Taxes are one of the few certainties in life and major tax changes for crypto exchanges and wallets are coming very soon. Are you ready for them?
While cryptocurrency owners have been required to report their crypto gains and losses on their income taxes for a few years now, crypto exchanges and wallets were not required to provide the IRS with information about their customers and their transactions. But all that is about to change as new federal regulations will require crypto exchanges and wallets to provide tax documentation in the form of a 1099-B to their customers. And it will not be an easy process.
To be prepared for this change, you need to know exactly what will happen soon to crypto exchanges and wallets, what type of report you are being asked for, and why it might not be a good idea to develop these capabilities. internal.
On the horizon of the tax return
Despite the cryptocurrency’s intent to be decentralized, federal tax rules have caught up with crypto owners, who must declare their crypto holdings as property and pay the associated capital gains tax. However, unlike broker or swap exchanges, crypto exchanges and wallets were not required to report customer information, transactions, and gains or losses to the IRS and issue a form to customers for their own tax purposes.
However, this changed with the Investment and Employment Infrastructure Act, also known as the Infrastructure Act, on November 15, 2021. The bill expands the tax filing required for transactions, and as of 2023, crypto exchanges and wallets are required by law to and give 1099- B forms out — or anything like that — to their clients, the federal government, and any state that requires reporting. And with nearly 600 crypto exchanges, the largest of which handles $15.9 billion in volume, there’s a lot of work ahead of them.
A 1099-B – like other 1099 forms – is used to report non-W2 income earned in excess of $600 and its records of self-employment or concert work, interest received, dividend payments, etc. Even certain cryptocurrency purchases can cause a taxable event that applies to the $600 threshold. A Form 1099-B is issued specifically by brokerage firms and exchange exchanges and lists all transactions, instrument used, gains or losses, etc. The message is clear: the IRS considers your exchange a brokerage firm or exchange exchange. And as such, you must track and monitor all crypto transactions made per customer on your platform. You may also need to report existing tax liabilities, such as withholding tax.
Because it’s required by law, you don’t have the option of doing nothing – or you can and will be fined. You have to develop your ability to handle this massive amount of data collection and tracking to get there next year. But how are you going to do this?
Crypto exchanges and wallets must prepare end-to-end for these new tax regulations, from collecting customer information to tracking and allocating transactions to generating a form that complies with the law. What kind of information does a typical 1099-B contain? You can find a customer’s name, address and Social Security number – and SSNs require their own collection and verification process before the 1099-B issuance can begin. It also lists every transaction made, including what was sold, date of sale, quantity, profit or loss, and other important information.
There is a lot of data to keep track of and a lot of reports to correct. Your first idea may be to develop these capabilities in-house, but you will encounter a number of obstacles to doing so, such as:
- Compliance: There are some internal challenges. The first is compliance and making sure that the way you collect and report information complies with this new tax law. And rest assured that the IRS is monitoring crypto exchanges and wallets to make sure they are doing things right.
- the speed: Another challenge is the speed with which you can design, develop and implement these new features, especially when they have to be ready by the end of the year. Do you have the resources and budget to focus directly on solving this problem?
- Cost: Cost is another challenge when building in-house. Consider the research, design, procurement, development, testing, and maintenance costs of building, running, and maintaining the backend infrastructure for this capability. Does your exchange have the technical means to prioritize this as well?
- maintenance: Finally, are you ready to commit to the ongoing work to make this tax process go year after year and maintain the underlying infrastructure? Who performs software updates to keep up with changing tax laws? Which team will own it?
Using Custom APIs
You don’t have to build your solution yourself. The best way to get started quickly and easily is to use APIs to track and generate your 1099-Bs. Instead of building all this functionality in-house, APIs will integrate with your system and easily extract all this data to generate the forms you need. Plus, custom APIs from an expert vendor not only keep you compliant with tax laws, but also keep you up to date with changes and ongoing API maintenance. Ultimately, API integration will save you time, money and resources and prepare you for when new laws come into effect.
Tax changes for crypto exchanges
There is an old saying that there are only two things in life, and one of them is taxes. Crypto exchanges and wallets face an inevitable future of compliance when it comes to transaction reporting to the IRS – and perhaps even more extensive reporting, including strike tax. However, another old saying says that one moment in time saves nine, so if crypto exchanges and wallets start building capacity today, they won’t fall out when the IRS calls.