New York-based BlockFi, a provider of crypto-backed lending products, has partnered with Sovos, a startup that focuses on cryptocurrency accounting and auditing, in order to modernize its tax information reporting.
BlockFi will use Sovos’ technology to automate its 1099 forms and filings, which helps reduce potential human errors and ensure automatic regulatory updates. The company’s Tax Information Reporting solution, which has experience in handling tax issue in alternative currency markets, allows BlockFi to protect its users just as investors of other asset classes.
This collaboration should address the reporting needs of BlockFi’s cryptocurrency customers in the upcoming tax season. As such, accounting professionals servicing crypto-transacting clients will have sources required when reconciling cryptocurrency balances and transactions.
Recently, there have been numerous reports emerging of tax authorities clamping down and going after cryptocurrency traders. The US Internal Revenue Service (IRS) also sent letters to taxpayers who might have failed to report income and pay the resulting tax from cryptocurrency transactions.
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The IRS gets tough on crypto taxes
“The IRS expects tax reporting on cryptocurrency, but the agency has not clarified guidance around the exact Form 1099 requirements. In the meantime, companies must interpret the regulations to help their clients understand taxable crypto events and avoid improper or under reporting of income to the IRS and applicable states. For companies like BlockFi, managing risk and maintaining compliance is critical to growing in a market rife with regulatory unknowns,” Sovos explains in a joint statement.
At the very core, the IRS still deems crypto assets to be property rather than currency for income tax purposes, the same as its regulatory guidance came out five years ago. That means the authority will continue to tax crypto profits and losses like those for stocks, at capital gains rates.
“By leveraging the Sovos platform, BlockFi can continue to grow quickly and release new financial products without worrying about murky cryptocurrency tax information reporting requirements,” said Amit Cheela, senior vice president of finance at BlockFi.
BlockFi is backed by billionaire Mike Novogratz’s Galaxy Capital, which, in 2018, raised nearly $58 million in various funding rounds. The Winklevoss twins’ Gemini exchange is also providing custody of BlockFi accounts, which recently added digital asset insurance coverage.
According to the company’s website, the BlockFi crypto lending platform has attracted so far over $800 million in deposits from retail, corporate, and institutional crypto investors.