How do you deal with inaccurate tax forms issued by exchanges?

Sometimes, you might receive tax information reports (Form 1099-MISC) from exchanges detailing rewards you earned from staking and other activities. In some cases, amounts reported on these tax forms do not match your records. These reporting differences can become an issue because the Internal Revenue Service (IRS) expects to see the amount reported in Box 3 (Other income) of Form 1099-MISC on your Schedule 1, Line 8z of Form 1040. If you notice a difference between Form 1099-MISC and your records, follow the below steps to report amounts correctly and not trigger the IRS needlessly sending you a notice.

General taxation of staking rewards.

Rev. Rul. 2023-14 states that staking rewards are taxed when the holder obtains dominion and control (D&C) over the token. Generally, a taxpayer obtains D&C through constructive receipt, which is when “it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time” (Reg. § 1.451-2(a)) and there are no substantial limitations or restrictions. Essentially, D&C is achieved when you can sell or transfer the asset without any restrictions. If there are substantial restrictions, you do not have total D&C over the rewards. 

For example, Chris stakes 100 Tez (XTZ) on Coinbase and receives a reward of 0.5 XTZ (worth $10 at the time of receipt). Chris has instant access to these rewards with no restrictions. Here, he has to report $10 as ordinary income. The reported income will be the cost basis when he sells the reward in the future. If Chris sells 0.5 XTZ for $30 next year, he will have a capital gain of $20 ($30 - $10).

If you earn more than $600 of staking rewards, you will get a Form 1099-MISC reflecting your annual earnings. You must report this amount on Schedule 1 line z as “Other income.” You must also report staking income even if you don’t receive a 1099-MISC from an exchange.

When you sell your rewards, you will report the capital gains on Form 8949 and Schedule D.

For more information on staking, visit our cryptocurrency staking tax guide. 

ETH rewards accrued in 2022

One reason the form might not agree with your records is that you included the Ethereum (ETH) rewards earned in 2022 on your 2022 tax return, but the exchange combined the accrued 2022 rewards with the 2023 rewards and reported the combined amount on a 2023 Form 1099-MISC. The reason exchanges included the rewards in 2023 and caused a mismatch is that taxpayers did not have access to rewards until after the Shanghai upgrade in April 2023.

In the case of ETH rewards accrued in 2022, the question is, when does the taxpayer gain dominion and control (D&C) over the tokens? Generally, you could not unstake the earned ETH rewards until 2023. That means you didn’t have D&C over those assets until you could unstake them. 

For example, Dean staked ETH on an exchange in 2022 and started earning ETH staking rewards. When earned, the ETH rewards were credited to his account, but he was not allowed to transfer, sell, trade, or otherwise dispose of the rewards until April 30, 2023, when the exchange unlocked them (release restrictions). Since there were restrictions on the rewards, Dean did not have constructive receipt and D&C of the rewards and had no staking income in 2022. Therefore, all the rewards earned before April 30, 2023, will be income as of April 30, 2023. The income is equal to the fair market value of ETH on April 30, 2023. 

However, the IRS could argue that these rewards are available at the time of receipt (in 2022) if individuals can convert the rewards into a wrapped version. The wrapped version is liquid, and individuals can trade, transfer, or sell the wrapped version, which gives them D&C over the assets. 

For example, Emily staked ETH on an exchange in 2022 and started to earn ETH staking rewards. The ETH rewards were credited to her account when earned, and the exchange allows her to trade the rewards for a different wrapped version of the rewards in 2022. These rewards would be income in 2022 because Emily has D&C and constructive receipt of the rewards. She has D&C and constructive receipt because the rewards are credited to her account and available to be traded. 

What do I do if I receive a Form 1099-MISC that doesn’t match my records?

If you receive a Form 1099-MISC with staking rewards that don’t match your records, the best option is to report the amount in Box 3 of Form 1099-MISC and then enter an other adjustment to reduce the reported amount. Typically, staking rewards are reported on Schedule 1, line 8z, “Other income” with a description. In this case, the description should say “Incorrect Form 1099-MISC” with the amount reported on the form. Next, you will add an other adjustment on Schedule 1, line 24z, “Other adjustments” with the same description (Incorrect Form 1099-MISC).

For example, Fred receives a 2023 Form 1099-MISC with $1,000 reported in Box 3 for his staking rewards. However, Fred reported $200 (of the $1,000) on his 2022 return because he thought he had D&C over the assets when he received them. The $200 was the amount reported in his CoinTracker account. His records show he earned $800 in staking rewards for 2023. 

To rectify the error, Fred can enter $1,000 on line 8z with the description “Incorrect Form 1099-MISC” and $200 on line 24z with the description “Incorrect Form 1099-MISC”, giving him a total of $800 (which agrees to his records) on Schedule 1 line 26. 

Mismatches between reporting forms and crypto tax calculators will become more common as reporting by exchanges increases. This staking reward example highlights the importance of maintaining detailed records on crypto tax calculators. These records often serve as the source of truth when reconciling discrepancies and ensuring compliance as tax regulations in the cryptocurrency space develop.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.