You spend weeks pouring over your transaction history, trying to make sure that your tax return is accurate. Despite your best efforts, you end up getting a warning letter from the IRS saying that you owe thousands of dollars in unpaid taxes.
It might sound like a bad dream, but just a couple of years ago, this nightmare scenario actually happened to thousands of cryptocurrency investors. And, because of short-sighted regulations drafted hastily by American politicians, it’s likely to happen again in the near future on a much bigger scale.
Form 1099-K: A Short History
In the past, there were no clear guidelines dictating what tax forms bitcoin exchanges were required to send to their customers. As a result, different exchanges chose different approaches to tax reporting.
Coinbase and other exchanges chose to send Form 1099-K to customers (and to the government) if customers hit a certain threshold of trade value and number of trades. Of course, there was a problem. These forms were designed to be used by credit card companies, not cryptocurrency exchanges. As a result, all of the trader’s transactions (even the ones that were non-taxable) were reported on the form.
This ended up causing a nightmare for taxpayers, as the IRS was being notified that certain taxpayers transacted with hundreds of thousands of dollars of cryptocurrency. The IRS ended up sending thousands of warning letters to investors, many of whom had gone through painstaking efforts to accurately report their taxes.
To their credit, large exchanges seem to have learned from their mistakes. Because of the confusion that these forms caused, Coinbase and Gemini have since stopped issuing them to customers. Unfortunately, it doesn’t appear that the federal government learned the same lesson.
In the near future, taxpayers are going
