Mastering Form 1099: A Comprehensive Guide to Cryptocurrency Tax Reporting in the USA [2024 Update]

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. We keep you informed! </p></div></div></div>

Do I Need to Declare Cryptocurrency on My Tax Return?

Yes, in the U.S., you must declare cryptocurrency transactions on your tax return. The IRS mandates reporting for various crypto-related activities through different forms. Income from cryptocurrencies is reported using Forms 1099, while Form 8949 covers capital gains, and Form 1099-B addresses other transactions. If you're compensated with cryptocurrency for services rendered, you'll need to use Form 1099-MISC to report such payments, while transactions involving NFTs necessitate Form 1099-NEC. 

However, these aren't the only forms relevant to cryptocurrency transactions; there are several other 1099 forms, each serving different reporting needs for your crypto activities. This article will guide you through these forms, ensuring you understand how to report your cryptocurrency transactions accurately.

The tax implications of your crypto transactions depend on factors such as transaction type, holding period, and the asset's cost basis. It's essential to report accurately to avoid penalties and fines. For a comprehensive understanding and to ensure you're meeting all your reporting obligations, refer to our detailed US crypto tax guide.

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Understanding Form 1099 for US Tax Filers

Form 1099 serves as an "information return" to the IRS, documenting a variety of non-employment-related income over 600$. This includes freelance work, gig jobs, rent, or cryptocurrency earnings. 

For US tax filers, understanding these forms is crucial as they delineate income received outside traditional employment. While there are over twenty different 1099 forms, crypto investors will primarily encounter Form 1099-MISC, Form 1099-NEC, Form 1099-K, Form 1099-B, and the newly introduced Form 1099-DA. 

These forms are issued both to taxpayers and the IRS, ensuring that all income is accurately reported. This article focuses on the forms related to crypto investments, aiming to clarify their purposes and requirements for a comprehensive understanding of how to report cryptocurrency transactions and activities.

How Do I Obtain Form 1099?

Obtaining Form 1099 from cryptocurrency exchanges has been inconsistent, with practices varying across platforms. Some exchanges issue Form 1099-MISC for income exceeding 600$ by January 31, designated to be reported as "Other Income." However, there's no standard requirement for exchanges to provide these forms, leading to discrepancies in reporting practices.

This situation is anticipated to change with the American infrastructure bill, which mandates crypto exchanges to issue Form 1099-DA to customers and the IRS starting in the 2025 tax year. This change aims to clarify tax reporting obligations, despite potential challenges unique to cryptocurrency transactions.

It's crucial to note that regardless of whether you receive Form 1099, all crypto transactions, including sales and gains, must be reported on Form 8949. This ensures compliance with IRS guidelines and accurate tax reporting.

What Happens if I Fail to Report Income from Form 1099?

Failing to report income from Form 1099 can lead to significant issues with the IRS. Since major exchanges send an identical copy of Form 1099 to the IRS when they issue one to you, any discrepancy between your tax return and the 1099 form will likely flag your return. This discrepancy could prompt the IRS to send you a Notice CP2000, alerting you to the unpaid tax liability and potentially initiating further action to reconcile the unreported income. This notice serves as a reminder of the importance of accurately reporting all income, including that from Form 1099, to avoid complications with the IRS.

Form 1099-K

Form 1099-K is crafted for payment networks to report user transactions to the IRS. Before 2022, certain crypto exchanges would issue this form to users surpassing 20,000$ in transactions and 200 trades. However, its original intent wasn't for cryptocurrency exchanges, as it reports the total transaction volume without distinguishing taxable events.

Exchanges Issuing Form 1099-K

• Crypto.com
• eToro USA
• Venmo
• Bitstamp
• Cash App
• Gemini
• Kraken

Steps to Take Upon Receiving Form 1099-K

Receiving a Form 1099-K indicates to the IRS your involvement in digital asset trading within the tax year. It's crucial to accurately report your crypto capital gains using Form 8949 and crypto income on Schedule 1, as Form 1099-K does not detail your individual transaction gains and losses. This differentiation ensures you meet your tax obligations without overreporting your taxable income.

Form 1099-B

Form 1099-B is utilized by brokers and barter exchanges to report capital gains or losses from the disposal of capital assets. Unlike Form 1099-K, Form 1099-B offers a more precise method for reporting capital asset transactions, including proceeds, cost basis, and the nature of the gain or loss (short-term or long-term).

Exchanges Issuing Form 1099-B

• Uphold
• Bittrex
• Robinhood
• Cash App
• BlockFi
• eToro USA

Steps to Take Upon Receiving Form 1099-B

Receiving Form 1099-B indicates that your crypto transactions have been reported to the IRS, detailing capital gains and losses. This form is crucial for accurately filling out Form 8949 and Schedule 1 of Form 1040 for your annual tax return. However, due to the complex nature of tracking transactions across multiple platforms, the information on Form 1099-B might not always be accurate. In such cases, consulting with an accountant is recommended to ensure your tax filings reflect your true capital gains and losses.

Form 1099-MISC

Form 1099-MISC is utilized to report miscellaneous income, including interest, referral bonuses, and staking rewards from cryptocurrencies, directly to both taxpayers and the IRS. Crypto exchanges issue this form to users who have accumulated at least $600 in income, excluding capital gains and losses from crypto transactions.

Exchanges Issuing Form 1099-MISC

• Binance.US
• Crypto.com
• Coinbase
• Gemini
• Kraken
• Bitstamp Earn
• BlockFi
• eToro USA

Steps to Take After Receiving Form 1099-MISC

Upon receiving Form 1099-MISC, it's essential to report this miscellaneous crypto income on your tax return, typically on Schedule 1 for individual taxpayers. This ensures all your earnings from various crypto activities are accurately accounted for and comply with IRS regulations.

Form 1099-NEC

Form 1099-NEC is specifically designed for reporting payments to independent contractors, freelancers, or self-employed individuals who receive $600 or more for services provided. This includes those involved in cryptocurrency mining or receiving payments in crypto or other currencies from a business as a non-employee. 

Platforms like Kraken might issue this form to account for such income, ensuring that non-employee compensations are accurately reported to the IRS, aligning with tax obligations for individuals engaging in these types of work or services.

Introduction to Form 1099-DA

Form 1099-DA (Digital Assets) is an upcoming form from the IRS tailored specifically for cryptocurrency transactions, reflecting adjustments in reporting requirements set to start in the 2023 tax year and become accessible for the 2024 tax filing season. It's speculated that this form will mainly require crypto exchanges to report the gross proceeds from crypto disposals, leaving taxpayers responsible for accurately tracking and reporting their capital gains.

However, the introduction of Form 1099-DA accompanies broader changes in crypto tax reporting driven by the Infrastructure Bill, which tightens regulations for crypto exchanges and possibly other crypto-related businesses. This shift aims to address the inadequacies of current 1099 forms like 1099-K, 1099-B, and 1099-MISC in capturing the complexities of crypto transactions, marking a significant evolution in US crypto taxation guidelines.

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Addressing Fair Market Value Discrepancies on Form 1099

If your Form 1099 from crypto transactions shows a fair market value different from your records, it's advisable to report the value listed on Form 1099 in your tax return, as this aligns with the information provided to the IRS. 

The discrepancy may stem from the varied pricing across cryptocurrency markets, and using the 1099 value ensures consistency with IRS data. Maintaining accurate transaction records is crucial, especially for addressing potential audits. Services like TokenTax can facilitate this process, ensuring comprehensive and precise crypto tax filings annually.

Mandatory 1099-DA Forms: Navigating Tax Reporting Changes for Crypto

The 2021 American infrastructure bill mandates that cryptocurrency exchanges, deemed as "brokers," issue Form 1099-DA, introducing a significant shift in how crypto transactions are reported. This requirement, while aligning with practices for stockbrokers, presents unique challenges for crypto reporting due to the inherent transferability and interoperability of digital assets. Exchanges might report incomplete or inaccurate information, complicating tax filings.
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Imagine the following scenario:
1. Alex buys 0,1 BTC for 5,000$ on a DEX
2. Alex transfers the BTC to Coinbase and sells it for 5,000$

Without access to the purchase history, the Form 1099-DA from Coinbase might only show $5,000 in gross proceeds without detailing Alex's cost basis, potentially misleading the IRS into taxing $5,000 as capital gains. 

Utilizing crypto tax software like Blockpit becomes essential in such scenarios, offering a solution to accurately track and report transactions amidst the evolving landscape of US crypto taxation.