Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily

Taxes are one of the few certainty in life, and major tax changes on crypto exchanges and wallets are coming soon. Are you ready for them?

Cryptocurrency owners have had to report income tax crypto gains and losses over the last few years, but crypto exchanges and wallets did not have to provide the IRS with information about customers and their transactions. But that’s all changing, as new federal regulations require crypto exchanges and wallets to provide customers with tax documents in the form of 1099-B. And it’s not an easy process.

To prepare for this change, you need to know the exact future status of crypto exchanges and wallets, the types of reports you need, and why it is not appropriate to build these features. In-house.

Tax reporting outlook

Despite the intent of cryptocurrency decentralization, federal tax regulations are catching up with crypto owners, who have to report their crypto holdings as property and pay the associated capital gains tax. there is. However, unlike stock exchanges and exchanges, cryptocurrency exchanges and wallets do not need to report customer information, transactions, and profits or losses to the IRS and issue forms for the customer’s own tax purposes. was.

But it is Infrastructure Investment and Employment Law, November 15, 2021, also known as the Infrastructure Bill. The bill extends the tax reports required for crypto transactions, and after 2023, crypto exchanges and wallets will be required by law to generate and issue 1099-B forms. — For customers, the federal government, and each state that needs reporting.And with Almost 600 crypto exchanges There — the biggest thing is running $ 15.9 billion volume — There is a lot of work in front of them.

The 1099-B, like other 1099 forms, is used to report non-W2 income in excess of $ 600 and is a record of freelance or gigwork, interest received, dividend payments and more. Even certain purchases using crypto coins can trigger taxable events that apply to the $ 600 threshold. Form 1099-B is specially issued by a brokerage firm and a barter and contains records of all transactions made, goods used, profits or losses, etc. The message here is clear. The IRS sees your exchange as a brokerage firm or barter. Therefore, it is necessary to track and provide a record of all cryptographic transactions performed on the platform for each customer. You may also need to report on your existing tax obligations, such as withholding reserves.

This is required by law, so there is no option to do nothing. Or you may face a penalty. We need to build the ability to handle this huge amount of data collection and tracking. Then it will be next year. But how do you do that?

How to prepare for a replacement

Cryptocurrency exchanges and wallets need to prepare this new tax law end-to-end, from collecting customer information to tracking and attribution of transactions to generating tax-compliant forms. What information does a typical 1099-B contain? You can find the customer’s name, address and social security number. The SSN requires its own process to collect and verify before it begins issuing 1099-B. It also contains a list of all transactions performed, including what was sold, date of sale, quantity, profit or loss, and other important information.

There are many data to track and reports to be accurate. The first idea might be to build these features in-house, but to do so, you face many hurdles, including:

• compliance: There are many challenges to building in-house. The first is compliance, ensuring that the methods of collecting and reporting information comply with this new tax law. You can then be confident that the IRS will monitor the crypto exchange and wallet to make sure they are working properly.
• speed: Another challenge is the speed at which these new features can be designed, developed, and deployed. Especially if you need to prepare by the end of the year. Do you have the resources and budget to immediately focus on resolving this issue?
• price: Cost is another issue when building in-house. Consider the cost of research, design, procurement, development, testing, and maintenance to build, run, and maintain the back-end infrastructure for this feature. Does your exchange have engineering resources to prioritize this as well?
• maintenance: Finally, are you ready to carry out this tax process every year and work on ongoing work to maintain the underlying infrastructure? Who will update the software to keep up with evolving tax laws? Which team owns this?

Use a custom API

You don’t have to build the solution yourself. The best approach to get up and running quickly and easily is to use the API to track and generate 1099-B. Instead of building all these features in-house, the API integrates with the system, easily retrieves all the data and generates the form you need. In addition, custom-built APIs from knowledgeable vendors not only maintain tax compliance, but also support API changes and ongoing maintenance. Ultimately, adopting API integration can save you time, money, and resources, and prepare you for the new law to come into force.

Cryptographic exchange tax changes

The old saying says that there are only two things in life that are certain, one of which is tax. Cryptocurrency exchanges and wallets face the inevitable future of compliance when it comes to transaction reporting to the IRS. Perhaps a more extended report that includes staking taxation. However, another old saying says that stitching time can save nine, so if crypto exchange and wallets start building that feature today, scrambling will occur when the IRS calls. It does not occur.