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January 28, 2024

New to Tax Information Reporting? Here's what you need to know

Tax Information Reporting (TIR) is the process of reporting necessary information to the IRS. It is also sometimes called Information Reporting and Withholding (IRW), Tax Reporting, or just 1099 filing. With the new digital asset tax regulations coming around and the definition of “broker” being somewhat wide reaching (though not as broad as it is currently), many more companies are going to have to start doing Tax Information Reporting (sending 1099 forms to customers and the IRS). 

Similar to how traditional investment firms (Schwab, Vanguard, etc) send out 1099 forms, digital asset companies that meet the new “broker” definition will have to send out 1099s to their customers and the IRS. For companies that have never sent out 1099 forms before, there are a few things necessary to get the system in place.

First, you’ll need a TIR filing partner (FIS, Thomson Reuters, Sovos, etc). Their job varies from simply putting data on forms and distributing to walking you through the whole process and helping you figure out what data you need to collect. The basic information that is needed is customer personal information like names, addresses, tax ID numbers (TINs), etc. Once that is collected, the cost basis information may need to be collected and reported. Every time there is a reportable sale (a B-record), there has to be a 1099 form filled out. If your platform “effects [the] sale”, and at any point has custody of the asset, cost basis likely has to be reported.This is where Ledgible comes into play. Ledgible is the leading cost basis engine in the digital asset space. Ledgible pulls all the transactions from the blockchain (or from your private ledger depending on how your company works), normalizes the data, processes it and does calculations for tax lot cost basis, gain, loss, etc. then sends the data to the appropriate party. Depending on the workflow, it can be sent to either the tax reporting partner or back to your company to be combined with the client information.

The flow described above is greatly simplified. There are lots of caveats and special cases that are difficult to handle. For example, if someone provides the wrong address or TIN, there need to be procedures in place to manage that. Or if someone dies mid year, then what? This is where the reporting partners shine. They can manage those special cases, including the cases where a physical paper form is required. From the cost basis side, wash sales for digital assets are not yet implemented, but what happens when they are? Ledgible supports wash sales and has a proven record with the first SPBD of digital asset securities providing wash sale support.

Not sure if you have to do all this filing? Let us know and we can connect you with FIS, Sovos, Thomson Reuters or others who are experts in the filing space. Or if you just need to talk about the digital asset cost basis piece (perhaps you already have a filing partner), just let us know and we can have a conversation with our digital asset tax and cost basis experts like Jessalyn Dean who was the first person to testify before the IRS regarding the latest regulations they proposed.

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