Kelly Bullis: Crypto exchanges will have to start the 1099 Tattling Game

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Tax tips (and other things)

Kelly Bullis

Sunday 15th August 2021

Whenever Congress decides to “fix” something, they usually make life more complicated. In order not to disappoint you, they just did it again. The new “infrastructure bill” hides a new provision for reporting on cryptocurrencies.
The question now is what cryptocurrency tax reporting has to do with roads and bridges, but when does Congress make sense at all?
To be clear, the new reporting requirements change nothing for individuals other than how they deal with new, possibly FALSE 1099s from cryptocurrency exchanges. Individuals are already required to report all cryptocurrency transactions and answer a special question in the affirmative upon their return if they have had cryptocurrency transactions or held cryptocurrencies at any time during the year.
What will change is the requirement for cryptocurrency exchanges to keep track of all transactions and report a summary for each taxpayer at the end of the year. If you have a business, you are already used to the 1099-K that you get from the credit card companies who report all credit card receipts to the IRS. If the actual gross income you declare on your tax return is LESS than the total in this 1099-K, you will receive a “friendly” letter from the IRS asking you to explain the difference. This usually leads to a full audit if the IRS suspects that you are not reporting all of your income.
However, the new 1099 (which has yet to be created) will likely look something like a 1099-B stockbroker statement. It will likely display the date of purchase, the date of sale, the original cost and the selling price. It can take several years for the cryptocurrency exchanges to create the software required to track and report this type of information. The potential start date requested by the IRS may not be before 2023 so they have time to get everything set up.
The penalties for switching cryptocurrencies could be HUGE if not done right. Basically, it will fall back on the current 1099 reporting error penalties. Currently, the penalty for any customer who fails to report their crypto transactions is most likely $ 250. The annual cap is currently $ 3 million. BUT, if the IRS determines that the cryptocurrency exchange is “deliberately disregarded” by failing to send explanations, there is no cap on the total penalties.
Think about it for a second. Notice that the average cryptocurrency exchange has 100,000 customers. 100,000 x $ 250 is $ 25 million. Do you think that the incentive is enough to stick to it and just send something even if it’s not right? You bet! Expect the first few years of these reports to be full of errors, so check them VERY carefully when you receive them. That means you need to keep very accurate and detailed records of all of your cryptocurrency transactions.
Have you heard? Prov 12:17 says: “Whoever tells the truth gives honest evidence, but a false witness is deceptive.”
Kelly Bullis is a Certified Public Accountant based in Carson City. Contact him at 882-4459. On the Internet at BullisAndCo.com. Also on Facebook.