Tracking Crypto Transactions
The IRS has been tracking crypto transactions since 2013 when it first issued guidance on how to report these types of transactions. The agency uses several methods to track crypto trades, including:
- KYC/AML Compliance: Cryptocurrency exchanges are required by law to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. This means that they must verify the identity of their users before allowing them to buy or sell cryptocurrencies. The IRS uses this information to track trades and ensure compliance with tax laws.
- Blockchain Technology: Cryptocurrency transactions are recorded on a public ledger known as the blockchain. This makes it possible for the IRS to trace the movement of funds and identify individual transactions.
- Third-Party Reporting: Crypto exchanges may also report transactions to third parties, such as tax reporting software or payment processors. These reports can be used by the IRS to track trades and ensure compliance with tax laws.
Reporting Crypto Trades to the IRS
In addition to tracking trades, the IRS requires crypto exchanges to report certain types of transactions to the agency. This includes:
- 1099-K Forms: Exchanges must provide users with a 1099-K form at the end of each calendar year that reports all transactions made on their platform during that year. Users must then include this information on their tax returns.
- Capital Gains Tax: The IRS treats cryptocurrencies as property for tax purposes, which means that users must pay capital gains tax on any profits they make from buying and selling these assets. Exchanges are required to provide users with the necessary information to calculate their capital gains tax liability.
- Form 1040-SR: If a user holds cryptocurrencies in their personal wallet and not through an exchange, they must still report their transactions on Form 1040-SR, which is used to report income from investments.
Summary
In summary, crypto exchanges are required by law to track and report trades to the IRS. This information is used to ensure compliance with tax laws and to identify individual users. As a crypto trader, it is important to understand how your trades are being tracked and what you need to do to comply with tax laws. By staying informed and following best practices, you can avoid potential penalties and ensure that you are reporting your trades accurately.
