IRS Cryptocurrency Tax Guidance Fails to Address 1099 Reporting

This blog was last updated on January 11, 2024

The IRS released long-awaited guidance on cryptocurrency tax regulations this week, but the agency did little to clarify tax reporting policy.

The guidance, the first update to IRS cryptocurrency policy in five years, is aimed at individual taxpayers and tax practitioners who prepare returns for taxpayers. The new information addresses information IRS Commissioner Charles Rettig promised the agency would provide after receiving several letters from members of Congress demanding a response and includes clarification on taxation of specified forked assets, air drops, and fair market value issues.

What it does not do, however, is specify which forms crypto trading exchanges should use to report tax information to the IRS and customers. Confusion remains over whether Form 1099-K, 1099-B or some other document is appropriate for reporting, as well as how to report the details on whichever form is determined to be appropriate.

IRS aims cryptocurrency tax guidance at individual taxpayers 

With its guidance, the IRS is likely trying to inform taxpayers who are:  

1. Crypto asset owners who filed extensions to the standard April 15 filing deadline to push filing until Oct. 15 in anticipation of IRS policy clarification, and 
2. Crypto asset owners who will be obligated to file returns for the 2019 season.

The guidance is specific to the type of questions those taxpayers and their practitioners have asked in an effort to properly calculate gains and losses or value assets. 

With the IRS sending enforcement letters to individual taxpayers recently, the agency definitely  has taxpayers’ attention, and now is the time to educate taxpayers that they need to include crypto income not only in returns they file on October 15th but also for the coming 2019 season.

Crypto clarification arrives on forked asset transactions and airdrop 

Specifically, the guidance primarily provides information about forked transactions and airdrops. Forked transactions occur when one type of cryptocurrency splits into two types of cryptocurrency. The clarification offered two specific scenarios in terms of when taxpayers realize income associated with a forked transaction:

The first is a forked transaction in which the value of the new digital asset is not deposited into a wallet for the holder to access, and the second occurs when the value of the new digital asset is deposited into a wallet for the holder to access. In the second, the IRS clarifies that the “gift” of the new value of the currency is treated as ordinary income to the taxpayer in that calendar year.

The guidance provides plenty of citations to existing tax law in terms of why the income is considered taxable and at what points the IRS has determined the income to be taxable. For instance, the IRS focuses recognition of income to the taxpayer around the point when the taxpayer was able to access the value of the cryptocurrency, or “exercise dominion or control” over it. 

That is not a new concept. When a taxpayer receives income deposited into a bank checking account, the taxpayer is taxed when the money is deposited and not when the taxpayer actually withdraws it from the account. That is because the taxpayer had the ability to “exercise dominion or control” over the income as soon as the bank deposited the money into the account. But in the crypto world, the “control” issue is a hotly debated topic, something the IRS deftly avoided in this round of guidance.

IRS FAQs expand on previously answered questions 

There are also new FAQs, essentially an updated version to the Notice 2014-21 FAQs that have existed since the IRS first provided cryptocurrency guidelines. Again, the FAQs are primarily relevant for individual taxpayers and address specific income tax calculation questions related to airdrops, forks and how to value assets. 

Fair market value has been a problem for crypto holders because an asset’s value is different depending on which exchange platform the holder checks at any given date. Taxpayers wanted some clarity from the IRS on this point, and there are a few questions and answers aimed at how to value assets in certain scenarios. In addition to complex forked and airdrop scenarios, the FAQs also address basic trading transactions that occur with digital assets, including trading crypto for fiat currency and trading one crypto asset for another. 

Form 1099 filers will have to continue to wait for IRS cryptocurrency tax guidance 

However, the glaring omission is the same level of guidance for filers of Forms 1099. Filers can certainly glean some ideas from the guidance to individual taxpayers, but they need the IRS to provide the community with more specifics: Which form should a filer use to report forked asset transactions with airdrops on so that the taxpayer can calculate income appropriately? Which form should a filer use when a taxpayer trades crypto for fiat? Which details are required to be included on that form so that the taxpayer can calculate cost-basis? As 2019 filing season rapidly approaches, filers need this, and other clarifications, so that they could work to update transaction systems and produce accurate tax information in time for January deadlines. 

There are two types of taxpayers impacted by the IRS’s ongoing lack of guidance in this area: the taxpayer and the payer of the income, or the filer. Filers provide the IRS, through W-2 and 1099 reporting, with the level of tax compliance that is necessary to enforce tax law. The fact that the government does not put the same level of effort into proactively managing this problem through the tried and true 1099 reporting process remains baffling. Instead, it continues to use its resources on enforcement for direct taxpayers, who often weren’t given the tax information they needed to comply in the first place.

Perhaps the next round of IRS guidance for filers is on the heels of this round for taxpayers. In the meantime, all filers can do is wait.