If you own a crypto exchange or if you’re an avid crypto seller, here’s everything you need to know about Form 1099-K in 2022 and its impact on your sales and tax reporting.
Cryptocurrency is on everyone’s mind.
Some want to invest in it and others want to turn this sudden demand for virtual currency into an opportunity. While investors look at cryptocurrency like it’s pure gold, payment processors and credit card companies are silently making the most out of this sudden influx in demand for crypto.
If you’re a crypto exchange, you must have observed a sharp increase in the crypto trade, especially during the pandemic. Thousands of investors around the world have learned about the benefits of investing in virtual currency and how it helps investors cope with the rising inflation.
Intending to accommodate a smoother trade, well-known crypto exchanges have now enabled third-party payment networks and payment card transactions, helping crypto enthusiasts invest easily and securely. The relevance of this aspect will be explained as you read on.
What follows this is a Black Friday-like rush towards cryptocurrency. The surge in prices of cryptocurrencies is indicative of the demand.
Now, regardless of your role in this digital economy, tax compliance is a default that you can’t escape. Despite the best efforts, it hasn’t been easy for the IRS to identify profiles that have been hiding their crypto gains. This was so until some regime changes were made to accelerate reporting transparency and compliance.
How It Started
The bipartisan infrastructure bill signed by President Joe Biden in 2021 puts a halo on the inconsistencies within the crypto economy and provides resolutions to solve the non-compliance instances. The provisions begin with streamlining the KYC procedures to identify the crypto investors better to assess the unreported income. It additionally focuses on some changes to the crypto tax reporting procedures, including the 1099-K reporting regime.
This regime change or a simple update from the IRS removes the cap on the transaction value of $20,000 and replaces it with a base gross amount of $600. It further removes the transaction limit of 200, making the crypto transaction reports transparent, comprehensive, and precise.
Better compliance. More transparency.
This was made possible due to two key factors:
1. Demand for crypto.
2. Enablement of online payment methods for crypto trade, which conveniently allowed people to invest in virtual currencies.
What Are Third-party Network & Payment Card Processors?
Examples of payment card companies:
- American Express
Examples of Third-party Network processors:
- Google Pay
- Amazon Pay
Understanding Third-Party Network & Payment Card Transactions
Not every retailer can afford a transaction gateway to process online payments. This is when a third-party network processor, such as PayPal steps in to help the retailer accept the online payments through a custom online payment setup.
This way, retailers will be able to accept credit cards and other online payment methods through the third-party payment processing page. If you shop online (clothes, gifting, shoes, etc), then you must have experienced something like this on Amazon. Even though the sellers are private, Amazon helps them accept payments through its payment network, such as Amazon Pay. To the retailer, Amazon or PayPal is the third party, hence the name – third-party payment network.
Payment cards are credit cards like American Express cards, which allow buyers to make payments online and buy products online.
Purpose Of Form 1099-K
Since the third-party networks and credit card processors are processing such transactions on behalf of the retailers, the payment processors are required to send a Form 1099-K to the retailer (the recipient or payee). Each processor is required to send a Form 1099-K to each retailer for whom they have processed transactions with a gross amount of $600 or more.
Mechanism Of Form 1099-K In Cryptocurrency Tax Reporting
Now, apply this very logic to cryptocurrency transactions that are processed through crypto exchanges. Here, the crypto exchange is the third party between the crypto buyer and seller. Note that both the buyer and seller are the customers of the crypto exchange.
So, a crypto exchange records all the transactions it’s processing on behalf of the sellers and all the profits/incomes that its customers are gaining through these transactions, and reports the gross proceeds made through such sales on Form 1099-K.
Note: It is important to understand that Form 1099-K does not report the individual transaction information. From the 1099-K perspective, it doesn’t matter if you’ve engaged in 2 transactions or 200 transactions; it’s the gross total, exceeding the threshold of $600, which matters.
But what does this do?
Yes, you read that right.
Form 1099-K reporting is just a formal step to bring transparency to the crypto transaction activity. Consider this to be an additional step in the voluntary tax compliance program.
However, the main objective remains to be very clear – to alert the IRS that the crypto sellers and investors have some unreported income generated through the reported crypto activity.
How Is Form 1099-K Different From Form 1099-B?
Contrastingly, Form 1099-B reports the comprehensive transaction information, specifying the transaction count/volume, date of transaction, the value of the asset, tax withholdings, discounts, and other information.
Note that receiving a Form 1099-B is far different from receiving a Form 1099-K.
When Do Crypto Exchanges Send A Form 1099-K?
Form 1099-K is usually sent at the end of the tax year to the payee before the 1099 recipient deadline, i.e. 31 January.
Upon receiving the Form 1099-K from the payer (the credit card processor or third-party payment processor), the retailer must review the reported information and inform the payer if there are any errors or inconsistencies.
Once confirmed, the third-party networks and credit card processors are required to file the primary copy of Form 1099-K to the IRS before the 1099 deadline, 31 March.
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