The Internal Revenue Service announced yesterday that the 2022 filing season will open on January 24, and US taxpayers’ tax returns will be due on April 18. Tax season is particularly stressful for those who buy, sell, trade or invest in digital assets such as cryptocurrency and non-fungible tokens, or NFTs. Unlike your average Edward Jones brokerage account, to date, most cryptocurrency exchanges have not provided a 1099 report form or other information to accurately report gains and losses from transactions entered into in a given year. Calculating the basis, gains and losses was very cumbersome and expensive for digital asset investors.
Today, TaxBit announced a new network that will provide free and unlimited returns for necessary federal information to cryptocurrency investors and the 2021 NFT for transactions made on exchanges affiliated with the TaxBit network.
Tax reporting for digital assets such as crypto and NFTs – 101
In general, cryptocurrency and NFT are taxed like property. You can read more about how to properly report these assets here. But cryptocurrency and NFT investors do not currently have access to the kind of information reporting forms that owners of publicly traded securities receive. The lack of routine and standardized information reporting makes it extremely costly and time consuming for taxpayers to prepare their Federal Income Tax returns and report virtual currency or digital asset transactions.
Let’s say you buy 3 shares of Microsoft
With the passage of the Investments and Jobs in Infrastructure Act (Public Law 117-58), cryptocurrency will be defined as security and subject to increased information reporting requirements by “intermediaries,” which will now include”[a]A person who is responsible (for consideration) for providing any service on a regular basis to carry out digital asset transfers on behalf of another person.” In other words, once the new law comes into force in December 2023, all digital asset intermediaries, exchanges or sellers will be required to Provide information reporting forms on transactions of digital assets, including cryptocurrencies and NFTs.
New Approach – TaxBit . Network
The TaxBit network will revolutionize tax return preparation for digital asset investors and users right NowAnd And just in time for the 2021 registration season. It will provide each approved TaxBit Network user the option to receive a free 2021 tax information form, including IRS Form 8949, which is required to report property exchanges, sales, and dispositions, as well as forms that will provide an income report.
According to TaxBit, “Together with the launch of the TaxBit Network, several platforms will integrate one-click sharing, a free subscription to TaxBit within their native apps to simplify access to 2021 tax forms and year-round access to industry-leading TaxBit software.”
Austin Woodward, CEO of TaxBit, a certified public accountant, created TaxBit with his brother Justin Woodward, a tax attorney. Austin Woodward describes the TaxBit network as similar to a health insurance network that will provide free services to end users (customers) who use service providers within the network. In fact, the “network” TaxBit will It works like a health insurance network. In-network exchanges will now include a feature that allows customers to click a button and produce a tax information reporting form associated with all transactions in that account, free of charge. TaxBit account and tax form preparation services can still be used for years before 2021 and for off-network exchanges or private wallets, but taxpayers will have to pay a fee for these services. The TaxBit network includes well-known cryptocurrency exchanges such as Coinbase and is growing every day.
“With the recent passage of a crypto tax requirement in the Infrastructure Act, proactively providing our users with the tax reporting and forms they need is an important step in our commitment to safety and compliance,” Binance.US CEO Brian Shroder said in a statement. To make the tax reporting process simple and free for our users through the TaxBit Network.
Thomas Kane, CEO of Kane Capital Group, said: “TaxBit is solving a critical challenge for our clients, crypto investors and digital asset companies, by increasing consumer confidence, which is a win-win for industry at all levels.” Cryptocurrency investors of all sizes will be provided with a unifying element of the process Tax reporting where there is no clear precedent. These types of services are essential to individual and institutional investors as US lawmakers determine the best way to implement a regulatory framework for the industry.”
The tax compliance problem of digital assets
The IRS has made no secret that it aggressively pursues taxpayers who engage in cryptocurrency transactions and fails to accurately report and pay taxes on those transactions. Furthermore, the IRS has confirmed that it is not considering a global voluntary disclosure program designed specifically for taxpayers who have engaged in but failed to disclose digital asset transactions.
“We expect compliance with the rules to properly report activities involving any property or currency to include virtual currency. While technology can be complex, taxation is much simpler: spending or disposal of virtual currency is generally a taxable event. Today, when you sell or trade something for more than you paid for it, you can expect to be taxed,” according to the IRS. In fact, not only is technological complexity involved, but the relevant information needed to calculate and report on federal income taxes based on those complex transactions is also maintained. The unlimited wallet and unlimited transaction product that TaxBit is offering for free will certainly make it easier for taxpayers to properly prepare and file their taxes for 2021 and 2022, prior to the new reporting required by the Infrastructure Act.
What about private wallets? Yes, the IRS can see you.
As an attorney for tax controversies, I often hear from people who think that cryptocurrency held in a private wallet is just that — private. These same people believe that they can expose cryptocurrencies on a public exchange, such as Coinbase, without having to reveal the existence of a private wallet. This is the distasteful idea. First, the simple act of exposing part of the story is far worse from a criminal tax perspective then any other possible course of action. The taxpayer shows an understanding of what is required, but only does so some of what is needed. This is the book on criminal tax evasion.
Second, just because something is in a private wallet doesn’t mean the IRS can’t see it. In fact, according to the IRS, “[i]It is certainly possible to track virtual currency as it enters an address, even when the address is kept in a private wallet. Then, when the wallet owner “spends” the virtual currency by engaging in a transaction, the tracking process can resume and track the progress of transactions, either backwards or forwards along the blockchain, to have both a history of the transactions that led to the private wallet and the disposition of the virtual currency When it comes out of the wallet. The phrase we live with at the IRS, “follow the money,” works just as well in the realm of virtual currencies as it does in the world of fiat currencies. It’s just that in IRS parlance, we’re now thinking of “follow the characteristic”, as virtual currency is defined by the IRS. “
When asked if the IRS can track funds in a private wallet, the IRS responded positively, “The IRS has deployed various software tools for agents working on issues related to virtual currency transactions. We are able to track transactions and taxpayers on the blockchain as well as through We have various data sources, which we can then use in assessing whether a particular taxpayer is tax compliant. It is always important to keep in mind that any transaction has two sides, not one. There is always a sender and a receiver. In addition, there is always A transfer of value between the sender and receiver, and this is where many transactions become visible on the blockchain. When using a blockchain, which is by definition a “distributed public ledger,” the transaction path is visible and traceable.”
The new TaxBit network will not allow individuals to generate free reports going back years before 2021. But for anyone who has engaged in crypto transactions without reporting them in the past years, now is the time to consider paying for services like what TaxBit offers to prepare for compliance. Just be sure to do so with a qualified tax attorney who can advise on the best way to enter without a criminal trial.