Have You Received a Form 1099-K from Your Cryptocurrency Exchange?

If you trade or invest in cryptocurrency, you are obligated to report all income from your trades and sales to the Internal Revenue Service (IRS). But, you are not the only one with this obligation. Your cryptocurrency exchange has an obligation to report this information to the IRS as well—and the IRS can use your exchange’s filings to determine whether you have accurately reported and paid what you owe.

As Washington D.C. tax lawyers, we represent many cryptocurrency traders and investors, and we know the challenges that many of these individuals face with accurately reporting the gain (or loss) from their cryptocurrency activity. However, we also know that the IRS is specifically targeting cryptocurrency tax fraud, and it is devoting substantial resources to ensuring that cryptocurrency traders and investors pay tax on their cryptocurrency earnings.

Some Exchanges have Been Reporting Customers’ Cryptocurrency Income Using Form 1099-K

According to a recent report from Forbes.com, Coinbase has been reporting its customers’ cryptocurrency income to the IRS using form 1099-K. It is possible that other exchanges may have been following this practice as well.

As the IRS explains, Form 1099-K is used to report “third party network transactions.” The IRS defines a third party network transaction as, “any transaction that is settled through a third party payment network, but only after the total amount of such transactions exceeds $20,000 and the aggregate number of such transactions exceeds 200.” As stated in the Forbes.com report, Coinbase has been sending completed Form 1099-Ks to customers (and the IRS) when a customer’s total transactions on the platform exceed these thresholds.

The problem with this is that a cryptocurrency transaction is not the type of third party network transaction contemplated by Form 1099-K. While the types of transactions that should be reported on Form 1099-K are generally taxable (i.e. transactions involving the sale of goods or services for fiat currency), not all cryptocurrency trades and sales are taxable events; and, even when they are taxable events, the amount of tax owed is not necessarily determined by the value of the transaction itself—the taxpayer’s basis in the cryptocurrency needs to be taken into account.

Has Your Taxable Cryptocurrency Income Been Incorrectly Reported to the IRS?

As a result of this issue, some cryptocurrency traders and investors who have received form 1099-Ks have also received CP2000 tax notices from the IRS. These notices inform taxpayers that their personal tax filings are inconsistent with the tax filings submitted by other parties (i.e. 1099-Ks filed by Coinbase and other exchanges)—and that they may owe significant back taxes, interest and penalties as a result. While Coinbase is reportedly switching to Form 1099-MISC for the 2020 tax year, individuals who have received a 1099-K in the past may be at risk for having underpaid (or overpaid) the IRS in prior tax years.

Speak with Washington D.C. Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

Have you received a Form 1099-K or CP200 tax notice from the IRS related to your cryptocurrency investing or trading activity? If so, you will need to carefully make sure that you have paid what you owe to the IRS. To discuss your situation with Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email ket@thornlawgroup.com or requesting a confidential consultation online now.