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How do you report your crypto taxes? You are probably here because that’s what you want to know, and ironically that’s also what we want to know. You see, the information reporting system that is slowly developing in the U.S. is turning out to be a nightmare for crypto investors trying to report their taxes. But perhaps not every investor is affected. If you only buy Bitcoin and HODL it, then you’re fine for taxes. But what if you trade crypto constantly, transfer between exchanges, use DeFi, or stake some of your assets? Plus, you may have even purchased an NFT or two.
Since cryptocurrencies took off, there has been no information reporting for tax purposes, resulting in a very low level of compliance when compared to compliance with other investments. The IRS, like many other tax authorities around the world, knows that investors have made a lot of money in crypto and continues to attempt to enforce compliance. Under the U.S. Internal Revenue Code §61(a)(3), gains derived from the dealings in property are to be included in the gross income. So what is the problem?
Let’s forget for a second that there is still no clarity on many aspects in cryptocurrency, such as staking, lending or liquidity pools. Let’s also forget that the tax law is still under construction, as regulators attempting to understand the industry and politics often get in the way. This year's biggest problem for traders and investors trying to be compliant is being created, ironically enough, by the exchanges’ attempts at being compliant but not having a well thought-out solution for taxpayers.
The U.S. Infrastructure Bill, signed into law last year, will require all exchanges to issue forms 1099 starting with tax year 2023. Some exchanges, however, have decided to be proactive and are already issuing 1099-B’s, such as Uphold for example. A Form 1099-B is a form that contains details on all your trades with an exchange - your proceeds, cost basis and gains and losses are reported to you, and also to the government. The government then generally goes on to match data on Forms 1099 to data filed by the taxpayer. If any kind of mismatch is detected, you will get a love letter from the IRS.
Okay, so just report gains the way my 1099-B’s report them, right? Exactly. But what happens when those gains are incorrect? If you only transacted inside that given exchange, and the exchange has your full history (as is the case with Robinhood (NASDAQ:HOOD) or PayPal (NASDAQ:PYPL) since they don’t allow you to withdraw or deposit crypto), then your information will be correct. But if you have transferred crypto into an exchange, the cost basis will be missing and your gain will be overstated. How bad can this be? Imagine you held Bitcoin that you purchased at $52,000, but after transferring it to cold storage you then transfer it back to an exchange (not the one you purchased it from) and you sell it for $39,000. You had a loss of $13,000, but if your basis is missing, your Form 1099-B might say “$39,000 process - basis missing”. So is this implying a gain of $39,000? Not necessarily, but when you file your tax return and the IRS gets a copy of the 1099-B, what will they be looking for? How many letters or audits may get triggered due to data mismatching?
In the last example we assumed only one Bitcoin was purchased. But what if you are a whale and are moving many BTC at a time, across multiple wallets while trading on different exchanges? Your Form 8949 might have numbers in the tens of millions or larger. How will the IRS go about it when they receive 1099’s showing such large amounts but missing basis? Certainly they might be expecting gains, but what if you actually had losses?
So, what can you do if you get a 1099-B that is incorrect or has a missing basis? One option is to use a crypto tax tool like Accointing.com to not just keep track of all of your transactions, but also eliminate confusion by connecting your wallets and generating accurate tax reports. Sure, the 1099 is the form that’s being sent out to the government, but it will be incomplete. So if you want to report your correct amounts and not have issues with the tax authorities, it is best to keep track of all your data by leveraging helpful tools such as Accointing.com.
With crypto exchanges still waiting for guidance from the Treasury on implications of the Infrastructure Bill, taxpayers could at a minimum use some guidance on best practices when data is reported incorrectly. Odds are the IRS will be sending many letters to taxpayers who have fully complied and will have reported everything correctly, but an exchange issued a wrong 1099-B triggering the IRS to pay attention. If this happens, it is important to have your documentation and be able to prove your basis, wallets and transactions. It will simply be a matter of providing the data to the IRS and showing them that you have reported everything correctly. This is why a tool like Accointing.com is critical, even in the age of 1099’s.
If we fast-forward five years or so, hopefully reporting crypto tax will be sorted out, but for the time being, we are left with a tax reporting nightmare that will lead to headaches at best for many crypto investors. This also highlights the need to remind everyone why being fully compliant with your tax authorities is always best - cryptocurrency is taxable and you should report your taxes, otherwise the issues with the tax authorities won’t be as simple as proving your basis. Being fully compliant and tracking your entire portfolio with a tool like Accointing.com is always the best approach, especially if you value your peace of mind when it comes to crypto taxes.
This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.
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