Here’s what crypto exchanges and their customers need to know about Form 1099-K.
When you invest in crypto and trade vigorously, some uncertainties are inevitable. However, keeping a track of your transactions, tax-related paperwork, and other documentation is necessary. Without this data, you could end up either underpaying or overpaying your taxes.
When crypto investors don’t have access to such data, they usually rely on invoices they receive from the payment settlement entities or payment merchants, which usually specify the transaction ID in reference, the amount paid for your crypto transaction through debit/credit cards, and other particulars of the transactions.
When you trade with a reliable crypto exchange and exceed the gross payments threshold of $20,000 and transact above the limit of 200 transactions, you usually end up receiving a copy of the IRS Form 1099-K from the payment settlement entity which is processing these reportable transactions. This form itemizes and reports all gross payments settled through third-party networks and payment card transactions for every month of the calendar year respectively.
As a taxpayer, you have to recognize the transactions itemized in the form, validate the transactions, calculate the gross payments made in a year, and assess the accuracy of the reported transactions. Bring it up with your payment settlement entity or the exchange if you notice any discrepancies.
Now that you have a general context to understand the nature of these tax reports, let’s dig in and look at the purpose and regulatory reporting obligations of Form 1099-K in detail.
Purpose Of Form 1099-K
IRS Form 1099-K has been introduced to accelerate voluntary tax compliance for business entities, self-employed individuals, and others who make and accept payments through third-party network transactions and payment card transactions. This approach also focuses on payment settlement entities and their reportable transactions, allowing the IRS to verify the reports accurately.
The form primarily reports any payments received by the payment settlement entities through third-party payment network transactions and payment card transactions.
Here’s how the IRS differentiates Third-party Payment Network Transactions and Payment Card Transactions.
| Payment Card Transaction | Third-Party Network Transaction |
| When a payment card, or any account number, or other identifying data associated with a payment card is accepted as payment then it is a payment card transaction. | When a transaction 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, it is called a third party network transaction |
The IRS is planning on removing the transactional threshold on all such payments and further reducing the cap on gross payments processed. This means that payment settlement entities probably have to report all transactions with gross payments amounting to $600 or more through Form 1099-K from the 2023 tax year.
Learn more about this update here.
Who Must File Form 1099-K
In a general payment settlement entity-payee business arrangement, the payment settlement entities (PSEs) are required to file Form 1099-K with the IRS and send a copy of the form to their payees.
In this cryptocurrency exchange-customer business arrangement, it is the cryptocurrency exchange that is required to file a 1099-K form with the IRS and send a copy of the form to the crypto investors (exchanger’s customers) for accepting and processing payments through third-party networks and payment cards (debit/credit cards, in-store credit, etc).
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What Must Be Reported On Form 1099-K
Any transaction processed through a third-party payment network and payment card transactions must be reported on Form 1099-K.
The IRS 1099-K instructions specify that the form must be filed when the aggregate number of transactions is 200 or more. Plus, the gross payments received must be $20,000 or more.
When your transactional data matches the above criteria, it is time to report the same in Form 1099-K along with the payee tax details.
When To File Form 1099-K
Payment settlement entities, or crypto exchanges in this scenario, are required to send out 1099-Ks to their recipients by January 31 of every calendar year.
Copy ‘A’ of the 1099-K form must be filed with the IRS by February 28.
Easy 1099-K Filing With Tax1099
Tax1099’s Crypto Tax Compliance solutions allow crypto exchanges to manage their customer data and maintain tax records for every reportable transaction. With 12+ dynamic integrations, you can easily import your transactional data, validate the payee TINs in real-time; validate your transaction reports, and schedule your e-files to submit Form 1099-K before the IRS deadline.
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