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5 Things Enterprises Need to Know About Creating a Tax Center

5 Things Enterprises Need to Know About Creating a Tax Center

Key insights on creating a Crypto Tax Center for enterprises. Learn about digital asset brokerage, tax reporting, and staying IRS-compliant.

Historians will look back on 2024 as the year crypto entered mainstream finance. Many crypto community members have waited years for crypto’s acceptance and integration into global finance.

The transition hasn’t been without its complications. Even amid the high fives, some might say, “Be careful what you wish for.” As governments and institutions begin to integrate cryptocurrency, staying on top of regulatory changes is a massive mission-critical challenge for enterprises serving high-volume crypto transaction accounts.

The IRS is clarifying the definition and responsibilities of a digital asset broker. To remain compliant, entities like exchanges, DeFi platforms, gaming companies, and investment firms must create strategies and action plans.

Unfortunately, the IRS does not view taxpayer confusion or lack of regulatory clarity as justification for non-compliance. Understanding the updated digital asset definitions and broker reporting obligations will help you stay compliant and seize strategic opportunities while mitigating risks.

Since 2017, ZenLedger has offered tailored solutions to individuals to ensure seamless compliance and enhanced performance. We now leverage our industry-leading expertise to serve digital asset brokers and other enterprises with significant crypto tax reporting compliance liability. We help you stay ahead in a market where the cost of non-compliance could be substantial.

This post covers an overview of the different elements to consider with a tax center – digital assets, broker reporting, Form W-9/W-8, cost basis/Form 1099-B, and voluntary reporting.
We’ve also included some bonus information about the evolving status of NFT regulation. (Please note that this material is for informational purposes only and should not be your only tax, legal, or financial advice resource.)

Digital Assets

Regulators are broadening the definition of a digital asset to cover not only cryptocurrencies but also Non-Fungible Tokens (NFTs) and stablecoins. We look more closely at NFTs later in this post. What constitutes a digital asset will likely expand as the crypto market evolves with more diversity and complexity.

The Emergence of the Digital Asset Brokerage

A digital asset broker is any entity facilitating the transfer of digital assets. The closest analogy to digital asset brokers’ positioning and responsibilities is stockbrokers, who facilitate stock trading and provide reporting to their clients and the IRS. Under new IRS regulations, digital asset brokers must provide detailed transaction reporting.

Several existing entities now qualify as digital asset brokers or firms. These include:

  • Entities facilitating the transfer of digital assets, such as cryptocurrency exchanges
  • Digital asset trading platforms that provide custodial wallet services.
  • Decentralized platforms that operate through smart contracts, specific peer-to-peer marketplaces, and other non-custodial digital asset trading platforms.
  • Digital asset payment processors.
  • Digital asset kiosk operators and owners
  • Wallet providers with software that allows users to access trading platforms directly
  • Issuers who regularly offer to redeem digital assets (including stablecoin issuers)

What Activities Define a Digital Asset Broker?

Under the new regulations, brokerage activities typically include acting as an intermediary in transferring these assets between parties.

The activities include matching buyers and sellers, executing trades on behalf of clients, providing transactional infrastructure (like trading platforms), and offering related services like custody or valuation.

The exact definition and scope can vary based on specific regulatory guidelines and interpretations. If you have any questions, please consult an attorney specializing in digital assets, federal tax law, and taxes for your jurisdiction.

Brokerage tax documentation obligations now include providing detailed records of digital asset transactions to the IRS and their customers. This is similar to how stockbrokers issue a 1099-B form detailing the sale of stocks and other securities. Digital asset brokers must provide comparable information, ensuring transparency and compliance with tax laws.

(Slowly) Emerging Clarity for NFTs

The IRS now considers NFTs to be digital assets for tax purposes. NFTs, unique digital tokens representing ownership or proof of authenticity of a specific item or asset, could revolutionize recordkeeping in thousands of use cases. NFTs are already a complex tax area because there are so many potential different types of NFTs.

Good News (So Far) for NFT Creators

NFT creators generally do not have to register as brokers under current regulations. The definition of a digital asset broker typically focuses on entities that facilitate the transfer of digital assets, such as exchanges and wallet providers.

NFT creators, primarily involved in the creation and initial sale of NFTs, do not usually engage in brokerage activities as defined by these regulations. However, as regulatory landscapes evolve, NFT creators must stay informed about changes that might affect their responsibilities.

Are NFT Trading Platforms Also Digital Asset Brokers?

What about NFT platforms like OpenSea? Don’t they “facilitate the transfer” of NFTs? OpenSea reports they are not a digital asset broker in their Terms of Service.

The definition of a broker depends on the level of risk, expertise, and service involved. A brokerage service or a specialized intermediary that assists in large or complex NFT transactions could be considered a broker.

These services might offer additional features like escrow, valuation, or authentication services, playing a more active role in the transaction process than a typical platform or creator.

As you can see, the tax status of NFTs is still a moving target. The IRS released its first NFT-specific guidance regarding collectible NFTS in May. Avid NFT collectors should keep updated on the latest developments and consult a qualified attorney to devise a tax strategy.

Broker Reporting

The US federal tax process is notoriously complex, with over 800 different forms and schedules. Soon, there will be one more form, as the IRS is working on a version of the 1099 called the 1099-DA.

Form 1099-B, Soon-to-be DA

The Form 1099, specifically the 1099-B in the context of brokers, is crucial for reporting the sale of securities and, by extension, digital assets. It includes important details such as the date of purchase, the sale price, and the cost basis of the assets sold.

The cost basis information is essential for taxpayers to accurately calculate their capital gains or losses for tax purposes.

Beginning in tax year 2023, the IRS will require digital asset brokers to use a similar form to report transactions. This requirement is a step in aligning digital asset transactions with standard financial practices. The form is essential for tax reporting and compliance, ensuring that brokers and clients have accurate tax data.

Cost Basis

As mentioned above, tracking and reporting the original value (cost basis) of each unit of digital assets sold is vital. The cost basis is the original value of an asset for tax purposes, typically the purchase price. It’s important because it calculates capital gains or losses after you sell an asset.

Knowing the cost basis helps determine the taxes owed on any profits made from the asset’s sale. In digital assets, accurately calculating the cost basis ensures compliance with tax regulations and helps properly report financial gains or losses.

As you can imagine, tracking cost basis and transactions can be a massive task for high transaction accounts. ZenLedger has specific expertise in this area; reach out if you have any questions.

Form W-9/W-8

IRS now mandates that starting in 2025, for new, existing, or non-US accounts, brokers must obtain a Form W-9 from US customers with accurate tax identification numbers. Ensuring proper documentation is essential for regulatory compliance and accurate tax reporting, aligning digital asset transactions with established financial transaction norms.

Voluntary Reporting

For proactive types, the good news is that the IRS permits brokers to start reporting on digital assets voluntarily before the mandated deadlines of 2025 and 2026.

Voluntary reporting is beneficial for a few different reasons:

  • It demonstrates proactive compliance and preparedness.
  • Early adopters of new reporting practices will adjust to new requirements more easily.
  • Avoid the stress, potential complications, and increased error rates due to last-minute compliance.
  • Establish a reputation for transparency and reliability in the eyes of customers and regulators.

Think of early voluntary reporting as earning extra credit for doing homework ahead of time!

Moving Ahead with Creating a Tax Center

Looking back at significant financial evolutions, we don’t usually see the massive amount of detailed work behind the transition. If you are a digital asset broker, you are part of a historic yet challenging phase of crypto’s integration into mainstream finance. And, as you can see, the tax devil is definitely in the details.

Navigating Crypto Taxes and Compliance for your business? Learn more about how ZenLedger can help!

Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Kala Philo