Outdated Tax Form Costs Crypto Traders Thousands
Key points to remember
- The top US tax regulator has notified crypto traders of the misreporting of taxes for the year 2018.
- For many, this has resulted in cumbersome tax audits or hundreds of thousands of dollars in taxes.
- The discrepancy is caused by the Form 1099-K used by crypto exchanges.
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US crypto traders recently reported receiving tax audit notices from the Internal Revenue Service (IRS).
The notices, called CP2000, are issued if the IRS systems detect misreported taxes for a given year. In these notices, the regulator refers to the activity of 2018.
Indeed, the IRS verifies returns on a two-year interval and is currently reviewing the 2018 tax year.
For many, these letters caused a major headache. Beyond simple audit notifications, the IRS is requiring some merchants pay hundreds of thousands of dollars in taxes.
Industry tax experts, however, have identified the source of this problem: Form 1099-K.
Unpacking the 1099-K tax form
In 2018, exchanges like Coinbase issued 1099-K forms for users who had over $20,000 in traded volume and over 200 trades.
The problem with Form 1099-K is that it does not show a trader’s gains or losses. Instead, the form adds up the proceeds of all transactions made on an exchange as income and reports that number to the IRS without considering actual profits and losses.
This accounting error therefore shows that traders have earned massive sums of personal income.
As a result, the IRS automatically assumed that many traders underreported their 2018 earnings and ran audits.
“We have seen a slew of clients come to TaxBit for assistance with CP2000 letters based on Form 1099-Ks issued by exchanges during the 2018 tax year. Form 1099-K reports the total total volume of a user’s payment transactions and does not take into account the cost basis, as it does not accurately represent what you may owe in taxes,” Explain Justin Woodward, crypto tax attorney at TaxBit.
All crypto transactions are reportable for tax purposes because the IRS considers cryptocurrencies to be property. To file a specific capital gain Returngains and losses on individual trades must be calculated.
Crypto tax experts have explained that Form 1099-K was not designed for digital asset transactions and should not have been used by crypto exchanges in the first place.
“1099-K was never meant to be a form for cryptocurrency exchanges to use to report income. It was designed to report income from platforms where you get paid directly by third-party merchants like Uber, Lyft, and Etsy Form Doesn’t Make Sense in the Context of Cryptocurrency Exchanges,” CryptoTrader.Tax, a Crypto Tax Software Company wrote.
Experts say the ongoing problem can be solved by explaining the situation to the IRS in a letter and proving traders’ actual gains and losses using data provided by exchanges for the year.
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