1099 Information Reporting For Crypto Exchanges

Here’s how crypto exchanges must report their 1099 information to the IRS and maintain tax compliance.

There is no denying that the IRS is aggressive in its approach to nail down tax dodgers. The tax evasion occurrences are more common in the cryptocurrency economy and crypto exchanges. Many crypto enthusiasts are investing in crypto with a misconception that their earnings are free from taxes. But as you may have already guessed, those myths have long been busted. The IRS does tax your cryptocurrencies.

Cryptocurrency is treated as property or a capital asset by the IRS. This means that any capital gains you may make on your virtual assets are subject to the tax principles and regimes of a real capital asset.

Further, IRS stresses the tax regulations on cryptocurrencies and has released multiple fact-check statements [1] [2] [3] to help educate taxpayers on crypto tax regimes. 

However, some crypto enthusiasts are still not sure about how to go about crypto taxes. While traders are one side of the coin, crypto exchanges are also liable to pay their taxes since they are creating a virtual platform for the crypto trade to take place.

Crypto exchanges like Coinbase, Cash App, Bisq, and more are virtual currency exchanges, which create a virtual platform for crypto buyers and sellers to engage in crypto trade.

Crypto Exchanges: An Overview 

Crypto exchanges are virtual currency exchange platforms, where users can buy, sell, mine, and trade their cryptocurrencies and virtual assets for a representative value of the digital currency. Similar to stocks, crypto exchanges allow users to buy crypto coins in singles or bulk and sell them for a profit. This profit is subject to capital gain taxes.

For example, if you have bought a single Bitcoin for $35,000 and sold it at $48,000, then you have made a profit of $13,000. This $13,000 capital gain is subject to taxes. 

Similarly, the crypto exchange that enabled this transaction to take place is also liable to pay the taxes. Crypto exchanges often charge a small fee for enabling the transaction between the buyers and sellers and are required to report the same in their 1099 forms.

Tax Reporting Regulations For Crypto Exchanges

Crypto exchanges are required to report their virtual transactions, income earned, profits, and other particulars like a regular business. However, the 1099 forms used by crypto exchanges to report these transactions are slightly different.

The following forms are used to report the crypto tax information.

1099-K

This form is used to report any third-party network settlement payments and/or payment card transactions amounting to $20,000 or more and with a threshold exceeding 200 transactions in a year. Learn more about Form 1099-K.

1099-B 

Any proceeds made through broker and barter exchanges must be reported on 1099-B. Crypto exchanges such as Gemini, Binance, Coinbase, and more also provide crypto broker services to their user base and charge a small fee. This fee must be reported to the IRS through Form 1099-B by the crypto exchange platform.

1042-S

When crypto exchanges pay gains, profits, and other payments to their payees, the same must be reported in Form 1042-S. Due to the inherent nature of the virtual trade, crypto exchanges must report any payments made to foreign persons as a part of their payee pool distributions in Form 1042-S.

Form 5498 

Form 1099-R and Form 5498 require crypto exchanges to report any profit distributions or profit-sharing plans made during a tax year. If the amount paid to one payee is $10 or more in the profit-sharing context, then the crypto exchange must report it on Form 1099-R. If the crypto exchange has maintained any IRAs for their recipients, then the same must be reported on Form 5498.

1099 Reporting For Crypto Exchanges

Crypto exchanges as virtual currency trade enablers and brokers are subject to the tax rules of the IRS. It is no secret that the IRS is watching all the non-reported transactions within the crypto sphere. This means entities and individuals who are hiding their incomes are subject to tax evasion assessments, audits, penalties, and other liabilities.

Intending to curb corrupt practices within a virtual economy that has seen an influx of monetary activity, the IRS is trying to regulate the industry to reduce risks, money laundering, retain financial security for investors, and improve compliance.

So, it is safe to say that the crypto industry is very much responsible for its financial activity. The crypto exchanges must file their tax forms and pay their taxes on time.

1099 Tax Compliance For Crypto Exchanges With Tax1099

With the large volume of transactions that crypto exchange platforms see every day, it can be hard to maintain a record of every transaction throughout the year and then use this data to derive your tax payable.

At the end of the day, if you do not have all your tax information in one place, you might be at the risk of either undervaluing or over-estimating your tax liabilities.

To avoid such inconsistent experiences, Tax1099 brings to you Crypto Tax API. This allows crypto exchanges to import their crypto transactions, report their tax data, file their tax returns, and manage their IRS communications – all in one place.

Learn more about Tax1099’s Crypto Tax Software.

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