For those trading in cryptocurrencies, crypto trading platforms are required to provide you with a form 1099 for use on your taxes. When doing so, the IRS is also notified of the information contained on the tax form. And although you will receive either a form 1099-K or a 1099-B, it is not always clear what the information is saying. For example, a Form 1099-K will provide you with a list of cryptocurrency transactions and sales, but it will not tell you what your tax liability for those transactions is. Form 1099-B does provide more information, including your cost-basis, but many companies have not yet transitioned to the more descriptive form, and instead rely on the old 1099-K, which for many purposes is useless without a working knowledge of capital gains. You can find more information on the differences between Forms 1099-K and 1099-B, here.
So what exactly do you do once you’ve received one of these crypto 1099 forms?
What is a Cost Basis?
The term basis, as used in the Internal Revenue Code, refers to a person’s initial investment in a piece of property. For example, if you purchase something for $10, then your cost basis is $10. If you then sell it for $12, your cost basis is still $10, but your gain on the sale is $2. You are required to report and pay tax on the $2 gain, but not on the original $10 that you spent on the item. This holds true with your cryptocurrency holdings, though it can become much more complex as you likely hold more than $10 in crypto, and your holdings are likely diversified among different types of cryptocurrencies, which decrease and increase in value regularly.
The relevant governing statute for determining one’s basis, as well as gains or losses, can be found in IRC §1012. For the purposes of your cryptocurrency tax liability, you will likely not need to delve into the complexities of the Internal Revenue Code, which, unsurprisingly, is not very helpful to anyone who is not a tax attorney. You can find more information on how to determine your cost basis, here.
What Do I Do With My 1099?
As stated above, a crypto 1099 often comes in one of two forms: 1099-K or 1099-B, and understanding the information on those forms can save a lot of tax-related anxiety. Many cryptocurrency investors panic on receipt of a 1099-K form, as it only shows a list of crypto transactions and not a person’s actual tax liability. In order to determine your tax liability, we will need to refer back to the term “cost basis.” You can find more information on how to determine what is known as an adjusted basis, here.
It is always good practice to keep track of the initial purchase price of any cryptocurrency transaction you make. By doing this, you can keep track of your basis in the specific cryptocurrency holding. If you have not been keeping track, it is likely that your cryptocurrency management platform has.
In order to calculate how much you owe in taxes, all you need to do is look at the transactions listed on your Form 1099-K and subtract them from your initial cost basis of each transaction. The difference between the sale price and your cost basis is the amount realized, or what the IRS will consider your “gain.” You only need to pay taxes on realized gains, meaning if you currently hold cryptocurrency that you have not sold, you do not need to pay taxes on it until you sell it. This becomes increasingly difficult when making a lot of transactions, as each sale results in the need for a computation on gain, even if reinvested in a different cryptocurrency. This is why the Form 1099-K is helpful, as it lists all of the transactions.
For those with high volumes of transactions, it can be helpful to hire a tax attorney or CPA to help you file your taxes to ensure that you do it correctly, especially when determining the correct short-term or long-term capital gains tax, which operates differently than regular income tax.
Now that you have a basic understanding of what a cost basis is and what your crypto 1099 means, you can make your cryptocurrency trades with confidence, knowing that when you receive a Form 1099-K, you likely aren’t liable to pay taxes on the full amounts listed thereon, rather, you only need to pay taxes on your realized gains. And if you receive a Form 1099-B instead, your basis and gain should be clearly listed, for a much easier assessment of your tax liability.