On November 13, 2023, Shehan Chandrasekera, Head of Tax at CoinTracker, testified to the IRS on how to potentially solve the cost basis reporting issues and enhance crypto tax reporting. The testimony was in response to the proposed regulations (Regs), which defined the term “broker” and outlined the requirements to comply with tax reporting rules related to cryptocurrency transactions. If issued as proposed, these regulations will create data gaps in information reports filed by brokers and Form 8949s filed by taxpayers. (We discussed the Regs, who is a broker, the type of transaction subject to reporting, timing, and the impact in a previous article.)
Solving cost basis reporting problems
Ultimately, the true cost basis lives with the taxpayer, who shares it with transaction aggregators (like CoinTracker). Therefore, transaction aggregators have the source of truth for digital asset transactions across wallets & exchanges. This will be the case today and in the future. There is an opportunity for brokers to leverage this data, with user consent, to produce more complete and accurate information reports.
To unlock the full potential of information reporting (especially when an unhosted digital asset wallets are involved), we recommend:
1. The Treasury promulgates rules (by updating language on the §6045 and/or issuing separate guidance) to use data sourced from digital asset transaction aggregators when certain data points are missing from the internal records of the broker.
2. Brokers who take reasonable measures to ensure the accuracy of such data before including it in their information reports should be relieved from accuracy-related penalties under §6721 & §6722.
We would like all aggregators who meet a quality standard to partake and allow brokers to choose the best for their users. Taxpayers can seamlessly (if they choose) permit brokers to access this information to facilitate accurate and complete information reporting. User consent will be required. Once the right user controls are in place, we can work with brokers to supplement information reports with missing data.
With this solution, brokers can produce complete and accurate information reports by supplementing their proceeds and cost basis calculations with digital asset transactions aggregator data. This will lessen their burden and decrease customer confusion.
In addition, the IRS will receive higher-quality digital asset transaction data through both Form 8949s filed by taxpayers and information reports filed by brokers. This can decrease the complex processing of many inaccurate and incomplete forms, lessening the processing burden and call center volume.
Finally, many taxpayers will receive accurate and complete documents they can easily use
in their tax filing. If there are data gaps in Form 1099-DAs, taxpayers can continue to leverage digital assets and transaction aggregators.
Ultimately, as the digital assets industry grows, the source of truth will continue to live with the taxpayer. This approach will position the IRS to achieve long-term accuracy and compliance in digital assets.
IRS questions in the Regs
The IRS sought comments on roughly 50 questions in the Regs. We responded to two of those questions.
Question #7: Are there any technological or other technical issues that might affect the ability of a non-custodial digital asset trading platform that is a person who qualifies as a broker to obtain and transmit the information required under these proposed regulations, and how might these issues be overcome?
Whenever there is a transfer into a non-custodial digital asset trading platform from a non-broker source like a self-hosted wallet, the non-custodial digital asset platform will be unable to determine the cost basis and the acquisition date of the lot, which is essential to produce a complete Form 1099-DA.
For example, taxpayer A transfers 1 ether (ETH) from their unhosted wallet to non-custodial trading platform X and disposes of it for $5,000. In this situation, platform X does not have the date acquired and the cost basis of the ETH.
The aggregation market has evolved to keep meticulous records of taxpayers’ digital asset tax lots. In many cases, only aggregator tools (an extension of the taxpayer) have such information.
Therefore, whenever it’s not feasible for the broker to obtain the cost basis or other information required to produce a 1099-DA Form, we propose brokers rely on aggregator tools to source the missing data.
Question #43: Are there methods or functionalities that unhosted wallets can provide to assist taxpayers with the tracking of purchase dates, times, and/or basis of specific units of a digital asset upon the transfer of some or all of those units between custodial brokers and unhosted wallets?
We recommend unhosted wallet providers partner with a transactions aggregator tool to assist taxpayers with tax lot tracking, as described in greater detail above.
CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ cryptocurrencies and makes crypto tax calculations and portfolio tracking simple.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.