The United States Internal Revenue Service (IRS) has sent a round of letters to crypto traders called CP2000 due to inconsistencies found in their tax reports.
Now, this is done primarily from the information provided to the IRS by crypto exchanges and other payment systems. The IRS has estimated the amounts traders owe and included the amounts in dollars in the notices. The traders are required to pay within 30 days, starting on the delivery date also stated in the letter.
The existing regulation states that all broker and barter exchange services must annually report trader activity on a 1099-B form. Also, Transaction payment cards and third-party network transactions are required to report on Form 1099-K. These forms must be sent directly to the IRS and a copy of the same is to be sent to the trader.
The IRS is yet to publish specific guidelines for crypto exchanges. So it’s still in a very grey area with exchanges like Coinbase and Gemini providing 1099-K forms while Kraken and Bittrex do not provide any forms.
Similarly, the UK’s tax, payments, and customs authority, Her Majesty’s Revenue, and Customs, has requested that cryptocurrency exchanges provide it with information about traders’ names and transactions, primarily to identify cases of tax evasion.
In the U.S., data from exchanges is collected by the IRS and compared to each trader’s 1099-K report. If the reports do not match, the IRS will send the CP2000 notice to traders along with the amount every trader has to pay within 30 calendar days.
What are your Options?
If the amount proposed is correct then the trader must Complete the response form, sign it and mail it to the IRS along with the tax payment.
If the amount proposed is incorrect, then the trader must complete the response form and return it to the IRS along with a signed statement outlining the reasons for the disagreement along with supporting documentation to back your claims.
It is recommended to include all wallet activities and transactions carried out on all exchanges in order to have a fully accurate report as required by the IRS.
You pay capital gains tax on the profit between the buying amount and the selling amount to the exchange. This price is called a “cost basis.” Without it, you will not have an accurate report on crypto. 1099-K forms don’t require this information, only 1099-b forms do.
1099-K only accounts for the gross amount of the activity. These reports for individuals trading crypto can be inaccurate in some cases and does not estimate the cost basis, which is important for crypto trading calculations.
Therefore, the crypto activity must be fully calculated and compared to the previous tax filing before replying to the IRS notice.
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