Uphold is hoping to prevent its customers from being audited by reporting their crypto trades as property trades – not income, as many exchanges have done in the past.
The platform, which provides trading in crypto, fiat currencies and assets like metals, is partnering with TaxBit to provide customers with a tax liability dashboard on its user portal, and intends to help customers file more accurate tax returns, streamlining what has to date been an opaque process for crypto investors.
Michelle O’Conner, Uphold’s vice-president of marketing and communication, told CoinDesk the move is part of an effort to make her company more accessible for customers by simplifying the tax-filing process.
“We’ll provide real-time liabilities, real-time information, what your liability will be when making a trade, how to reduce your liability,” O’Connor said.
While Uphold is working with TaxBit, O’Connor said her company would not be providing any tax advice itself. Rather, Uphold will defer any actual questions or advice to TaxBit, which has certified public accountants on retainer.
Essentially, Uphold and TaxBit intend to file 1099-B forms, which are typically used for investments and report cost-basis, rather than the 1099-K forms some exchanges previously filed for their customers.
“This tax form was kind of a spur-of-the-moment reaction to something, but there was never any clear IRS guidance that that was the correct form,” said TaxBit co-founder Austin Woodward.
The 1099-K reports income and is used by merchants. Because exchanges were filing crypto transactions as income, they effectively said their customers’ assets had greater value than in reality (or what the customers were reporting directly), resulting in some customers being audited and others receiving warning letters from the agency.
Uphold’s CEO, J.P. Theriot, is one of the individuals who received an audit from the Internal Revenue Service due to inaccurate numbers being reported from his crypto holdings.
“Our CEO actually received a letter from the IRS basically saying ‘you owe an absurd amount of money’ from the 2016 tax season, and it was totally inaccurate,” O’Connor said. TaxBit helped resolve the situation.
TaxBit has been communicating with the IRS as part of an effort to reduce these audits, Woodward said. The company claims to have helped resolve “hundreds of 1099-K audits,” helping the agency accept the 1099-B as a more relevant form in the proces.
The B form lists all transactions, the numbers when buying or selling and the gain (or loss), Woodward said. The platform will file this form to the IRS, while the taxpayer will file the corresponding 8949 form.
“They’re intended for property transactions. The IRS defines property as a capital asset which encompasses equity, property [and crypto assets],” he said.
Woodward said he doesn’t yet know what the IRS might do for past years, given that there are likely scores more 1099-K forms that present individuals’ crypto holdings as much higher than they might be in reality. The agency is operating on a roughly two-year lag when it comes to audits, meaning individuals were audited in 2019 for their 2017 tax returns.
However, the agency is working to better understand how to treat crypto, he said.
“They’re investing heavily, they’re becoming more educated and informed,” Woodward said, referencing a CoinDesk investigation that found the agency spent $4.1 million on blockchain forensics provider Chainalysis, of which $3.6 million came in the last two years alone.
The IRS is even holding a summit on March 3, inviting stakeholders to participate in a number of panels addressing various questions about crypto and blockchain.
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.