Here are three major reasons why crypto exchanges are inclined to use Form W-9.
Taxpayer Identification Number (TIN) is one of the most popular topics when it comes to tax compliance. Every single taxpayer (entity or individual) must report a taxpayer identification number. Be it a Social Security Number or Employer Identification Number or Preparer Tax Identification Number, or ITIN, you have to report the unique identification number for taxpayers, i.e. taxpayer identification number in your 1099 forms. The best approach to obtaining someone’s taxpayer identification number is to send a formal document or instrument recognized by the tax authorities of that country. In the U.S., it is Form W-9 as recognized by the IRS.
Form W-9: An Overview
Form W-9 is an IRS form that enables entities and individuals to obtain the taxpayer identification number, legal name, address, and other information of a person or entity that has received payments or engages in reportable commercial transactions.
In simple words, Form W-9 is used to obtain the TIN of the payee.
Think of an independent contractor, a freelancer, or a logo designer from a remote city that you plan on hiring. All of these people have one thing in common –they receive payments from you and you’re required to obtain their TINs and legal names in order to process their payments in full.
Now, apply this logic to crypto exchanges.
Crypto Exchanges And Form W-9
Crypto exchanges deal with an influx of customers, investors, sellers, miners, vendors, brokers, and other profiles every day.
Verifying the identities of these profiles and validating the credibility of their identities is the responsibility of the crypto exchange (as the payer). This practice comes in handy especially when the payers have to process and settle 1099-K payments to the participating payees in the master sheet.
Form W-9 enables you to obtain the legal name, TIN, address, and other relevant information formally with the attested signature of the payee, certifying that the information provided is true and valid.
Now, obtaining this information is just a part of the task. Verifying the obtained information is a whole different game on its own. (More on this later)
Pro Tip: Use Tax1099’s real-time TIN Match system to verify payee TINs within seconds.
The following will detail the three major reasons why crypto exchanges must send Form W-9 to their customers.
W-9 Form Helps You Report Your Vendor/Customer TINs Accurately
To verify anything, you need the lead information and Form W-9 allows you to do just that. W-9 Form enables you to obtain and verify the customer and vendor TINs accurately.
The obtained information can be verified against the real-time records of the IRS using Tax1099’s real-time TIN match system.
Alternatively, you can use the IRS TIN Matching system to lookup the TINs (with limited functionality).
Now, what you’ve created here is a 3-step checkpoint, where you:
- Obtain the TINs from your customers/vendors
- Verify the TINs
- And report the verified TINs
As a result, the chances of reporting inaccurate and invalid TINs are reduced, accelerating your TIN reporting accuracy.
W-9 Form Helps You Prevent IRS TIN Discrepancy Penalties
The IRS tends to assess penalties and send B-Notices, such as CP2100 and CP2100(A) to entities that report incorrect TINs. Ignoring these notices will further invite IRS penalties, where each incorrect or invalid TIN report will cost you $240 (penalty) + interest.
Now, $240 is not much for a company that earns millions of dollars. But when you consider the volume of customers and vendors that entities deal with (which is probably in multiples of thousands), the penalty amount could easily multiply and become unbearably expensive.
When you obtain the TINs with Form W-9, you’re able to verify your TINs accurately, reducing your chances of being assessed for TIN discrepancies with the IRS.
Essentially, TIN solicitation with Form W-9 protects your business from unnecessary federal attention and penalties.
Pro Tip: Use Tax1099’s Digital W-9 Manager to obtain TINs from customers and vendors in a jiffy!
W-9 Form Helps You Report Backup Withholding Accurately
When vendors do not provide valid TIN and legal name information, the payer is free to hold further payments until the payee furnishes valid and verified information.
Additionally, the payer withholds a certain amount from the payments pending to the payee, commonly known as Backup Withholding. Backup withholding are withheld by the payer when the payee is not providing valid TIN and legal name information.
The withheld amount must be appropriately reported in the 1099-NEC form along with the payee’s TIN and legal name.
Form W-9 enables you to obtain the TIN and legal name of the payee. After soliciting the information, you must verify the information to check its accuracy.
Note: Remember that if you report and file 1099 forms with unverified TIN information, you must brace yourself for IRS B-notices and TIN discrepancy penalties.
Send Form W-9 With Tax1099’s Digital W-9 Manager
If after verifying, you’ve observed that the payee has furnished incorrect information, you may reach out to the payee to send the correct TIN information on Form W-9 and sign it.
While paper mailing these forms is a traditional method. It’s considered to be unsafe given the current global pandemic situation.
With Tax1099’s W-9 Manager, you can send electronic W-9 forms to your payees via email and enable them to edit the files and furnish the required information.
The digital form is encrypted and must be attested with a digital signature to certify the validity of the information from the payee’s end.
This way, you’re addressing three key objectives as specified above.
- You’re obtaining the correct information
- you’re able to prevent IRS penalties that are usually assessed when you report incorrect TINs
- You’re able to report the backup withholdings with the corresponding payee TIN
Altogether, you’re improving your reporting accuracy and staying compliant.
The best part is that with tools like Tax1099 W-9 manager and a real-time TIN matching system, you’ll be able to process millions of W-9 forms and verify millions of TINs in a matter of minutes!
Other Useful Crypto Articles:
- 1099 Information Reporting For Crypto Exchanges
- A Note On 1099-K Crypto Compliance For Crypto Exchanges
- How Tax1099 Automates Cryptocurrency Tax Reporting For Crypto Exchanges
- What Cryptocurrency Exchanges Should Know About Form 1099-K
- Challenges Of Form 1099-B Reporting For Cryptocurrency Exchanges
- Form 1099-B For Cryptocurrency Reporting
- Cryptocurrency Exchanges Face THESE 5 Tax Reporting Challenges
- Tax Implications Of Cryptocurrency
- Crypto And Its Stalling Impact On The Federal Infrastructure Bill
- Billionaire CEOs Are Now Saying That ‘Cryptocurrency Is Promising’. But Is It Really?