Form 1099-DA Is Changing How the IRS Monitors Crypto — Including in Your SDIRA

For most of the history of cryptocurrency, reporting relied heavily on self-declaration. Investors tracked their own gains and losses, tax software attempted to aggregate transaction histories from multiple platforms, and the IRS had limited visibility into what actually occurred. That system is being replaced, and 2026 marks a significant step in the transition.

Form 1099-DA, Digital Asset Proceeds From Broker Transactions, applies to digital asset transactions beginning with the 2025 tax year. Custodial brokers — centralized cryptocurrency exchanges and other intermediaries that hold digital assets on behalf of customers — were required to issue Form 1099-DA to both investors and the IRS by mid-February 2026, covering 2025 activity. For 2026 transactions, full cost basis reporting begins, substantially expanding the disclosure requirement. Those reports will be issued in early 2027.

What Form 1099-DA Reports

The IRS finalized regulations in 2024 (Treasury Decision 10000) establishing the custodial broker reporting requirement. For 2025 transactions, Form 1099-DA reports gross proceeds from digital asset sales, exchanges, and other dispositions. Cost basis reporting for 2025 activity was not required, though some brokers have elected to provide it voluntarily.

Beginning with 2026 transactions, brokers must also report cost basis information for digital assets they have held in custody since acquisition — these are called covered securities. A digital asset acquired in a custodial account on or after January 1, 2026, is a covered security for which the broker must report basis when the investor sells. Assets acquired before 2026, or transferred into a broker from another platform or wallet, are non-covered securities and are reported without required basis information.

This creates an important practical distinction: the first filing season with mandatory cost basis on new acquisitions will be the 2027 filing season, covering 2026 tax year transactions. The reporting infrastructure is being built incrementally.

How SDIRA Crypto Holders Are Affected

Self-directed IRAs holding cryptocurrency present a distinct reporting context. Because an IRA is a tax-exempt trust entity, its investment activity is generally not reported on the account holder's personal tax return in the same way that taxable account transactions are. The IRA itself does not pay capital gains tax when it sells appreciated digital assets. The account holder does not receive a Form 1099-DA directly reflecting in-IRA crypto trades as taxable events.

However, SDIRA crypto holders interact with this new reporting environment in two important ways.

First, custodian FMV reporting has intensified. SDIRA custodians are required to report the fair market value of IRA assets annually on Form 5498. For cryptocurrency, that means the IRA's digital asset holdings must be valued as of December 31 each year and reported to both the account holder and the IRS. As IRS data analytics capabilities have expanded alongside Form 1099-DA infrastructure, the IRS has greater visibility into whether IRA valuations appear consistent with market prices.

Second, IRS audit activity on Roth conversions involving crypto has increased. Multiple industry sources noted in 2026 that the IRS has become more active in examining Roth IRA conversions that occurred when cryptocurrency held in a Traditional SDIRA was valued at a market low — a strategy that reduces the tax bill on conversion by locking in a depressed value. The IRS's ability to cross-reference reported market prices against conversion valuations has improved as custodial reporting has become more standardized.

Third, the self-custody prohibition remains absolute for IRA-held crypto. An SDIRA cannot hold digital assets in a wallet controlled by the account holder. Private keys must remain with the IRA's custodian or an institutional exchange designated by the custodian. Transferring IRA-held crypto to a personal wallet constitutes a distribution — and in a Traditional SDIRA, a prohibited self-dealing transaction. The Form 1099-DA framework does not change this rule; it reinforces it, because the IRS now has a more complete picture of custodial holdings and outflows.

Activities That Remain Problematic in an SDIRA Crypto Account

The IRS has not issued new prohibited transaction guidance specific to digital assets in 2026, but the existing rules under IRC Section 4975 apply fully to crypto held in an SDIRA. Several common crypto activities create compliance issues inside an IRA structure:

• Staking, which involves locking digital assets to validate blockchain transactions in exchange for rewards, can create active income and custody complications. Many SDIRA custodians do not permit staking.
• Margin trading and crypto lending introduce leverage or lending relationships that can trigger Unrelated Business Taxable Income or conflict with the arm's-length requirements of the prohibited transaction rules.
• NFTs with primarily collectible value may fall under the IRC Section 408(m) collectibles prohibition, which bars IRAs from holding collectibles such as artwork, antiques, and certain coins.

For most SDIRA crypto investors, the cleanest compliance posture is straightforward: buy digital assets through the custodian's approved platform, hold them in custodial storage, sell to cash when appropriate, and allow proceeds to remain in the IRA. Avoid leverage, lending, staking through unapproved arrangements, and any form of self-custody.

The Broader Reporting Context

The Form 1099-DA framework signals a continued IRS commitment to closing what regulators have termed the cryptocurrency tax gap — the gap between taxes owed on crypto gains and taxes actually reported. The IRS notes that digital assets are public and traceable on the blockchain, and that IRA-related transactions are separately tracked through the custodial reporting system. Neither argument for non-disclosure holds up well under the current reporting environment.

For SDIRA investors, the broader implication is clear: documentation standards that may have felt optional when crypto reporting was inconsistent are now genuinely necessary. Maintaining records of acquisition dates, cost basis for any personally contributed cash that funded crypto purchases, and the timing of any conversions or distribution events is essential as the reporting environment continues to tighten.

Crypto's place in the self-directed IRA universe is well-established. The IRS has consistently treated digital assets as property under IRS Notice 2014-21 — a classification that makes crypto eligible for IRA ownership while excluding it from the collectibles prohibition. What is changing is the regulatory environment around that ownership — and keeping current with those changes is part of responsible self-directed investing.

This article is for informational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified tax professional regarding your specific situation.