How to triage crypto clients using Form 1099-DA red flags
Jan 21, 2026・8 min read
tl;dr
- A Form 1099-DA often represents only a fraction of a client's actual crypto activity.
- Filing based solely on the form can lead to material overstatements of gain (due to missing basis) or underreporting of capital gains (due to missing DeFi/self-custody).
- Watch for unknown cost basis, high transfer volumes, and mismatches between the client's "hobbyist" narrative and the "enterprise" volume on the form.
- Use these red flags to trigger a higher-tier "reconciliation engagement" using a crypto tax software.
Not all 1099-DAs are created equal
Beginning in early 2026, the IRS will require custodial digital asset brokers to issue Form 1099-DA for transactions occurring in 2025. This represents the first dedicated information return for digital assets. While this provides much-needed visibility into crypto transactions, it also introduces a dangerous temptation: the belief that crypto tax is now "plug and play." It isn't.
Unlike a 1099-B from a traditional brokerage, a 1099-DA from a crypto exchange often suffers from "informational blindness." Because the exchange cannot see what happens in your client's private wallets or on other platforms, the form is frequently incomplete.
Think of the 1099-DA not as the answer key, but as a smoke detector. When it beeps, it doesn't tell you exactly where the fire is. Instead it just tells you that you need to investigate.
Important timeline note: For 2025 transactions (reported in 2026), all digital assets are considered "noncovered," meaning brokers are only required to report gross proceeds and disposition dates. Beginning with 2026 acquisitions, cost basis and acquisition date reporting become mandatory for "covered" assets—those acquired and held continuously in the same custodial account. This transition makes understanding the scope and limitations of Form 1099-DA even more critical for tax professionals.
Red flag category 1: Mismatch between reported activity and client profile
The first warning sign often appears during the initial client interview versus what lands in the document portal.
The "hobbyist" with "enterprise" volume
- The narrative: "I just dabbled a bit this year. Maybe bought some Dogecoin."
- The form: Shows 5,000+ transactions and $2M in gross proceeds.
- The reality: The client likely used a high-frequency trading bot or grid-trading strategy. Even if the net profit is small, the sheer volume requires robust software to aggregate.
The "single app" user with "transfer" activity
- The narrative: "I only use Coinbase."
- The form: Supplemental information or transaction detail shows frequent "Transfers Out" or "Withdrawals."
- The reality: The client is sending funds somewhere the 1099-DA can't see—likely a self-custody wallet, a DeFi protocol, or an offshore exchange that won't issue a 1099 at all.
Note: Transfer information typically appears in supplemental broker statements or transaction reconciliation reports, not in a specific numbered box on Form 1099-DA itself.
Firm response:
"I see significant transfer activity in your brokerage statements. Can you confirm if you control the wallets these funds were sent to? If so, we need to ingest those wallet addresses to prevent these transfers from being taxed as sales."
The first warning sign often appears during the initial client interview versus what lands in the document portal.
Red flag category 2: Unknown or missing cost basis
This is the single most expensive error for clients if overlooked.
In plain English... If a client moves Bitcoin from Wallet A to Exchange B, Exchange B often doesn't know the acquisition information, such as the original purchase price and date. Consequently, they may report the cost basis as unknown/leave it blank.
Critical 2025 vs. 2026+ distinction:
- 2025 transactions: All digital assets are "noncovered." Brokers will generally report only gross proceeds. Cost basis reporting is optional.
- 2026+ transactions: Cost basis becomes mandatory for "covered" assets (acquired on or after January 1, 2026, and held continuously in the same custodial account). Transfers out of custody or between unrelated brokers break the covered chain, resulting in noncovered status.
Signals to watch for:
- Assets sold for significant proceeds with “unknown” listed in the basis box.
- Box 9 checked, indicating "noncovered" status. When box 9 is checked, brokers are not required to provide acquisition information (date acquired, cost basis, gain or loss and term), though they may voluntarily do so with penalty protection.
- A sale appears in June, but there is no acquisition information, implying the asset was acquired elsewhere.
- Digital assets that were transferred into the account from an external wallet or another exchange.
The math: If a client sells 1 BTC for $60,000 (Cost Basis: unknown on form), the IRS sees a $60,000 gross proceeds, but has no visibility into the actual gain or loss.
- Actual Scenario: Client bought it for $55,000. Real gain is $5,000.
- The Fix: You would benefit from using crypto tax software to link the original purchase to this sale, incorporating acquisition information from other custodians or wallets.
Red flag category 3: Evidence of off-platform or self-custody activity
The 1099-DA is a "walled garden"—it only knows what happens inside of US-based, custodial exchanges. However, it leaves clues about the outside world.
The transfer loop
If you see a pattern of Fiat On-Ramp -> Crypto Buy -> Transfer Out, followed months later by Transfer In -> Sell -> Fiat Off-Ramp, you are missing the middle of the story.
Why this matters
- While the funds were "away," did the client swap them for other tokens? Did they earn staking rewards?
- Did they use those funds to buy an NFT?
- The IRS knows that transfers often lead to unreported taxable events.
Important: Starting in 2026, when assets leave a custodial account and later return, they lose "covered" status even if they were originally acquired as covered assets. This affects basis reporting requirements and increases the importance of tracking off-platform activity.
Firm response: Stop the return preparation. You cannot accurately file until you ingest the transaction history of the external wallets involved in the transfers.
2025
Crypto Tax
Guide is here
CoinTracker's definitive guide to Bitcoin & crypto taxes provides everything you need to know to file your 2024 crypto taxes accurately.
Red flag category 4: Complex deFi activity and exempt transactions
Decentralized Finance (DeFi) is notoriously difficult to capture on standard forms.
Transactions exempt from 1099-DA reporting (but still taxable)
While Form 1099-DA captures most taxable dispositions through custodial brokers, several categories may be taxable to the client but exempt from broker reporting:
Stablecoin exemptions:
- Sales or exchanges of qualifying stablecoins for cash or other qualifying stablecoins when total qualifying sales during the year are $10,000 or less per customer
- Stablecoin-to-non-stablecoin digital asset exchanges (e.g., using USDC to purchase BTC)
NFT exemptions:
- Specified NFT sales where the customer's total annual proceeds do not exceed $600
Temporary exclusions (Notice 2024-57):
- Certain lending, staking, and wrapping transactions currently excluded pending future IRS guidance
Off-platform dispositions:
- Direct payments for goods or services in digital assets, where the broker records a withdrawal, not a sale
- Transactions through self-custody wallets without broker involvement
Critical reminder: Even though these transactions aren't reported on Form 1099-DA, they may remain taxable and must be included on the client's return. Some brokers may reflect these on substitute customer statements for informational purposes.
Optional aggregate reporting methods
Be aware that brokers may use optional reporting methods for certain asset classes:
Qualifying stablecoins: Brokers may aggregate all designated sales of each qualifying stablecoin on a single Form 1099-DA (one form per stablecoin type), omitting acquisition information.
Specified NFTs: Brokers may aggregate a customer's specified NFT sales on a single Form 1099-DA, though first sales by a creator or minter and subsequent sales must be reported on separate forms.
When these optional methods are used, expect to see less granular transaction detail on the forms.
Red flag category 5: Signs of prior-year or carryforward issues
The "immaculate conception" asset
A client sells 10 ETH in 2025, but your firm's prior year workpapers show they only held 2 ETH at the end of 2024.
- What happened? They likely had an unreported wallet in previous years.
- Action: You may need to amend prior returns or, at minimum, correct the opening balance in your current year's subledger.
The noncovered asset challenge starting 2026
Beginning with 2026 acquisitions, assets must remain in continuous custody to maintain "covered" status. If clients have been moving assets between wallets and exchanges, nearly all their holdings may be noncovered when sold in 2026+, requiring reconciling acquisition information to establish accurate basis.
Understanding form 1099-DA: Key technical details
Required information elements
Each Form 1099-DA must include:
- Customer identifying information: Name, address, and Taxpayer Identification Number (TIN)
- Asset identification: The name and DTIF (Digital Token Identifier Foundation) identifier of the digital asset sold
- Quantity disposed: The number of digital asset units sold or exchanged
- Disposition date: Required for each reportable sale (except when using optional reporting methods)
- Gross proceeds: The total amount realized from the sale or disposition
Covered vs. noncovered asset reporting
Covered digital asset: Acquired on or after January 1, 2026, in an account where the broker provides custodial services, and held in that same account until disposition. For covered assets, brokers must report acquisition date, cost basis, and gain or loss type (short- or long-term).
Noncovered digital asset: Any asset acquired before January 1, 2026, transferred into a broker account from external sources, or otherwise failing the covered criteria. When box 9 is checked, brokers are not required to provide acquisition information (date acquired, cost basis, gain or loss and term), though they may voluntarily do so with penalty protection.
Acquisition information
To improve accuracy for noncovered assets, brokers are developing workflows that allow customers to submit acquisition information from other custodians or wallets. CoinTracker and similar platforms offer embedded solutions that enable customers to securely share cost basis and holding-period data directly with their brokers, helping reconstruct transfer histories and reduce reporting errors.
How to operationalize red flags in your firm
Don't treat every crypto client as a bespoke consulting project. Standardize your intake using a Traffic Light"triage system.
🟢 The "green" client (Standard)
- Profile: 1099-DA received; <50 trades; No transfers out; Cost basis is complete (or all noncovered with reasonable CPI available).
- Workflow: Data entry from form. Standard pricing.
🟡 The "yellow" client (Reconciliation required)
- Profile: 1099-DA shows "unknown" basis; Transfers to self-custody; >100 trades; Multiple exchanges.
- Workflow: Require client to connect exchange API to tax software. Hourly billing or higher tier. Obtain Customer-Provided Information (CPI) for noncovered assets.
🔴 The "red" client (Complex advisory)
- Profile: DeFi activity; NFT activity; High-frequency bot trading; Missing history; Evidence of exempt transactions not captured on 1099-DA.
- Workflow: Mandate full crypto tax software reconstruction. Significant retainer required. Comprehensive acquisition information documentation.
In summary
In the era of the 1099-DA, the tax professional's value shifts from "data entry" to "data verification and reconciliation." These red flags are your guide as your prepare to file return and your opportunity to price your services according to the complexity involved.
Key takeaways:
- Form 1099-DA represents a starting point, not a complete record
- The 2025 transition year requires only gross proceeds reporting; full basis reporting begins with 2026 acquisitions
- Covered vs. noncovered status significantly affects reporting requirements
- Multiple categories of taxable transactions remain exempt from broker reporting
- Acquisition information will be critical for accurate noncovered asset reporting
Don't let a "simple" form hide a complex audit risk. Use these red flags to identify which clients need comprehensive crypto tax reconciliation services—and to protect both your clients and your firm from compliance exposure.