Pursuant to the Infrastructure and Jobs act signed by President Biden on November 15, 2021, the term broker has been expanded to include all platforms or businesses that facilitate the trading of digital assets. This means the IRS considers it a broker if you can trade cryptocurrency or other digital assets on it.
Cryptocurrency Reporting Requirements
For cryptocurrency exchanges to be compliant, there are different groups of data that they will be required to provide the IRS under the appropriate Form 1099 for every client.
This will include the following:
- Personal details: these will encompass the name, physical address, and phone number of all their clients.
- Gross Proceeds: gross proceeds are the amount that results from the sale of any asset. In this case, they will refer to the amount resulting from a cryptocurrency sale.
- Capital Gains and Losses: depending on the type of trading year you had, your crypto broker will be expected to report all your capital gains subject to tax and your deductible losses.
Types of Forms 1099
The 1099s forms are designed specifically for financial institutions to report any client activity subject to tax. The IRS has several of these forms, including:
- 1099-Bs: for stock brokers to report gains and losses resulting in stock transactions.
- 1099-INT: this is for reporting interest income.
- 1099-MISC: the MISC stands for miscellaneous information and is the form some cryptocurrency exchanges use to report their income and staking.
- 1099-K: this is the form some exchanges have used to file taxes. But it is not officially designated for reporting under the Investment Bill.
Which Form 1099 Do Cryptocurrency Brokers Use for Reporting?
For compliance under this new bill, the IRS has designed the 1099-DA. This form is intended to bring reporting uniformity across the cryptocurrency market.
Some experts believe this type of traditional reporting may complicate the industry more than help ensure tax compliance.
Most argue that because of the nature of the industry, some exchanges don’t collect any personal details or Know-Your-Customer information from their users. This means that filing tax forms will not be easy for these exchanges and may affect their compliance.
Penalties for Non-Reporting
Exchanges that fail to comply with reporting may receive harsh consequences from the IRS.
Cryptocurrency exchanges will be fined $250 to $3 million for failure to file under the correct Form 1099 under IRC 6721.
The same amount will be imposed for failure to report under the correct Form 1099 under IRC 6722. But the IRS may look mercifully on exchanges who swiftly correct their errors.
However, should any violation be deemed intentional, then exchanges or persons in question can expect a minimum fine of $500. There is no maximum penalty imposable for this violation.
Further, should any violation be viewed as willful, then in addition to the penalties already imposed, persons can expect a misdemeanor charge which carries a $25,000 fine or up to a year in prison. If the guilty party is a corporation, then their fine will go as high as $100,000.
What Are the Next Steps?
Cryptocurrency brokers should start collecting personal details and taxpayer identification numbers from their customers and users. They will also need to develop processes to track the time assets spend in customers’ accounts and the prices at which assets were bought or sold.
Reporting Your Cryptocurrency Tax Under the Investment Bill
For cryptocurrency exchanges, filing taxes is not an option but mandatory. Ensuring that you use the right form and report at the right time will help you escape significant penalties.
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Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.
