There is some significant history behind the answer to this question, in that the IRS sued the US crypto exchange called Coinbase in a federal court case.
In 2018, a federal court granted the IRS a “John Doe summons,” a request for information about unnamed individuals, targeting Coinbase’s customers that made virtual currency purchases or sales between 2013 and 2015.
John Doe summons is a tool frequently used by the IRS when they are unsure about the identity of an individual who has potentially engaged in illegal conduct. In this case, the summons were undoubtedly a method aimed at gaining evidence to build cases against individuals and help the IRS understand the activities of cryptocurrency traders. (1)
In this court case, the judge compelled Coinbase to disclose names, social security numbers, addresses, and historical transaction records to the IRS.
The significance here is this court case was the first time that the IRS had compelled any crypto exchange to divulge records on its US taxpayers.
Approximately 13,000 US taxpayers were affected by this court ruling.
Coinbase began issuing a 1099-K for US clients who had made over 200,000 transactions or $20,000 in trading proceeds from that ruling forward.
US Crypto Exchanges – 1099-B
The US crypto exchange called Robinhood issues a 1099-B (Proceeds from Broker and Barter Exchange Transactions) since it is a closed trading platform.
Robinhood issues the 1099-B instead of the 1099-K to show the purchase and sale price on all crypto trades.
The only reason Robinhood could do this is that they are a closed exchange. Meaning no coins are allowed to go in and out of the exchange.
The 1099-B form is highly beneficial in preparing a tax return.
US Crypto Exchanges – 1099-K
By contrast, a 1099-K (Payment Card and Third Party Network Transactions) like those issued from Coindesk is not helpful at all in preparing a tax return.
It is not helpful because it only reports the proceeds and not the cost of trading.
Therefore, the 1099-K reports enormous numbers that are not representative of what the client made in gains.
The IRS has still not issued any guidelines on what 1099 crypto reporting should be for crypto exchanges.
And that’s the reason Coinbase de-committed from that form.
This lack of guidance is the same reason I expect we’ll see fewer and fewer 1099-Ks moving forward.
US Crypto Exchanges – 1099-MISC
Another form issued by various US crypto exchanges is a 1099-MISC (Miscellaneous Income). This form is used to report income resulting from staking or interest typically.
As of now, the different US exchanges typically use 1099-B 1099-K and 1099-MISC to report to the IRS.
But there is no standard, and this is a problem.
TIGTA Talks About Non-Compliance From Income Not Reported Using One Of These Forms With US Crypto Exchanges
TIGTA (The Treasury Inspector General for Tax Administration) is a watchdog agency inside the US government, which comments on what the IRS is doing.
TIGTA said that income reported on W2’s and 1099s has a high compliance rate of people reporting it on their tax returns.
It’s typically effortless for the IRS to verify that this information has been reported on the return.
However, income that is not reported on one of these forms has a much lower compliance rate, according to TIGTA.
TIGTA says that the compliance rate is only 55% for unreported income on average. In other words, 45% of the people aren’t telling the IRS about their income.
US Crypto Exchanges Have No Standards for Reporting To The IRS
This is the big problem with crypto trading because there are still no standards for reporting defined by the IRS, causing US crypto exchanges like Coinbase (and soon others) to stop issuing the 1099-Ks.
A continued lack of reporting standards will create an unfortunate situation where taxpayers and tax preparers will not easily understand how to report their crypto activity to the IRS.
US Crypto Traders Need A 1099-CRYPTO
Crypto Traders need a hypothetical “1099-CRYPTO” designed for reporting crypto activity because the US crypto exchange has to know how much was paid for the stock, as well as what it was sold for, and you need a closed system for that.
A lot of millennials who own cryptos do not know how to report their taxes and are falling into the non-compliance for not reporting their cryptos.
They’re filing false tax returns because they know they don’t have a better tool to do it.
A hypothetical 1099-CRYPTO is years away, but the idea is that the 1099-CRYPTO could be like a 1099 B for crypto traders that would state what you bought it for and traded it for and what the dollar value was.
No single exchange has that type of information because people bought on exchange one, and they sold an exchange two. And exchange two has no idea what you bought it for.
I expect this will be a continuing headache for the IRS.
As of now, the IRS has not provided any guidance on how they’re going to fix it.
Suppose you are a millennial who has fallen out of compliance with the IRS for the IRS’s lack of clarity for reporting your crypto.
My advice to you is to get compliant this year and file a crypto tax return with integrity. From there, your best defense against an IRS audit is becoming a member of CryptoTaxAudit.
Become a member today. We’ve got your back!