories. It advises on the legal treatment of transactions, entity structure, and regulatory questions, represents clients in examinations, and works alongside your certified public accountant, who prepares the returns.
Related Questions
Do wash sale rules apply to crypto?
The wash sale rule as written applies to stock and securities, and digital assets are generally treated as property rather than securities. The position has been the subject of repeated legislative proposals, so it is worth confirming rather than assuming for any given year.
How are NFTs taxed?
Generally as property, like other digital assets, though certain NFTs may be treated as collectibles, which carries a different rate on long-term gains. The classification turns on what the NFT represents.
What if my exchange has gone under?
Losses from an exchange failure raise difficult questions about timing and character, and the answer can differ depending on the insolvency’s progress. Keep every record you have; reconstructing it later is far harder.
Does receiving an airdrop create income?
Generally yes, at fair market value when you gain dominion and control over the tokens, with that value becoming your basis. Airdrops of tokens with no established market raise valuation questions of their own.
Talk to a California digital asset attorney
Broker reporting means the gap between exchange records and your own is now visible to the IRS. To review a digital asset position, discuss coming into compliance, or get representation in an examination, call the office nearest you or email intake.
Bay Legal, P.C. — serving California statewide
Northern California office
667 Lytton Ave Ste 3, Palo Alto, CA 94301
(650) 668-8000
Southern California office
3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068
(213) 668-8000
Intake: intake@baylegal.com
Fax: (650) 963-0041
Website: https://baylegal.com
This page is general information about California and federal law and does not constitute legal advice or create an attorney-client relationship. Bay Legal, P.C. does not provide tax advice, tax preparation, or accounting services. For advice on your specific situation, contact a licensed California attorney and a qualified tax professional.