A Note On 1099-K Crypto Compliance For Crypto Exchanges

A simple rundown on Form 1099-K reporting, its impact on crypto compliance, and how crypto exchanges are dealing with the regulations.

Crypto exchanges are observing an influx of customers/investors from around the world. Newer platforms are emerging in the market due to a surge in demand for cryptocurrencies. 1 in 10 people in the U.S. are investing in crypto just for ease of trade. This just tells us how quickly cryptocurrencies found their way into people’s lives (and phones).

With global markets and governments slowly finding their way around cryptocurrencies, finding compliant solutions to adapt to cryptocurrency has become increasingly normal. While all of this is at play, crypto exchanges and crypto platforms are also finding themselves in the midst of a highly charged yet highly unregulated scenario with very little time to manage the ecosystem as a whole. 

Imagine this; when millions of customers are waiting outside your burger shack, would you focus on taking their orders and helping them find a decent place to sit, or would you take them through your new on-demand policies? 

The thing is that crypto exchanges are not unwilling to comply. There are just too many technical hindrances that are preventing them from complying. 

While this is something to think about, compliance is not up for debate. 

You’re either compliant or you’re out of business. That is the literal federal stance on unregulated markets like cryptocurrency which are lately at the receiving end of focused attention from the IRS. 

Significance Of Compliance In The Crypto Market 

Compliance is a very intricate element for any business. And given the amount of public data, the volume of transactions, and the monetary value at stake, federal authorities are not going to be easy on crypto exchanges. 

Crypto exchanges are giving these transactions a platform. Through these platforms, enthusiasts can buy crypto and sell them for profit. The nature of these transactions being legitimate, regulated, or illegal is a different question.

The main objective for federal agencies is to regulate the crypto exchanges with AML (anti-money laundering) and ATF (anti-terrorism financing) mandates so that the crypto enthusiasts that engage with the platform are also regulated and compliant as a result. 

Hence, tax information returns, such as Form 1099-K, 1099-B, Form 1042-S, Form 8949, and Form 5498 were introduced and incorporated into this industry. The regulations extend to crypto exchanges that deal with crypto miners, sellers, and of course, buyers. 

Incorporating Compliance-First Protocols 

Cryptocurrencies can be bought anonymously without any KYC processes.

With a simple Google search, you may still be able to find a handful of platforms that enable users to buy crypto anonymously. There are no identification procedures in place. No KYC. 

No one in the whole world would know from whom you’re buying your digital coins. Not even the seller. 

This is the whole reason why crypto has become so popular. It gives users this luxury of privacy and anonymity while they continue to trade in hundreds of thousands of dollars for a few coins.

And when KYC policies are mandated in a “free virtual economy” like crypto, things don’t look so good. 

KYC, customer identification processes, and due diligence would kill this “anonymous” dream and make things transparent. However, this is a good thing from a compliance perspective because terrorist organizations and other illegal transactions were previously finding a safe haven in the crypto world. And with compliance, there would be no room for foul play.

From Hidden Income To Transparency 

By regulating this highly unstable market, the financial custodians are making it accessible and transparent for everyone to study, invest, and evolve in the crypto world.

The users that chose to invest in cryptocurrencies a few years ago (before it was even popular) decided to do so to create a secondary source of income that cannot be regulated by the IRS. But this isn’t the case anymore. 

The IRS states that all digital assets will undergo the same tax regime as regular properties. This means there are no exceptions for crypto transactions [1]. 

The regulation of Form 1099-K further bolsters this regime where the crypto exchanges are required to send a variety of tax forms to their customers.  Each 1099-K form must explain and validate the number of transactions, and the monetary value of each transaction, specifying the recipient’s TIN and legal name.

Learn more about Tax1099s TIN Matching Service 

This would create a transparent ecosystem where the identities of the seller, buyer, and the third party payment network are validated and verified by the IRS and the inter-related transaction details are recorded, reported, and made available to the regulatory body (the IRS).

The Compliance Transformation: Changing Perspectives 

To say that crypto exchanges are not interested in compliance would be void. Crypto exchanges are in a rush to regulate and legitimize their organizations to garner more customers and potential investors. Amid investment security concerns on the rise and a blur of tax and legal implications on the surface, companies are on a soothing spree to retain their investors. [1]

Crypto platforms like Coinbase or Coinswitch are just as interested in being regulated as the federal authorities are interested in regulating these entities.  At this point, unregulated markets could be highly unsustainable. 

Even a single instance of money laundering or terrorism financing through the “intermediary” platform would spiral out of control within minutes, making the organization highly unstable for trading. And what’s worse are the legal liabilities, the penalty assessments for federal law violations, and the reputational losses that come with unregulated systems.

Recent episodes of foul play from certain crypto exchange platforms are testimony to the fact that no crypto exchange can sustain instability, irregularities, and noncompliance. 

The lack of investor security is the linchpin (which is still indefinite) that needs more attention and consistency. Crypto Tax Reporting With Tax1099

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