Some of the most prominent cryptocurrency exchanges issue a specific type of 1099, known as form 1099-K, to qualifying customers. If you’re an active cryptocurrency investor, you may have received one of these in the mail or electronically. A 1099-K is very different from the customary 1099-B you would receive from a typical stock brokerage detailing your investing activity. In my work as the co-founder of a cryptocurrency tax platform, I’ve found that from a tax reporting perspective, 1099-K is useless. This is because it does not help the taxpayer report their capital gains and losses from cryptocurrency investing activity.
What’s the purpose of a 1099?
All 1099 forms serve the same general purpose: to report certain types of nonemployment-related income to the IRS. Form 1099-K is no different in this regard, and cryptocurrency exchanges send out two copies of the form: one to the qualifying customer, and one to the IRS. This gives the IRS information on who has cryptocurrency-related income that should be getting reported on their tax return.
So what’s the problem?
The fundamental problem is 1099-K does not report gains and losses to the customer; it only reports gross proceeds. The gross proceeds figure is the total amount you have transacted on an exchange in U.S. dollars. However, when it comes to completing your taxes, gross proceeds do not matter — gains and losses do.
In other words, a 1099-K form will not help you with your cryptocurrency capital gains and losses tax reporting. But yes, it will alert the government that you have crypto-related income that needs to be reported.
Why can’t my exchange give me a 1099-B instead?
This would definitely make tax reporting easier for consumers. Unfortunately, exchanges fundamentally do not have the ability to give their users complete and accurate 1099-B forms.
Why is this? Simply put, cryptocurrency exchanges do not always have the cost basis information for your cryptocurrency…