A look at the current state of cryptocurrency taxation and how Prime Trust and Sovos make it easy
As cryptocurrency tax reporting regulations continue to shift and technology outpaces compliance, the reporting of digital asset tax information is critical to platform scalability. If you’re considering launching a new crypto-focused business or extending an existing business into crypto and digital assets, here are the three things you need to know.
Form 1099-B is coming for crypto
As crypto assets increase in popularity with a surge in mainstream adoption, the government is paying attention. There are many investors who now have a new asset class, and related unrealized gains and losses on their balance sheets.
As a result of the September 2020 Treasury Inspector General for Tax Administration report, The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions, many believe Form 1099-B is on the horizon. Form 1099-B reports on proceeds from broker and barter exchange transactions with purchase price, sale price, and gain or loss. It will be important that your business be prepared to issue these forms to clients and governments alike. For Prime Trust clients, this will be automatically reported through the Sovos integration. To keep up with the shift, read more here.
Classification by the IRS
Tax treatment of crypto assets has continued to change based on the various government administrations and their respective stance towards crypto, as well as the maturation of the industry and the types of products, assets, and services being introduced.
In 2014, the IRS said that bitcoin, ethereum, and other crypto assets are akin to property for tax purposes. This meant that buying and selling of crypto assets qualified for capital gains treatment just like traditional equities. However, with the introduction of decentralized finance (DeFi) services like staking and lending, digital asset holders can now earn ‘interest’ or rewards on their crypto assets. Similarly, artists can earn income by selling tokenized assets via NFT marketplaces. This complicates individuals’ and institutions' income profiles, which means that accountants need to closely monitor how crypto is used to determine whether it will be taxed as capital gains, ordinary income, or dividend income.
As the ecosystem continues to explode with new and more sophisticated financial transactions involving cryptocurrencies, it is important that your business be prepared to issue any information returns that the IRS requires. For Prime Trust clients, this expansion will again be automatically supported through the Sovos integration.
Be proactive about your crypto taxes
Despite what you might have assumed, tax reporting is not a once a year occurrence. In fact, reporting incorrect or late information to the IRS could result in your business receiving mandatory withholding tax notices and proposed penalty notices from the IRS. These notices require your business to engage in reactive compliance processes with the IRS to avoid being assessed the penalties and to help the IRS to obtain the correct tax information. If your business doesn’t report 1099s at all, current tax law authorizes the IRS to penalize a business as much as $560 per return for every return not filed with no maximum annual limit to the penalty.
To stay ahead, partner with a technology provider that is dedicated to tax withholding and information reporting so that your business is prepared to issue any of the more than 30 different Forms 1099 or other information returns required by the IRS and the states. Another tip: outsource your tax reporting obligations to a trusted third-party to manage the complex transformation and submission of data to the IRS and the states to avoid risk of noncompliance or late filing penalties.
About Prime Trust and Sovos
Sovos, the largest private filer to the IRS of 10-series tax forms, and Prime Trust, the one-stop shop for financial infrastructure for fintech, recently announced a tax reporting integration that makes it easy for Prime Trust’s customers to keep up with the changing tax landscape and stay compliant. Through the integration, Prime Trust’s customers will be able to automate 1099 forms and filings, eliminating potential errors and delivering automatic regulatory updates to help customers navigate the ever-changing cryptocurrency compliance landscape.