Updated: December 2021 (new IRS reporting requirements for exchanges)
This article is part of TokenTax's Crypto Tax Guide.
In November 2021, the U.S. House of Representatives passed the Infrastructure Bill, which included more stringent regulations on tax reporting for crypto exchanges. Beginning in the tax year 2023, U.S.-based crypto exchanges must collect tax reporting information from their customers so that they can send them (and the IRS) Forms 1099. 1099s report income earned from an entity or person other than an employer.
The bill does not specify which type of the 20 types of Forms 1099 must be issued by exchanges, although the information the bill requires resembles what is collected by the 1099-B.
As of the 2021 tax year, the U.S.-based exchanges that send 1099s send one (or more) of the three types of 1099s detailed below.
What is Form 1099-MISC?
As its name suggests, Form 1099-MISC is designed for reporting miscellaneous income to the IRS. Before the 2020 tax year, it was most often used for reporting non-employee compensation. However, some crypto exchanges, most notably Coinbase, have begun to use it to report traders’ gross income from crypto rewards or staking. This amount is typically reported in Box 3 of Form 1099-MISC, as “other income.”
Exchanges that send Form 1099-MISC typically send them to U.S. persons who have earned more than $600 on rewards or staking.
For Coinbase, this is a change in procedure from previous years, in which it did not send Forms 1099-MISC for rewards/staking income, but did send Forms 1099-K to certain high-volume/high-value traders.
An exchange sends two copies of each Form 1099-MISC: one to the taxpayer and one to the IRS. When the IRS receives a Form 1099-MISC report of an individual’s total income from crypto rewards or staking, it will expect that person to itemize and report those transactions on their income tax returns.
Additionally, although a Form 1099-MISC only reports income from crypto rewards or staking, the form does suggest to the IRS that a taxpayer is actively involved in crypto trading and may have additional gains (not from rewards or staking) to report.
Which exchanges send Form 1099-MISC?
Coinbase, Coinbase Pro, Coinbase Prime
eToro (for income from staking, friend referral, or other promotional incentive)
What do I need to do on my crypto taxes if I get a Form 1099-MISC?
The 1099-MISC doesn’t report individual transactions from staking or rewards, just your total income from them. You will need to report each transaction—as well as any other crypto transactions from any exchange—in order to calculate your crypto taxes. If you fail to file, you may come under scrutiny of the IRS.
What is Form 1099-K?
The Form 1099-K states your cumulative amount traded in a tax year: the total value of crypto that you have bought, sold, or traded on an exchange. This form is also known as a Payment Card and Third Party Network Transactions form. It’s commonly used by credit card companies and payment processors like PayPal to report payment transactions that they’ve processed for third parties.
Exchanges that send Form 1099-K typically send it to U.S. traders who have made 200 or more transactions, the volume of which equals $20,000 or more.
The amount on the 1099-K does not represent your total capital gain or loss, and you don’t need to include the amounts on this document on your tax return.
Don’t be alarmed if the number on your 1099-K is a larger number than you’d expect. It’s merely a report of your trading volume to the IRS. If you trade often, you may have a very large trading volume while also not having that large of a gain or loss.
Which exchanges send Form 1099-K?
What do I need to do on my crypto taxes if I get a Form 1099-K?
As is the case for many tax forms, if you’ve received a Form 1099-K, so has the IRS. The form alerts the IRS that you have been trading cryptocurrency and thus you will likely be expected to report crypto on your tax return.
The 1099-K doesn’t report individual transactions, just the cumulative amount traded. You will need to report each transaction—as well as any other crypto transactions from any exchange—in order to calculate your crypto taxes. If you fail to file, you may come under scrutiny of the IRS.
Why did Coinbase switch from Form 1099-K to Form 1099-MISC?
Because Form 1099-K reports the aggregate amount of crypto involved in an individual’s trades, rather than the net profits or loss, it is easy for transactions that ultimately represent a loss to be interpreted as generating revenue.
For example, imagine you purchased a token for $1.00, but sold it later in the same year for only 75 cents. Despite the fact that this series of transactions represented a 25 cent loss, $1.75 would be reported as part of the amount on the 1099-K.
This situation can lead to confusion at the IRS. Agents sometimes interpret 1099-K calculations as crypto traders’ profits, rather than their trades’ volume. This may result in the IRS sending CP2000 letters, which inform filers they may have significantly under-reported their income on their tax filings. To address such misunderstandings usually requires the intervention of a crypto-savvy CPA.
Although IRS misinterpretations of the 1099-K are typically resolved, their effect on customers was burdensome enough to prompt Coinbase and some other exchanges to stop sending them.
What is Form 1099-B?
Form 1099-B is traditionally used by brokers and barter exchanges to report gains on a capital asset sold or exchanged on behalf of clients. Unlike Forms 1099-MISC or 1099-K, Form 1099-B does report individual transactions, detailing the following information:
A short description of the item sold, such as “100 shares of XYZ Co"
The date it was acquired
The date it was sold
How much it was acquired for
How much it was sold for
Whether the broker withheld any federal tax
Each transaction is reported separately, although trades from the same brokerage may be consolidated.
Form 1099-B often presents challenges for crypto exchanges, however, since the decentralized, easily-transferable nature of crypto can make it difficult to calculate an asset’s cost basis information.
For example, a user might transfer crypto between wallets on two different exchanges and then ultimately sell the asset on the second exchange. Although the second exchange would know the amount the crypto sold for and the date it was sold, it wouldn’t know the same information about the crypto’s acquisition. Therefore, it would be unable to determine the gains or losses a trader made on the transaction.
Which exchanges send Form 1099-Bs?
Robinhood (not an exchange, but a crypto broker)
What do I need to do on my crypto taxes if I get a Form 1099-B?
Individuals and/or their crypto tax professionals use Form 1099-B to fill out Form 8949, which is eventually filed on the taxpayer's Schedule D. Be aware, however, that because of the difficulties inherent in filing them or crypto transactions, Forms 1099-B may often contain incorrect information. We recommend you speak to a crypto tax professional about how to proceed if you receive a 1099-B.
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