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Challenges Of Crypto Tax Reporting With Form 1099-K For Cryptocurrency Exchanges

Note: IRS delays the rollout of the $600 threshold for 1099-K reporting.
The threshold for Form 1099-K remains at $20,000 with a 200 transaction limit for the year 2023. This delay designates 2023 as a transition period, maintaining the existing requirements for reporting.

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A rundown on the most common crypto reporting challenges that crypto exchanges come across when preparing 1099-K forms.

Cryptocurrencies and crypto exchanges are collectively one of the fastest emerging markets globally. Millions of investors acquire digital currencies in minimum quantities and over the years, build their virtual currency assets. Bitcoin, Dogecoin, and Ether are just examples of cryptocurrencies. 

Platforms like Binance, Coinbase, and more enable crypto enthusiasts to purchase virtual currencies and sell them after a certain period. Superficially, crypto exchange resembles mutual funds or stock exchange transactions. 

Regulatory bodies, such as the IRS require taxpayers to report and pay taxes on the gains received through crypto transactions in a year. To further regulate the digital asset market, crypto exchange platforms, or simply, crypto exchanges are required to report with Form 1099-K and other forms. This will help PSEs and payment network entities report the crypto transactions and the amount paid to their customers/payees through crypto exchange transactions. 

Fundamentally, this regulatory reporting system will enable the IRS to observe trends in cryptocurrency markets, find irregularities in crypto transaction reporting, and come up with new regulatory frameworks to streamline the reporting procedures. The overall goal here is to establish compliance and regulate a highly-sensitive crypto market. 

Now, when you look at the impact of these reporting requirements from the taxpayer’s perspective, you may observe that achieving this level of compliance is not very easy. This is because of certain irregularities that plague the crypto market. This becomes more challenging as new regulatory practices are mandated to regulate the industry. 

The following will discuss in detail some of the challenges that crypto exchanges experience and how 1099-K reporting specifically seems like a giant task in the crypto industry. 

So, let’s get started.

Obtaining Crypto Transaction Data Is A Hustle 

Payee information, such as the legal name, EIN or TIN information, number of transactions, the amount paid to the payee through such transactions, and other such details that are recorded throughout the tax year must be reported on Form 1099-K. 

Crypto exchanges deal with large data pertaining to their customers, their identities, the digital assets they’re investing in, the volume of transactions, the gains or losses made on each of these transactions, and so on. 

Now, the 1099-K form requires the crypto exchanges to report the volume of the transactions along with the amount involved in each transaction. The recent update from the IRS is indicative that there is no cap on the transaction limit but a regulatory threshold of $600 up to which the payers can skip reporting. 

But crypto exchanges deal with large transactions with huge stakes and without obtaining the right data with corresponding customer identification, Form 1099-K reporting can get even more complicated.

Crypto exchanges must verify their customers prior to onboarding. Further, every transaction that occurs must be recorded and reported in the accounting books prior to 1099-K reporting for relevance and accuracy.

Relying On 1099-K Forms Alone For Crypto Transaction Reporting 

Relying on the 1099-K form alone will not suffice. Forms like Form 1099-B, Form 1042-S, Form 8949, and Form 5498 are used for reporting a variety of crypto transactions that occur in a tax year. The end game for reporting crypto transactions is compliance. That is the ultimate goal. 

However, when crypto exchanges use Form 1099-K alone for crypto reports and ignore the remaining forms, inconsistencies in reporting can become a common occurrence. The information, although factual, may seem inconsistent as some information might be missing. 

Delaying Your Crypto Filings 

The IRS requires crypto exchanges (or any taxpayer for that matter) to report and send Form 1099-K with their recipients on or before January 31 and eFile to the IRS by March 31. 

As you may have gathered from above, when crypto exchanges do not have access to the transaction data or the payee data, reporting the crypto transaction information can become complicated, taking up more time just to obtain the information and then verify it. 

An overlooked challenge in Form 1099-K reporting is the late filing penalties that are levied on crypto exchanges that fail to file their 1099-K forms on time. 

Lack of access to data, inability to verify the reportable information, and failure to furnish the 1099-K forms to the IRS by the prescribed due dates, are all inter-connected complexities, which are destabilizing the compliance narrative in the virtual asset industry. 

Overlooking The Importance Of TIN Verification 

The crypto economy is observing an influx of vendors, customers, and anonymous profiles that invest in virtual currencies. What is fascinating is that the crypto exchanges do not possess the legal identities of their customers to a large extent.

The inherent encrypted and secure nature of cryptocurrencies can be blamed (partially) since they make way for anonymous transactions, making it mostly impossible for the exchanges to retain the profile information. However, due to regulatory non-compliance issues, anonymous transactions have been reduced, making way for transparent transactions and data retention. 

The only problem here is that crypto exchanges, although they possess the identity details of their customers, the identities are validated or verified. This means the crypto transactions are still unregulated to some extent. This can be a huge challenge in 1099-K reporting because unverified TINs could mean invalid or incorrect TIN reports, which make way for TIN discrepancies and penalty assessments from the IRS.
TIN Match or TIN Check or TIN Lookup enables crypto exchanges to verify the TIN + legal name of the customer profile. And with a KYC ecosystem in place, verifying customers and regulating the inflow of crypto investors can be achieved.

How Tax1099 Helps You With Cryptocurrency Tax Reporting 

Tax1099 is a modern digital tax compliance platform that enables hundreds of crypto exchange platforms like yours to easily eFile 1099-K and other crypto tax forms securely. 

In just a few quick moments, Tax1099 enables you to import the tax-sensitized data with its seamless accounting and data management integrations and eFile 1099-K forms in bulk. 

Our smart digital tax calculator starts calculating the total net tax you owe as you enter the transaction data in the electronic forms. With Tax1099’s crypto tax API solutions, you can easily eFile millions of crypto tax forms within minutes. 

What’s more? Tax1099, with its real-time TIN Check system, enables you to verify millions of TINs within minutes, accelerating your reporting process and improving reporting accuracy. 

Get A Demo today to see what Tax1099 can do for you. Create Your Free Account