Curt Mastio
By Curt Mastio on December 01, 2023

Coinbase Tax Form Changing: What It Means For You

In the eyes of the IRS (and most other global tax authorities) – gains are gains. If you’re making money from any source — including cryptocurrency — you are required to report it to your tax authority. It follows then that no matter which tax forms your trading platform issues, you need to report your gains.

As Coinbase is a US based trading platform issuing US tax forms, this article focuses mainly on US taxpayers and crypto users who are required to report crypto gains or losses to the IRS. As with many US-based trading platforms, Coinbase doesn’t provide any official tax advice and doesn’t issue tax forms in any countries besides the US.

Because of their “secretive” nature – built into the Crypto name – many users like to believe (incorrectly) that crypto currencies and exchanges are exempt from tax laws. On the other side, the IRS is very keen to track down taxpayers with crypto holdings and make sure they’re paying taxes on any gains derived from buying or selling cryptocurrency. Fortune recently reported that the IRS is considering adding a question on the 2020 tax forms which would require filers to indicate whether or not they have crypto holdings. 

It’s not a good idea to dismiss crypto holdings and/or profits. As a rule, crypto users are responsible for submitting their own taxes based on their transaction activity related to crypto transactions that gave rise to any gains and/or losses. This is exactly why it’s important to understand tax form changes, from Coinbase.

Coinbase’s 1099-K

For tax years prior to 2020, Coinbase has issued tax form 1099-K for cryptocurrency users exceeding the threshold of 200 trades worth over $20,000 (in sum). It’s important to note that this threshold is lower for several states, including Mississippi and Vermont, where it is $600.

 Unfortunately, the 1099-Ks filed by Coinbase caused some confusion both at the IRS and for taxpayers.

The nature of the form, combined with the average crypto user’s lack of awareness regarding tax filing, caused several undesirable effects. The 1099-K form only reports gross proceeds from the transaction. Other related information, like the cost basis of the assets or deductions for losses, was strikingly absent from the forms.

That means for example, that you could sell $100 worth of Bitcoin at a 50% loss compared with your purchase price ($200 in this case), and only the $100 in revenue would be communicated to the IRS. In the filings, any information about the losses generated by the transaction is entirely absent. It’s only those users (or their CPAs) savvy enough to generate the cost basis from their transaction history who properly filed. But as it sometimes goes, filing properly didn’t necessarily save them from receiving notice from the IRS.

Because of the information included on the 1099-K, some uninformed users (likely filing their own taxes) ended up overpaying the IRS. The other, perhaps more sinister effect, was the IRS letter sent to dozens who presumably did file correctly, accusing them of underreporting their holdings and earnings.

Making Changes

Starting with the 2020 tax year, Coinbase has changed their policy. According to their website they will no longer provide any 1099-K forms. Instead, any Coinbase user subject to US taxes, who earned more than $600 from Coinbase Earn, USDC Rewards and/or Staking in 2020, will receive a 1099-MISC.

No other tax forms will be issued by the trading platform. While this does resolve the issue of the past years mix-ups, it doesn’t solve most users’ tax reporting issues. The 1099-MISC offers some advantages over the 1099-K for some users, but the form comes with its own challenges.

Your best bet is to align with your CPA and work out what information you need to file.

What does this all mean for you?

Traditionally, when it comes to tax time, many crypto users have simply attempted to feign ignorance. They pretend to be unaware of the fact that filing is a requirement, while hoping they aren’t a big enough fish to get caught in the IRS’ nets. But the IRS is catching on and the platform is maturing, looking to avoid issues with auditors.

Going forward, Coinbase will issue a 1099-MISC for any crypto user earning more than $600 from Coinbase Earn, USDC Rewards, and/or Staking, income generating products which are similar to bank deposits. What’s not yet clear, however, is whether all users will receive a 1099-MISC or only those earning more than $600 through certain Coinbase products.

However, if the 1099-MISC were to become the standard for all users, many more users would receive the form due to the much lower threshold than for the 1099-K. While sending the form to all users doesn’t solve everyone’s tax reporting issues, at least it lets people know that they aren’t exempt from reporting earnings to the IRS.

Unfortunately, widespread usage of the 1099-MISC would have a few flaws. Coinbase won’t, and can’t, provide all of the necessary information required to file taxes. Similar to the 1099-K, there is no place to report the cost basis of your cryptocurrency holdings and profits.

On the other hand, not receiving the form doesn’t exempt cryptocurrency users from filing with the IRS. As such, most users will still need help from a tax professional or CPA.

As the nature of cryptocurrency transactions can be complex, it would be nearly impossible for Coinbase to report the cost basis. Users need to reference their transaction histories to synthesize this information.

Consider the situation where a user purchases — or receives as a gift — some Bitcoin on Binance or another trading platform, and adds the tokens to a Coinbase wallet in order to sell the tokens on Coinbase. There’s no way for Coinbase to reliably know or track the cost basis for such a transaction. As such, users are still responsible to calculate their own cost basis based on their transaction histories.

You need a CPA

What it comes down to is this: if you HOLD or trade cryptocurrency, you are required to report it to the IRS. To do that properly, you’ll probably need some advice from your CPA. Coinbase is a trading platform. While they do offer a tax guide, they don’t provide tax advice and they aren’t in a position to fulfill all of your reporting requirements.

A quality CPA service, on the other hand, can help you reliably determine the cost basis for your cryptocurrency transactions and ensure that you’re filing the proper information with the IRS.

In addition to ensuring you’re fulfilling the necessary regulatory requirements, they can also help you be sure you’re properly accounting for any losses you’ve incurred. They can help minimize your tax bill by offsetting your gains with those losses as well. Together, you and your CPA can define a strategy for how cryptocurrency fits into your overall tax situation.

The bottom line is that you need to do something. Now, more than ever, pleading ignorance and hoping you won’t get caught is a fool’s errand. Not documenting and reporting any profits to the IRS will draw their attention and cause more trouble than it’s worth.

Published by Curt Mastio December 1, 2023
Curt Mastio