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UPCOMING EVENTS

Navigating the New 1099-DA Form: What Crypto Investors Need to Know

As the cryptocurrency landscape continues to evolve, so too does the regulatory framework surrounding it. In a significant move, the Internal Revenue Service (IRS) has introduced a new form, the 1099-DA, specifically designed for digital assets. This addition aims to streamline the reporting process for crypto transactions, ensuring greater compliance and transparency. Here’s what crypto investors need to know about the new 1099-DA form and how it impacts their reporting obligations.

The 1099-DA form is a tax document introduced by the IRS to capture information related to digital asset transactions. This form is part of the broader effort to address the complexities and ambiguities that have plagued the reporting of cryptocurrency activities. The 1099-DA is expected to simplify the tax filing process for individuals and entities involved in the buying, selling, and trading of digital assets.

One of the key features of the 1099-DA form is its comprehensive reporting requirements. It mandates detailed information about digital asset transactions, including the date of acquisition, date of sale, fair market value at the time of the transaction, and any associated gains or losses. This comprehensive approach ensures that all relevant data is captured, reducing the risk of incorrect reporting or errors.

Another important aspect of the 1099-DA form is expansion of the reporting requirements by third parties. Unlike previous reporting requirements that primarily focused on cryptocurrency exchanges, the 1099-DA form extends its reach to encompass a wider range of entities, including brokers, custodians, and platforms that facilitate digital asset transactions. This broad scope aims to close existing reporting gaps and create a more robust compliance framework. Additionally, the introduction of the 1099-DA form is expected to improve the accuracy of tax filings by providing a standardized format for reporting digital asset transactions. This consistency helps taxpayers and the IRS alike, reducing the likelihood of discrepancies and audit triggers.

For crypto investors, the new 1099-DA form brings several implications. Firstly, it underscores the importance of meticulous record-keeping. Crypto investors must maintain detailed records of their digital asset transactions, including dates, amounts, and fair market values. This documentation is crucial for accurately completing the 1099-DA form and avoiding potential penalties for underreporting.

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Secondly, the 1099-DA form highlights the IRS’s increasing focus on cryptocurrency compliance. Investors should be prepared for enhanced scrutiny and potential audits, making it essential to ensure that all crypto activities are accurately reported. Lastly, the introduction of the 1099-DA form may lead to a greater need for professional tax advice. Given the complexities of digital asset transactions and the evolving regulatory landscape, seeking guidance from a tax professional with expertise in cryptocurrency can help investors navigate their reporting obligations effectively.

The new 1099-DA form represents the next phase of the IRS’s efforts to regulate the cryptocurrency space. By providing a standardized and comprehensive reporting framework, the form aims to enhance compliance and transparency in digital asset transactions. For crypto investors, this development underscores the importance of meticulous record-keeping and professional tax advice to ensure accurate and compliant reporting. As the regulatory environment continues to evolve, staying informed and proactive is key to navigating the complexities of crypto taxation.

CASE OF THE MONTH

Tait v. Commonwealth Land Title Insurance Company

The California Court of Appeal recently reversed a trial court’s decision to grant a summary judgment motion in a significant title insurance case. The plaintiffs had purchased a residential property in Danville for $1.25 million in 2016 and the title company issued an American Land Title Association (ALTA) Homeowner’s Policy of Title Insurance accordingly. Per the terms of the policy, it insured against “actual loss” from covered risks, including undisclosed easements. Of note, the term “actual loss” was not defined in the policy.

The dispute arose when the plaintiffs discovered an unknown 1988 maintenance easement on their property, which they believed reduced its value and interfered with their plans to subdivide the lot. The trial court granted the title company’s summary judgement motion regarding limitation of damages, ruling that the policy only required compensation based on the property’s use as a single residential lot, not its potential highest and best use as subdividable land.

The plaintiffs argued that the title company should compensate them for the diminution in value based on the property’s highest and best use. The title company’s appraisal valued the diminution at $43,500, considering the property as a single lot, and paid this amount. The plaintiffs, however, obtained their own appraisal, which valued the property without the easement at $2.08 million and with it at $1.38 million, calculating a diminution in value of $700,000.

In overruling the trial court, the Appellate Court referred to Overholtzer v. Northern Counties Title Ins. Co. (1953), which established that damages in title insurance cases should be based on the depreciation in market value caused by the defect. The Court of Appeal agreed with the plaintiffs, stating that the policy entitles them to reimbursement based on the property’s highest and best use. This created a triable issue of fact regarding the actual loss under the policy, precluding summary judgment.

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The appellate court emphasized that “actual loss” should reflect the property’s value based on its highest and best use, including the potential for subdivision. This decision highlights the importance of considering potential future uses and highest value applications in determining actual loss in title insurance cases.

The case underscores the complexities of title insurance policies and the necessity for property owners to understand their rights and coverage extent. It also reminds title insurance companies to consider the highest and best use standard when evaluating claims for undisclosed easements and other defects.

Freddie Mac Plans to Offer New Second Loans

The Federal Housing Finance Agency (FHFA) has made a new proposed rule that would allow the

Federal Home Loan Mortgage Corporation (Freddie Mac) to purchase certain single-family closed-end

second mortgages. The plan is the result of concerns regarding the impact of current, higher interest rates

on existing homeowners, which provides limited options to access equity.

As FHFA stated in their proposal, “[f]or the many homeowners who purchased or refinanced their

homes during a period of lower mortgage rates, a traditional cash-out refinance today may pose a

significant financial burden, as it requires a refinancing of the entire outstanding loan balance at a new, and

likely much higher, interest rate. Homeowners may also use second mortgages to access the equity in their

homes. For a second mortgage, only the smaller, second mortgage would be subject to the current market

rate, as the original terms of the first mortgage would remain intact. Moreover, second mortgages are

typically offered at a lower interest rate than some financing alternatives such as consumer or personal

loans.” To mitigate these issues, Freddie Mac proposal would create an avenue for lenders to sell these

close-end second mortgages on the secondary market, providing a lower cost alternative to a cash-out

refinance in higher interest rate environments.

According to the Urban Institute, this new approach could offer substantial savings. For example, a

homeowner with a $300,000 mortgage at a 3% interest rate might face a monthly payment of about $1,265.

If their home value has increased to $500,000 and they wish to borrow an additional $100,000 for

improvements, refinancing at the current rate of 7.25% would raise their monthly payments to

approximately $2,729. Freddie Mac’s new plan, however, allows this borrower to keep their existing

payment and take out a new 20-year mortgage for the extra $100,000, adding only $965 per month,

resulting in a total monthly payment of $2,130.

Despite these potential benefits, Michael Bright, CEO of the Structured Finance Association and

former president of Ginnie Mae, has voiced concerns about the broader implications of this policy. Bright

argues that government-backed second mortgages could introduce several risks.

Firstly, he warns that increased consumer spending, encouraged by equity extraction, might

exacerbate inflationary pressures, counteracting efforts by the Federal Reserve to manage inflation.

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Secondly, by making it easier for homeowners to access equity, this policy could further constrain the

housing supply. Homeowners who extract equity might be less inclined to sell their properties, intensifying

the existing supply crisis.

Bright also raises concerns about the financial risks borne by taxpayers. With the government

backing these second liens, there is a risk that taxpayers could face significant financial exposure if

borrowers default on their loans.

In summary, if Fannie Mae does choose to move forward in purchasing second mortgages it will

provide homeowners with more flexible financial options.

The greater economy and housing market will

likely be impacted if this occurs. In particular, the housing supply will likely continue to be limited and the

challenges for buyers, especially first-time buyers, will continue.

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