February 18, 2019

February 18, 2019

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Form 1099-MISC Reporting - Virtual Currency and Privacy Concerns

Once again the filing season for Forms 1099 is upon us.  The IRS continues to focus on taxpayers’ information reporting obligations which are becoming more complex with the use of bitcoin and other virtual currencies.  In Notice 2014-21, the IRS provides guidance on tax issues associated with virtual currency.  According to this Notice, taxpayers must recognize gain and loss on the receipt of convertible virtual currency as payment for providing goods and services.  Taxpayers must maintain records on their basis in virtual currency in order to calculate gain or loss on such exchanges. Given the volatility of virtual currency, the gain or loss recognition associated with virtual transactions can be significant.  On the flip side, a payment made with virtual currency is subject to the same informational reporting requirements as other payments and must be reported on Form 1099-MISC.  Meeting these filing obligations may be challenging for taxpayers if records are not kept to track these transactions and the basis associated with the same.

In light of growing concerns over identity theft, taxpayers should carefully secure Forms 1099 because they are tied to social security number, individual taxpayer identification number, or employer identification number.  Be sure to contact your payers and provide any address changes so that your Form 1099 is not mistakenly sent to someone else.

Background

Form 1099-MISC reporting is an important component of IRS compliance and audit efforts.  The IRS has a simple goal for these efforts.  That goal is to locate payments that should have been reported but were not.   Form 1099-MISC reporting applies to payments totaling $600 or more (except royalty or broker payments in lieu of dividends and tax-exempt interest of $10 or more) made in the course of your trade or business.   Personal payments are excluded from the requirement.  Nonprofit organizations are considered to be in a trade or business and are subject to Form 1099 reporting requirements. 

How does the IRS define “virtual currency” and “convertible virtual currency”?
Virtual currency is defined as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency.  Bitcoin is one example of a convertible virtual currency.  See Notice 2012-21, 2014-16 IRB, Section 2.

Is convertible virtual currency treated as currency or property for tax purposes?
It is considered property and receives capital gain or loss treatment. Convertible virtual currency is not treated as foreign currency.  Foreign currency results in the gain or loss being treated as ordinary income for tax purposes.  The property treatment is favorable for investors due to the preferential tax rate on long-term capital gain. 

How is the basis of virtual currency received as a payment for goods or services determined?

The basis of virtual currency is equal to the fair market value of the virtual currency in U.S. dollars as of the receipt date.

What else is new for 2014?

On Form 1099-MISC, Box 11 (Foreign tax paid) and Box 12 (Foreign country or U.S. possession) were deleted.  This information is now reported on Form 8966, Foreign Asset Tax Compliance Act Report.

Which entities are required to file Forms 1099-MISC?
Forms 1099-MISC are required for almost all payments for rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments not under a qualified plan, and a number of other payments listed in the instructions for Form 1099-MISC to non-incorporated entities that the taxpayer incurs during the year if the payments total $600 or more.  This includes payments to vendors, subcontractors, independent contractors, etc.  Payments made to corporations are typically not required to be reported on Form 1099-MISC.  
However, the following types of payments must be reported even if the payee is a corporate entity.

            -Medical and health care payments

            -Attorneys’ fees and the gross proceeds paid to an attorney

            -Substitute payments made in lieu of dividends or tax-exempt interest

            -Payments by a federal executive agency for services

            -Other payments specified in the Form 1099-MISC instructions

Are social security numbers reported on Form 1099-MISC?

Yes.  Do not forget to watch your mail for Forms 1099 and keep them in a secure place.  Also, do not forget to update payers with any changes of address.  If you do not update, your 1099 will be mailed to someone else who will then have access to your social security number or individual taxpayer identification number or employer identification number.

Are payment card transactions reportable on Form 1099-MISC?

No.  Payments made with a credit card or debit card or via PayPal are not reportable by the cardholder/payor on Form 1099-MISC.  The bank or credit card company that made the actual payment will be responsible for issuing Form 1099-K, Merchant Card and Third Party Network Payments. 

Can the IRS assess penalties for late filing or failure to file?

Yes. The IRS may assess penalties for every Form 1099 that is filed late.  Penalties can also be assessed for every Form 1099 filed with errors.  From the IRS examiner’s perspective, an “error” includes when a Form 1099 is filed with a payee U.S. Taxpayer Identification Number (TIN) but which does not match the TIN in the U.S. Government’s files for the named payee.  There is also a penalty for every Form 1099 that should have been filed but was not filed.  In addition, there are also penalties for each payee statement that was not delivered or was delivered with errors. 

Accumulated penalties can rapidly double if the IRS examiners find willful disregard of the tax information reporting requirements.  What is willful disregard?  This may surprise many but willful disregard does not necessarily rise to the level of a fraudulent criminal type activity. Depending on the facts, the IRS may consider willful disregard to involve conduct entailing lack of compliance policies and procedures, lack of training, lack of internal controls and documentation, or even inaction when there is an indication that a problem exists. 

Are payments made with convertible virtual currency subject to backup withholdings?

The answer is “sometimes.”  Backup withholding applies to all payments, including payment with convertible virtual currency, reportable on certain Forms 1099 which were made without having first obtained the (TIN) of the payee.  This means that a payor must withhold 28 percent of the amount of the payments made to reportable individuals or payees if the payee fails to furnish a TIN or supplies an obviously incorrect TIN.  A person is treated as having failed to furnish his TIN if the TIN furnished is obviously erroneous because it does not contain the proper number of digits or contains one or more alpha characters.  If the payor fails to withhold, the IRS may assess the payor with backup withholding penalties, which are currently equal to 28 percent of the payments subject to backup withholding.  For more information on these issues and how to avoid the dreaded Backup Withholding Notice from the IRS, see IRS Publication 1281,  Backup Withholding For Missing and Incorrect Name/TIN(S). Also, see Publication 2108A to learn more about the IRS’s On-Line Taxpayer Identification Number (TIN) Matching Program.

Deadlines for Filing Forms 1099-MISC

  • February 2 – Provide the recipient with his or her copy of Form 1099-MISC to report income for the previous calendar year. The due date is extended until February 17th if you are reporting payments in boxes 8 or 14.

  • March 2 – Mail Forms 1099-MISC to the IRS.

  • March 31 – Electronically file Forms 1099-MISC with the IRS.

Due to the potentially severe nature of the penalties associated with informational reporting, it is critical to develop policies and procedures to properly report payment transactions with the first step being to obtain a Form W-9, Request for Taxpayer Identification Number and Certification, from each payee.  

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About this Author

Melissa Watkins, taxation, business and commercial planning lawyer, Steptoe Johnson, morgantown Law Firm
Member

Melissa Watkins concentrates her practice in the areas of taxation, business and commercial planning, nonprofit tax issues, and other areas related to the establishment and operation of nonprofit organizations.  She is also a licensed certified public accountant.

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