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January 28, 2024

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

It goes by many names: Tax Information Reporting (TIR), 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). From our experience at Ledgible, we’ve learned that many of these companies don’t have a TIR expert on staff. The burden falls to the compliance team or product owner. If you’re on the product team or general compliance team, this article is for you.

Just like how you get a 1099 form from Schwab or Vanguard or whoever you use for your investing sends you a 1099 (probably 1099-B) during tax season, digital asset companies that meet the new definition of “broker” are going to have to send out 1099s to their customers and the IRS. Unfortunately, you can’t really head down to Costco, get TurboTax for Business and send out 250,000 1099 forms (because you need one for each transaction that then get consolidated to a single form for each user). There are two things you’ll need, if not a few more. 

First, you’ll need a TIR filing partner (FIS, Thomson Reuters, Sovos, etc). They put the customer PII you collect (yes, you have to collect customer information (PII) like names, addresses, SSN/TINs, etc). You also need someone to calculate the cost basis for all the transactional activity your clients do. That’s where Ledgible comes into play. We are the leading cost basis engine in the digital asset space. We pull all the transactions from the blockchain (or if you use a private transactional ledger, we get them from you), normalize the data, process and do calculations for tax lot cost basis, gains, losses, etc (which have to go on the 1099 forms). Then, depending on how your company works, we send it back to you to combine with the PII and send to the TIR filing partner OR we send directly to the TIR filing partner and they combine it with the PII.

Now why do you need partners for this? You can fill out a form, you can jump on a block explorer and bring transactions into a spreadsheet. You’re welcome to try, but what happens when the customer has moved mid-year and didn’t update their information? Or there’s a typo in their social security number? Or they died? What then? Plus what about the states that require physical paper forms to be sent (yes, there are some)? Are you going to print, fold, envelope and buy 10,000 stamps from the post office before sending? For the blockchain side, are you going to pull 10,000 addresses from a block explorer and calculate the cost basis for 40,000 B record sales? It gets complicated really fast and only Ledgible can do that piece with maximum efficiency and in collaboration with your TIR filing partner.

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 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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