Taxation of crypto in the US and Form 1099

Written 11th October, 2019

            The Internal Revenue Service (IRS) has recently published new guidance (Revenue Ruling 2019-24) and a Frequently Asked Questions (FAQ) page on their website to address concerns and uncertainty of the taxation of cryptocurrency. In response, IRS Commissioner Chuck Rettig said, “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.” As the last guidance published by the IRS was in 2014 through Notice 2014-21, this new information was certainly due. The IRS has maintained that taxpayers should still refer to Notice 2014-21 when dealing with the tax treatment of virtual currencies in addition to the new guidance and FAQ page.

Revenue Ruling 2019-24

            The newly published guidance addresses two main concerns:

            “(1) Does a taxpayer have a gross income under §61 of the Internal Revenue Code (Code) as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency?

              (2) Does a taxpayer have gross income under §61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency?”

In short, the Revenue Ruling 2019-24 states that if no new units of cryptocurrency are received after a hard fork, then they have not incurred gross income and thus is not a taxable event. And should a customer receive cryptocurrency as a result of a hard fork followed by an airdrop, then there is gross income and is a taxable event.

FAQ Page

            The Frequently Asked Questions page on the IRS website addresses the typical questions that a taxpayer may ask who is new to virtual currencies. Simple questions such as defining virtual currencies and discussing its treatment in the US are included in the FAQ. One particular question of interest is Q39: “If I engage in a transaction involving virtual currency but do not receive a payee statement or information return such as a Form W-2 or Form 1099, when must I report my income, gain, or loss on my Federal income tax return?” The answer to such question is: “A39. You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return”.

Form 1099

This response from the FAQ page regarding Form 1099 raises a previously discussed issue of whether crypto exchanges are obligated to issue Form 1099 to its customers. Certain crypto exchanges, such as Coinbase, GDAX, and Gemini, have been issuing 1099-K tax forms to certain customers. According to the IRS, Form 1099-K, Payment Card and Third Party Network Transactions, is an information return used to report payment transactions from “payment cards and/or in settlement of third-party payment network transactions that exceed the threshold of $20,000 in gross payments AND more than 200 such transactions”.

To issue a 1099-K Form, the company must view itself as a Third-Party Settlement Organization (TPSO), which according to the IRS is a “central organization that has the contractual obligation to make payments to participating payees…in a third-party payment network”. A TPSO has features such as acting as an “intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase”, and “charge sellers a fee for facilitating the transaction”. Gemini views themselves as a TPSO and follows the guidance of Section 6050W under the Internal Revenue Code in its filing of Form 1099-K on their Digital Asset-for-USD sales.

There is currently no specific guidance on whether digital currency transactions and exchanges that meet the $20,000 in gross payments and 200 transactions threshold applies to the Section 6050W rule requiring the 1099-K Form to be issued. Although the law still seems interpretive for crypto exchanges, it can be projected that crypto exchange platforms may be viewed as a TPSO by the IRS, and thus 1099-K Forms may be expected (retroactively or otherwise) for those who meet the threshold. However, the recently published FAQ page discussed above emphasized that even if an individual taxpayer doesn’t receive a 1099 Form, they must still be responsible for accurately reporting their crypto gains/losses. This places more responsibility on the individual, although it would certainly help for the IRS to state more clearly the requirements for crypto exchanges and whether they are required to file 1099 Forms for customers who meet the threshold.