Protect Your Crypto Clients From The IRS

Over the past few months, the IRS has been targeting crypto traders. Letters 6174-A, 6173, and CP2000 have been mailed to more than 10,000 individuals, and frantic cryptocurrency holders are unsure of the next move to make.  

The problem is the IRS doesn’t have all of the information it needs. Now, the agency is blindly contacting crypto holders whether their taxes were filed correctly or not. The government is basing its findings on data collected from cryptocurrency exchanges like Coinbase, giving them an incomplete picture of the crypto world. And as a crypto tax pro, this puts you in the position to educate your clients and help them through this stressful time.

Crypto Is Property

As you may know, in the United States and many other countries, cryptocurrency is taxed the same way as property, like stocks and bonds, not currency. And like property, capital gains and losses need to be reported to the IRS each year. This means that crypto traders must keep track of every time they buy, sell, or trade their currency.

Unsurprisingly, many cryptocurrency holders haven’t reported their crypto activity, which is why the government is taking such a keen interest. However, the IRS requires traders to use Form 1099-K, which is used to report gross transactions on a third-party network like a cryptocurrency exchange. 

The Problem With Form 1099-K

Form 1099-K gives the IRS an overview of a trader’s activity. It’s used to summarize each time a trader buys, sells, or transfers their cryptocurrency. If a cryptocurrency holder has more than $20,000 of activity, the crypto exchange will send this form to both the holder and the IRS. Seems like a good system, right? Actually, it’s extremely problematic. Because cryptocurrency is taxed like property, the amount of transactions a crypto trader makes is irrelevant when it’s tax time. Instead, cryptocurrency holders need to report their capital gains or losses as this is the only thing a trader can be taxed on.

Think of it this way. Say your client has $5,000 worth of Bitcoin that was purchased in June. If your client then sells their crypto a few months later for $3,000, they have a net loss of $2,000. But according to Form 1099-K, the government will only see $7,000 in gross cryptocurrency transactions. This says nothing about the capital loss your client is entitled to claim. On the other hand, if cryptocurrency users were issued Form 1099-B, which includes all of the trade information plus all of the data needed to calculate and accurately report capital gains and losses, the government and your clients would have all of the information they need in one place.  

Why Form 1099-B Doesn’t Work 

Why don’t crypto traders receive a Form 1099-B instead of Form 1099-K? Because a cryptocurrency exchange can only see what your clients are doing on its platform. If they use more than one exchange, it has no way of knowing where their crypto is, what they traded it for, or what the fair market value is. Because exchanges lack the necessary information to calculate capital gains and losses, they can’t issue Form 1099-B.

The fact that the IRS is relying on misleading information is a problem for both the government and cryptocurrency holders. If your clients are going to be taxed on capital gains and losses, not gross transaction amounts, a 1099-K doesn’t paint the complete picture. The good news is that if one of your crypto clients received a letter from the IRS, they don’t need to panic. If their crypto taxes were filed correctly, this is a non-issue. If you do have a client that’s concerned about these letters, talk them through the situation, review their past returns for errors, and be the expert crypto tax professional they can count on. And if you need any additional information, Crypto Tax Academy is always here to help. 

Mario Costanz


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