Crypto Tax & Unclaimed Property Compliance – A Year-Round Approach – Part I

Wendy Walker
March 21, 2022

Despite the reputation of being a “once a year” thing, tax information reporting and withholding is a year-round organizational compliance process.  Add unclaimed property (UP) obligations to the monthly to-do list, and businesses have a lot of compliance obligations to prepare for – all throughout the year.

This quarterly blog series will focus on tax information reporting (TIR) and UP issues impacting businesses facilitating transactions involving digital assets. Each quarter, Sovos experts will provide updates and reminders on tax and UP issues in advance of the next quarter – to help you have a line of sight into what to expect next.

We’ll also make sure to include legislative updates to call out key IRS and state regulatory changes we are tracking or that have occurred. With that –let’s have a look at what’s coming in Q2.

Tax information reporting (TIR) – looking ahead to Q2

We kick off this inaugural blog series looking ahead to the final stages of the 2021 TIR season. By now, most companies have completed some of the more complicated parts of the season processing including:

  • Issuing 1099s to recipients by the end of January or early February
  • Filing some 1099s/1042-S with the IRS and states
  • Filing of withholding 945 returns by the end of January
  • Issuing recipient copies and filing IRS versions of Forms 1042-S by March 15
  • Filing of withholding 1042 return by March 15

As businesses prepare to complete the home stretch of 2021 TIR season, the following are some key activities that should be completed over the next few months.

  • Verify IRS and state transmittals were received. April 1 is the day after the IRS transmittal is due for most Forms 1099, 1098 and other information returns. In the early days of April, make sure to confirm that files have been received successfully by the IRS and states and that no follow up issues need to be addressed to mark those tasks as “completed” for the season.
  • Conduct post-tax season review to identify lessons learned. Almost as soon as possible after filing season, hit pause and regroup the key members of the organization that execute the year-end process. Identify the process details that worked and didn’t work and create an action plan for improvements for 2022 and beyond.
  • File late original and corrected Forms 1099 with IRS to avoid a higher penalty rate. Inevitably, companies have minor compliance hiccups that result in late or corrected versions of Forms 1099 that need to be filed. Records filed with the IRS within 1-30 days after the March 31 deadline are subject to the lesser penalty of $50/failure. Identify late originals and corrections and ensure a file is transmitted to the IRS no later than the end of April to avoid the higher penalty rate applicable to penalties filed more than 30 days after the deadline. Identify late originals and corrections and ensure a file is transmitted to the IRS no later than the end of April to avoid the higher penalty rate applicable to penalties filed more than 30 days after the deadline.
  • Issue recipient copies and file Form 5498 IRA Contribution Information. Businesses that maintain Individual Retirement Arrangements (IRAs) with assets invested in digital assets are obligated to issue to the recipient and file with the IRS Form 5498 to report the details. This includes the fair market value of the assets in the IRA as of December 31, the amounts of contributions and distributions that occurred during the calendar year, and other details applicable to the arrangement. This form is due to be issued to the recipient and filed with the IRS no later than May 31, 2022.
  • Check the health of payee TINs often. The IRS issues annual backup withholding notices (B notices) and Proposed Penalties (P notices) for filing information returns that contained erroneous name and TIN combinations. Penalties for filing corrected information returns are updated annually. During June, take the opportunity to implement a real-time TIN matching program for new payees and a bulk TIN matching program for existing payees. Being proactive will help minimize the operational and legal expenses associated with the B and P notice processes.


Still awaiting regulations for infrastructure bill requirements 

  • The Infrastructure Investment and Jobs Act included a change to § 6045 to require brokers to report information related to digital asset transactions.
  • Generally, brokers will be required to report transfers of digital assets to unknown wallet addresses and report Forms 1099 with cost-basis details for sales of digital assets.
  • The effective date of the new requirements is with returns issued for calendar year 2023 (due to be issued and filed in early 2024).
  • The Treasury and IRS have not released regulations to describe how to comply with these legislative changes.

Unclaimed property: what to do now?

by: Kristine Butterbaugh, Solution Principal

In the world of unclaimed property, Q1 and Q2 are both busy with spring state reporting requirements. Many often think that unclaimed property is a part-time role with minimum exposure. Today, unclaimed property compliance is a year-round concern with compliance risks that should be prioritized for any business. By now, corporations have completed their spring due diligence and are finalizing the work to generate their April state reports for Pennsylvania and Florida. For cryptocurrency exchanges specifically, and for corporations involved with virtual currency payments and receipts, now is the time to be thinking about the following:

  • Policies and procedures: One of the first components of a comprehensive compliance program is making sure there are documented policies and procedures in place. This should include an explanation of a company’s policies regarding unclaimed property and a detailed procedure for each policy.
  • Proactive dormant customer engagement: Are you encouraging customers to engage proactively so that they do not become dormant or potentially fall into the definition of unclaimed property? If you have dormant accounts or accounts that have not been actively engaged, it is important to proactively reach out with the goal of eliciting a response. Keeping your customers engaged is a first line of defense for unclaimed property.
  • Customer engagement tracking: Are systems tracking, effectively maintaining and documenting customer-initiated engagement? Owner-generated activity that is well documented and properly identified can help accounts avoid unclaimed property altogether. Also be sure you understand what qualifies as owner-generated activity for unclaimed property purposes.
  • Communicate internally: If you do not have someone designated to stay on top of legislative changes and unclaimed property compliance requirements, it is time to define that role, either internally or by using a partner that has expertise in unclaimed property. Be sure to communicate the plans internally with all stakeholders and explain the importance of staying ahead of compliance requirements.

Crypto tax and crypto unclaimed property compliance are still works in progress at the federal and state level as regulations are pending in many areas. However, if you stick to the best practices outlined above, you’ll be in a good position to tackle cryptocurrency regulation.

Click here to read part II.

Take Action

Learn how Sovos can help you address the rapidly changing cryptocurrency regulations in 1099 and UP. Get in touch.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
Share this post

North America Unclaimed Property
March 1, 2024
What are RUUPA’s Pre-Presumption Outreach Requirements?

Managing compliance with unclaimed property has become challenging due to the constantly changing legislative environment. A recent obligation gaining traction among states, which companies must be mindful of, is the requirement to conduct outreach to owners before their property is considered abandoned. This obligation, referred to as “pre-presumption outreach,” stems from the enactment of the […]

North America ShipCompliant
February 29, 2024
Washington Wine the Positive Exception

By Andrew Adams, Editor, Wine Analytics Report With another year of winery direct-to-consumer shipments tallied and analyzed, the state of Washington was the only major region tracked by Sovos ShipCompliant and WineBusiness Analytics to enjoy growth over the previous year. Compared to 2022, shipment value by Washington’s wineries grew 11% to $187 million while volume […]

North America Tax Information Reporting
February 28, 2024
IRS Delays E-File Requirement for Form 1042: What You Need to Know

In a recurring theme, the IRS released communication this week that exempts the requirement to e-file Form 1042 Annual Withholding Tax Return for U.S. Source Income (Form 1042) information for 2023 transactions. Form 1042 for 2023 transactions must be filed with the IRS by March 15, 2024. Notice 2024-26 delays the new requirement to electronically […]

February 27, 2024
The Five Steps to Modern Compliance and Why They Are Critical for Your Business

Last week, we introduced the Sovos Compliance Cloud. The industry’s first and only solution that unifies tax compliance and regulatory reporting software in one platform, providing a holistic data system of record for global compliance. Accompanying this launch, our CEO Kevin Akeroyd wrote about the global landscape of tax compliance, how we got to this […]

North America ShipCompliant
February 22, 2024
Is Beverage Alcohol Self-Distribution the Next Big Thing?

A number of recent lawsuits filed by beverage alcohol producers have raised new interest in self-distribution rights, an often-overlooked area of the industry. Self-distribution is when a supplier of alcohol, such as an importer or domestic manufacturer, is authorized to sell directly to retailers without having to work with a wholesaler to get their products […]