Cryptocurrency Tax Reporting Takes a New Twist with SEC Declaration

The evolving saga of tax information reporting for cryptocurrency exchanges took another turn recently when the Securities and Exchange Commission (SEC) declared that cryptocurrency trading platforms must register as national security exchanges.

With the SEC’s new requirements, trading platforms must either register or be exempt from registration, or risk operating illegally. Effectively, the regulatory body plans to deal with cryptocurrencies and the platforms on which they are traded the same way it handles stocks traded on a stock exchange.

Crypto tax reporting causes confusion

The SEC’s new requirement puts pressure on crypto platforms to report transactions to the IRS, an issue that has proven controversial during the rise of Bitcoin in recent years. Securities transactions are reportable with form 1099-B, the form used for reporting stock transactions.

Banks and public companies send 1099-B forms to individuals for securities transactions. Until recently, however, with crypto platforms, the impetus was on the individual, not on the platform, to report income. Platforms themselves were reluctant to send forms to investors.

However, HR 1, otherwise known as the Tax Cuts and Jobs Act, removed the legal loophole that had enabled crypto platforms not to report some transactions. Under the new tax law, trading platforms are now required to send 1099-B forms to users who exchange different types of coins—for instance, Bitcoin for Ethereum—but simple investments in a cryptocurrency are reportable on form 1099-K, which is used for digital transactions.

In that case, the threshold for 1099-K reporting, both $20,000 in income and a minimum of 200 transactions, comes into play. Even in those situations, some crypto platforms have been reticent to report, and the IRS has stepped in with legal action.

New challenges to come for platforms

In light of the SEC’s requirement, crypto platforms will need a mechanism for managing reporting processes that may or may not exist in their organizations today. With the SEC paying closer attention to what exchanges are reporting, it is likely that manual processes for tracking and reporting payment transactions will be an insufficient strategy to remain compliant with regulators.

This change will cause volume of 1099-B forms to skyrocket. Given the desire of both crypto platforms and crypto investors to avoid tax regulations, a legal battle could be in the works. In any case, the saga of the IRS and SEC trying to rein in crypto revenues continues, and the implications for tax information reporting are likely to be significant.