The IRS’s new Form 1099-DA isn’t just a tax form: it’s a litmus test for whether your exchange is operationally ready for regulation. While larger platforms may have compliance teams and legacy systems in place, small and mid-sized exchanges are discovering just how high the bar is for broker reporting. And that bar is rising fast.
The Infrastructure Investment and Jobs Act (IIJA) granted the IRS authority to require broker reporting for digital assets. In 2024, the Treasury finalized those rules: starting with calendar year 2025, brokers, including many crypto exchanges, must collect detailed user data, calculate cost basis, and file Form 1099-DA with the IRS in early 2026.
This is not a simple year-end exercise. It’s a daily, integrated process that must be built into your operations from the ground up. For smaller exchanges, that means time is already running short.
Lessons from the “Dry Run” Year
Even though 1099-DA won’t be officially required until the 2026 tax filing season, many exchanges treated 2024 as a trial run; and the results were telling. While large, well-resourced platforms like Coinbase and Kraken smoothly managed user tax reporting, many smaller firms ran into trouble.
The biggest issue was cost basis reconstruction. Unlike stocks, crypto assets move between wallets, chains, and platforms, leaving behind a fragmented transaction history. When a user deposits Bitcoin or Ethereum, your exchange is expected to know not just its fair market value—but where it came from, what the user paid, and whether any prior income was involved (like staking rewards).
Many teams also underestimated the difficulty of collecting Tax Identification Numbers (TINs). Crypto users accustomed to pseudonymity don’t always respond well to compliance emails. Exchanges that treated this like a checkbox saw low response rates and customer churn. The ones who succeeded reframed the process as user education—explaining how regulations were changing, why compliance protects users, and what benefits come from proper documentation.
For exchanges, cost basis is now your responsibility, even if the asset’s history happened off-platform. Without proactive systems, you’re left guessing or risking misreporting.
Technical Reality: 1099-DA Is Not Plug-and-Play
Many small exchange operators assume they can figure out compliance once year-end approaches. That’s a mistake. 1099-DA compliance depends on real-time infrastructure. You must track, reconcile, and classify transactions from day one.
This includes:
- Transaction-level reconciliation: You’ll need systems that can track deposits, withdrawals, and trades across chains, user wallets, and centralized protocols—and calculate gains or losses with accurate timestamps.
- Income classification: Not all activity is equal. You’ll need to distinguish between trades, staking rewards, airdrops, and wrapped tokens—each with different tax implications.
- TIN validation and audit support: It’s not enough to collect user data. You must validate it, securely store it, and be ready to prove it to the IRS.
Building this in-house may be unrealistic for many teams. And most traditional CPAs don’t have the infrastructure (or the blockchain fluency) to support these needs. That’s why specialized crypto accounting firms are now critical strategic partners.
The reality is, if your engineering team hasn’t scoped this already, you’re behind. Broker reporting infrastructure must be integrated into your KYC, wallet management, and trading systems—not added on later.
What Small Exchanges Should Be Doing Now
If you’re unsure where to start, we’re here to help. Here are some tangible steps for small crypto exchanges to prioritize right now:
- Assess your current system’s ability to capture user transactions at the required level of detail. Are you tracking wallet-level activity, timestamps, and pricing data across every supported token and chain?
- Test your TIN collection flows. Embed them into onboarding. Avoid email blasts and instead incorporate compliance messaging into product experiences, such as withdrawal or staking pages.
- Work with a crypto advisor who can help you classify activity appropriately. You’ll need guidance on staking rewards, liquidity pool transactions, and multi-chain movements, all of which may require different treatments under IRS rules.
- Finally, build toward audit readiness. Keep defensible documentation, reconcile records regularly, and assume regulators will request substantiation for cost basis, fair market value, and user identity.
These aren’t one-time efforts. They’re recurring processes that must be baked into your operations if you want to avoid penalties.
Strategic Advantage: Why Compliance Now Pays Off Later
The best exchanges understand this is bigger than a form. Compliance is infrastructure, and infrastructure is strategy.
Institutional investors—corporate treasurers, venture-backed trading firms, and payment platforms—look for partners who can demonstrate regulatory maturity. And traditional banks considering crypto partnerships are increasingly unwilling to work with platforms that lack strong internal controls.
Even domestically, enforcement is escalating. The IRS has already signaled deeper scrutiny and deployed blockchain analytics tools to uncover unreported income. Internationally, the OECD’s Crypto-Asset Reporting Framework (CARF) is expected to launch in several jurisdictions by 2027, and many local regulators are following the U.S. lead.
For crypto institutions that want to succeed, compliance isn’t just a cost. It’s a moat. Platforms with real-time reporting capabilities are more attractive to partners, harder to replace, and better positioned to scale.
Looking Ahead: Compliance as a Growth Lever
The burden of broker reporting may lead some small platforms to question the future of their business. But for those willing to adapt, there’s real upside.
As the technical standards for crypto tax compliance become clearer, exchanges that build infrastructure now will benefit from:
- Fewer operational fire drills when new rules emerge
- Streamlined user experiences with verified, audit-ready data
- Higher customer retention, as users come to expect compliant, secure platforms
And as compliance infrastructure improves, so will your ability to monetize services, integrate with banks, and expand into new jurisdictions.
Work With Advisors Who Know Crypto Compliance
Form 1099-DA is just the start. The real challenge is building an operational foundation that will scale with regulation.
At Iota Finance, we specialize in helping crypto exchanges meet today’s regulatory requirements, and anticipate what’s coming next. We combine blockchain fluency with technical accounting expertise to:
- Implement 1099-DA systems
- Classify transactions across chains, tokens, and user types
- Help you manage TIN collection and audit readiness
- Reduce your exposure while preserving platform flexibility
If you’re behind, we’ll help you catch up. If you’re ahead, we’ll help you stay there.
Schedule a consultation with Iota Finance today and learn how we can help you turn compliance challenges into competitive advantage.
Disclaimer: This article reflects the regulatory environment as of mid-2025 and is for informational purposes only. For personalized guidance tailored to your platform’s technical architecture and jurisdictional exposure, contact Iota Finance.