Listen to my latest conference call on this subject:
December 20th 2018
Receiving a 1099-K and How to Avoid the Taxes
Did you know that transactions between crypto-currencies are not re-portable by the exchanges in which they are held. The 1099-K is deliberately erroneous so that people will mistakenly include the information on their Form 1040 and then be subject to paying taxes on property that was not subject to the tax. It’s not because of a law, it’s because of how people are mistakenly reporting information on their 1040 that creates the tax situation. The Secretary of the Treasury confirms that trading between crypto-coins is not taxable.
There is no income tax between crypo-graphic currency exchanges; however,the IRS is mis-applying the “backup withholding” provisions under 26 U.S.C. §3406 to force the exchanges to sell 31% of the dollar value of your crypto holdings and pay it to the IRS unless you request a determination letter and file a current W-9 Certification. This is specific to personal accounts at the exchanges, not business accounts such as LLCs that do not file returns.
Why do you request a determination letter? Because backup withholding applies only to “re-portable payments”. Re-portable payments are only payments of interest or dividends in U.S. Dollars. Trading between crypto-currencies has nothing to do with receiving payments from interest or dividends. The IRS is doing this to escape the normal tax assessment procedures that would allow people to scrutinize what is being done and you will not find any accountant or attorney who understands this well enough to correct it.
How do you request a determination letter? You must request a determination from the Secretary and it must be in a particular format as described in the most recent IRS Revenue Procedures Manual. I’m not trying to be cryptic here, but the language of the request is fairly technical and specific to 26 U.S.C. §3406 and 26 C.F.R. §31.3406(a)-1. I’ve used this process for nearly 20 years and it is very effective.
This works whether or not you are using the limited liability company and Blockchain Tax Immunity Trust or not. Everyone who is filing a 1040 and receives a 1099-K reported in his or her name and his or her social security number or EIN can use this process to eliminate any taxes resulting from the amounts reported on the 1099-K. One request will need to be made with regard to each 1099-K.
This needs to be corrected immediately, do not try to use the falling prices of crypto-currencies to claim losses with the IRS because you will be on the hook for taxes as the currencies increase in price against the dollar. Don’t play this game, correct it now or it could cost you tens if not hundreds of thousands of dollars.
When people begin receiving 1099-K forms from their crypto-exchange accounts, for crypto trades that did not involve selling cryptos for dollars, all hell is going to break lose. They will probably, and mistakenly, report the information on their tax returns because they don’t know any better, or ask a CPA or attorney for advice, who will mistakenly tell them to report the amounts on their tax returns. This report pertains only to people who have personal accounts on the crypto-exchanges, and does not apply to tax deferred limited liability companies and those using the Blockchain Tax Immunity Trust.
There is no tax liability for trading crypto-currencies for other crypto-currencies; however, if you can be tricked into reporting what you believe to be taxable income on your tax return, then it becomes taxable.
If you want to keep your money, and legally avoid the taxes, you must EXclude the 1099-K information from your tax return and send the exchange an updated Form W-9 certifying the correctness of your social security number and that you are not subject to backup withholding for the most recent tax period. Additionally, you must request a determination letter from the Secretary regarding the issue of backup withholding. This is where almost no tax professional will understand what to do, including attorneys.
You must have filed your tax return for the same period, and filed a current Form W-9 with the exchange, retaining a copy for yourself and have kept a copy of the Form 1099-K from each exchange. These documents must be sent to the Secretary of the Treasury, to each of three mailing addresses, via certified mail, along with a properly written request for determination letter. You cannot simply send a letter to the IRS or to the exchange claiming that the Form 1099-K is incorrect, this will be ignored. You must use the proper administrative procedure, as published by the IRS, and request a determination as to backup withholding. This will allow you to exclude the Form 1099-K data from your tax return, minus the amounts of cash you took in your own name.
Please follow this blog for updates and information. You should expect a Form 1099-K from each exchange before January 31, 2019; and in response, you will need to prepare and send one request for determination letter for each.
The following is the legal analysis for the reason why no taxes are owed, but I must caution you that simply using this analysis in some kind of protest letter will do nothing, it must be part of a six-page request for determination letter as instructed within the Internal Revenue Bulletin.
STATEMENT OF LAW: The law is certain and unambiguous. Please be advised that 26 C.F.R. §1.1471-1through 7 is defined as: “Reportable payment” to mean,“The term reportable payment means a payment of interest or dividends (as defined in section 3406(b)(2)) and other reportable payments (as defined in section 3406(b)(3)).”
ANALYSIS: The 1099-K incorrectly reports dollar amounts that were not remitted or distributed to the payee as stated on the form. The payor has retained ownership of the underlying property (amounts erroneously reported as payments in dollars on Form 1099-K) and never dispersed any payments to the payee, other than those reported on the payee’s filed tax form or statement (i.e. Form 1040). The “taxpayer”herein was not the “payee” of any interest, dividends or other re-portable amounts identified under 26 U.S.C. §3406(b)(3). Additionally, the dollar amounts erroneously stated on the disputed Form 1099-K do not represent dollars paid to the payee (settled transactions) and do not identify any amounts of interest or dividends paid to the payee and therefore, are not subject to backup withholding.
Specifically,“other re-portable payments” as they relate to this transaction,are identified in 26 C.F.R. §31.3406(b)(3)-5(a)“Payment card and third party network transactions subject to backup withholding.”
26 U.S. Code § 6050W(c) identifies a “reportable payment transaction”to mean “any payment card transaction and any third party network transaction”, and as it pertains to the transaction herein, Form 1099-K, “The term third party network transaction means any transaction which is settled through a third party payment network.” Assuming for a moment that the reporting party (payor) is a third party payment network, the dollar amounts stated on the pertinent Form 1099-K were never “settled transactions” within the meaning of the regulation and the dollar amounts stated on the Form 1099-K are incorrect. No payments were made to the “payee” as erroneously stated on the disputed Form 1099-K.
CONCLUSION: I am not subject to backup withholding for the period ending December 31,2018.