Congress is about to turn Bitcoin taxes into a tremendous clusterfuck

Tomorrow, the House of Representatives is voting on the infrastructure bill. I know you’ve probably read a thousand posts about this already but it seems like there’s one thing that’s been relatively under-discussed: the fact that 1099 reporting is going to turn reporting Bitcoin taxes into a total clusterfuck for the average investor.

What is 1099 reporting?

1099 reporting has existed within the traditional finance space for a long time. It's meant to help the IRS understand your non-employment-related income (like the income you get from stock trading). Brokers like Robinhood and eToro are required to send this info to the IRS to help identify people committing tax fraud.

The infrastructure bill would require major crypto exchanges to report the same information.

What’s the big deal? My stock broker is already sending my 1099 information to the IRS anyway.

Remember, Bitcoin is fundamentally different from stocks.

Bitcoin is meant to be transferable, peer-to-peer, and operate without the need for a third-party. That means that trying to force all of these traditional finance rules onto it is going to lead to disaster.

Here’s an example that might help make this more clear:

Jimmy buys 1 Bitcoin for $30,000 on Kraken.

Jimmy transfers his Bitcoin to Coinbase.

Jimmy sells his Bitcoin for $50,000.

Since Jimmy gained $20,000, he SHOULD incur $20,000 of capital gains.

However, Coinbase has NO IDEA what Jimmy’s cost basis for acquiring his Bitcoin was. Did he acquire it for $1000? $100? $60,000? Since the transaction took place on a different exchange, Coinbase doesn’t know.

Coinbase is also under NO OBLIGATION to provide that information to the IRS… so they’re not going to bother trying to figure it out.

They’ll give the IRS the information they do have: Jimmy sold his Bitcoin for $50,000. If Jimmy can’t prove that he actually bought it for $30,000, he’s on the hook for the full $50,000.

And look, most people feel overwhelmed when it comes to navigating their taxes. There's a good possibility that Jimmy MAY NOT EVEN REALIZE that he’s paying too much in taxes until it’s too late.

Jimmy can go to an accountant. But most accountants aren’t crypto-friendly and may not be able to provide much help.

“Whatever, we don’t know if the infrastructure bill is going to pass anyway.”

Unfortunately, it looks 1099-B reporting is coming no matter what. Even the “crypto-friendly” amendment to the infrastructure bill that was being pushed by Senators Wyden, Toomey, and Lummis would have required centralized exchanges to provide 1099-B reporting information to the IRS.

So what does this mean for you? It’s going to become WAY more important for you to track your Bitcoin transactions.

Remember, to avoid paying more in taxes than you actually owe, you’ll need to keep a record of all of your Bitcoin transactions.

You can do this via a spreadsheet or use a crypto tax platform. You’ll need to track the amount of Bitcoin you sold, the time the transaction took place, and the price of Bitcoin at the time of the transaction. (I was using a spreadsheet to track my Bitcoin transactions for a while, but it got too complicated so I said fuck it and got started with CryptoTrader.Tax)

I hate the fact that this is an issue in the first place. Bitcoin is supposed to be about the little guy standing up to the established financial system. While already-rich whales are going to come out okay, filing taxes is going to be harder than ever for retail investors.

TL;DR: Crypto exchanges often have no idea what your cost basis is. Requiring exchanges to send 1099 information to the IRS may cause the average crypto investor to pay WAY more in taxes than they actually owe.