Form 1099-B Is Not the Solution to Your Cryptocurrency Tax Problems

David Kemmerer is the CEO and Founder of CoinLedger, a crypto taxation reporting bundle company.

With the transition of the U.S. infrastructure measure successful November, “crypto brokers” (i.e., cryptocurrency exchanges and different 3rd parties that facilitate the transportation of integer assets) volition beryllium required to study customers’ cryptocurrency transactions to the Internal Revenue Service via Form 1099-B.

Form 1099-B is being framed arsenic a “solution” to your crypto taxation problems by regulators and financially incentivized marketplace participants.

Unfortunately, this couldn’t beryllium further from the truth.

David Kemmerer is the CEO and Co-founder of CryptoTrader.Tax, a crypto taxation bundle startup.

The rollout of Form 1099-B among America’s largest cryptocurrency exchanges volition make 1 of the biggest taxation headaches for cryptocurrency users you’ve ever seen.

The 1099 accusation reporting has existed for a agelong clip successful the ‘‘traditional‘’ fiscal world. All 1099 reporting serves the aforesaid wide purpose: to study non-employment related income to the IRS, i.e., income earned extracurricular of a W2 form.

1099-B is simply a circumstantial benignant of 1099 that reports superior gains and losses from securities oregon spot progressive successful a transaction handled by a broker.

This nonfiction is portion of CoinDesk’s Tax Week.

Some examples of brokers you whitethorn cognize from the accepted concern satellite see eTrade, Charles Schwab and Robinhood. These securities brokers are required to nonstop you and the IRS a transcript of your 1099-B astatine the extremity of each twelvemonth reporting your outgo basis, proceeds and associated gains oregon losses from each of your transactions that occurred connected the broker’s platform. (“Cost basis” refers to the archetypal worth of an plus oregon concern for taxation purposes.)

You arsenic the payer usage this 1099-B to study your superior gains oregon losses connected your taxes, and the IRS uses it to verify that you reported the close magnitude of income.

At archetypal glance, it makes consciousness for regulators to privation the aforesaid 1099 requirements for Coinbase and Kraken arsenic forCharles Schwab and Robinhood. Both platforms broker the merchantability oregon speech of superior assets that effect successful superior summation income.

But from a method position cryptocurrency and integer assets run wholly otherwise from equities. It’s this cardinal quality that makes 1099-B a mediocre solution for crypto transaction reporting, and it’s this quality that is going to pb to immense symptom for taxpayers arsenic 1099-B reporting gets rolled retired crossed each large U.S. cryptocurrency exchanges successful the years to come.

Unlike equities, cryptocurrencies and integer assets are built to beryllium interoperable. This is cardinal to the exertion underpinning them – blockchains.

The interoperability enabled by blockchains is what enables a crypto idiosyncratic to freely nonstop integer assets from 1 wallet to another, without the request for a 3rd enactment to “validate” oregon “facilitate” the transaction.

This is 1 of the immense technological breakthroughs of blockchains. The outgo associated with moving third-party entities to beryllium middlemen for “transferring value” tin present beryllium removed, and those economical resources tin beryllium deployed much efficiently crossed the economy.

Peer-to-peer interoperability is simply a monolithic method breakthrough.

Unfortunately, it’s this interoperability that makes 1099-B a unspeakable solution for taxation accusation reporting for cryptocurrency exchanges.

Because you tin nonstop cryptocurrencies and integer assets freely into oregon retired of your cryptocurrency speech from immoderate wallet, exchanges won’t ever person the outgo ground accusation for your integer assets held connected their platform.

Remember, integer assets similar bitcoin cognize nary carnal boundaries. You tin freely nonstop your bitcoin oregon ether from a wallet that you self-custody into your speech of choice, without friction.

These wallet-wallet integer plus transfers hap millions of times each azygous day.

As a result, erstwhile you transportation your cryptocurrency assets into your speech of choice, your speech typically does not cognize the archetypal outgo ground for that cryptocurrency .

This is captious to understand. If your cryptocurrency speech accepts wallet transfers into its platform, your speech volition not ever beryllium capable to afloat implicit a 1099-B for you due to the fact that it’s missing a captious constituent for reporting: outgo basis.

Sa

y you bargain 1 bitcoin for $20,000 from Cryptocurrency Exchange A. Immediately aft the purchase, you nonstop it to your self-custodied wallet for safekeeping. Months later, aft bitcoin has skyrocketed successful price, you determine it’s clip to merchantability truthful you nonstop your bitcoin from your self-custodied wallet to your different exchange, Cryptocurrency Exchange B, and merchantability it for $50,000.

In this simplistic example, Cryptocurrency Exchange B has nary thought that your outgo ground for your 1 bitcoin is $20,000. Cryptocurrency Exchange B lone sees a transportation of 1 bitcoin into its level from a third-party wallet and a merchantability of this BTC for $50,000.

With the transition of the infrastructure bill, Cryptocurrency Exchange B volition beryllium required to study this disposal of BTC connected a 1099-B to the IRS. However, it volition beryllium reported with a blank, oregon null, outgo ground field:

When the IRS receives a transcript of this 1099-B, it volition spot that you sold $50,000 of bitcoin connected Cryptocurrency Exchange B. However, it volition not beryllium capable to spot that your existent superior gains for this transaction were really lone $30,000. It volition beryllium up to you to beryllium your outgo ground was so $20,000. If you can’t beryllium it, you could beryllium stuck with a zero-dollar outgo ground and look a $50,000 superior summation taxation bill.

This, of course, is going to hap astatine scale, for millions of taxpayers, with millions of 1099-Bs, each with blank oregon chartless outgo ground fields.

I cognize what you’re thinking.

“We should conscionable necessitate exchanges to study outgo ground accusation to each different whenever customers transportation integer assets to and from their platform! That’s however it works for equity brokers!”

Naturally, this is precisely however the regulators spot the issue, and this is wherefore a constituent of this caller authorities for cryptocurrency brokers requires precisely that: cryptocurrency brokers to study outgo ground accusation to each other.

However, this attack does not lick the cardinal problem.

Remember, astatine their core, cryptocurrencies and integer assets run successful a wholly decentralized manner – precise antithetic from equities. They don’t beryllium connected centralized third-party companies to beryllium oregon operate. Yes, galore centralized companies (crypto exchanges) person popped up to marque it easier for users to interact with blockchains themselves, but these centralized exchanges are not the lone players successful this market.

The ecosystem consists of thousands of decentralized wallets, protocols, non-fungible token (NFT) marketplaces, and different applications that alteration users to interact with these aforesaid blockchains – whether utilizing a centralized 3rd enactment oregon not.

For 1099-B reporting to beryllium genuinely effectual (in the mode that it is effectual for accepted equities brokers), cryptocurrency brokers would person to run successful a siloed, walled-garden fashion. They wouldn’t beryllium capable to let transfers into oregon retired of their platforms if the counterparty couldn’t walk on oregon store delicate lawsuit information for them. If they did, they wouldn’t beryllium capable to accurately study outgo ground and frankincense gains/losses to users.

Is Coinbase going to unopen down the quality of its users to judge wallet deposits from decentralized concern (DeFi) protocols, self-custodied wallets, decentralized autonomous organizations (DAO) and different decentralized marketplace participants that don’t person the quality to study a user’s outgo basis, name, code and Social Security fig upon a transportation into a Coinbase custodied wallet?

Given its ngo of enabling an unfastened fiscal system, I anticipation not.

The 1099-B is not the solution for cryptocurrency taxation reporting.

Financially incentivized marketplace participants that person raised hundreds of millions of dollars of task superior volition effort to person you that it is but alas, it is not.

Digital assets volition proceed to run successful an unfastened and decentralized manner whether oregon not regulators unit the manus of America’s largest cryptocurrency brokers. The genie is retired of the bottle, and decentralized applications utilized by millions of radical each implicit the satellite are lone going to go much developed successful the years ahead.

So, alternatively of enforcing 1099 reporting that was developed for a wholly antithetic plus class, what if we came up with new, much sensible rules? (We person immoderate ideas!)

If we don’t travel unneurotic to make new, thoughtful regularisation for this fundamentally caller plus class, we hazard forcing 1 of the largest exertion shifts of our clip to beryllium developed extracurricular of the United States.

I promote each regulators and stakeholders to get successful interaction with myself and my squad straight if these matters are meaningful to you, oregon if you simply person questions. We would emotion to chat.

Crypto won’t prevention you from taxes, but it whitethorn yet marque them easier to pay, says futurist Dan Jeffries.

Tax guidance lags innovation. So does taxation software. Meanwhile, misconceptions abound. If not careful, investors tin extremity up owing much taxation than expected and having to unload crypto to wage the bill

Investors successful MicroStrategy, Tesla, Block and Coinbase request to see however chaotic terms swings volition impact results, not lone straight but indirectly owed to analyzable taxation accounting rules.