Cryptocurrency exchange Coinbase has decided to stop sending customers 1099-Ks. This is the U.S. tax form that led the Internal Revenue Service (IRS) to falsely believe that traders had underreported their profits.
The exchange will use the 1099-MISC form instead, at least for customers interested in credit and similar products. A blog post on Tuesday stated: The post appears to suggest that merchants who do not meet the criteria for the 1099-MISC are unlikely to receive forms from Coinbase to prepare their returns. When a Coinbase spokesperson was asked for a comment, they simply sent CoinDesk a link to the post.
Coinbase said in the post that it won't issue an IRS Form 1099-Ks for the 2020 tax year. The 1099-K form is used by some crypto exchanges to report transactions for authorized users. It can often be confusing as only the gross proceeds of crypto transactions are reported without considering the base price.
As a result, the forms can sometimes show all transactions as generating revenue, even if some actually caused a loss. For example, if you bought a coin for $ 1 and sold it for 50 cents, your 50 cents loss appears to be a profit. This, in turn, can lead to exchanges reporting a significantly excessive tax burden for the user.
This scenario seems to have played out recently, when the IRS advised at least dozen of crypto users that they had not adequately reported their holdings. Such warning letters were also sent to crypto users last year.
In its blog post, Coinbase said it won't be issuing a Form 1099-Bs either. The crypto exchange post added that 1099 MISC forms would be sent to users who "earn $ 600 or more in crypto from Coinbase Earn, USDC Rewards and / or Staking in 2020." These are income generating products, similar to bank deposits.
However, the post also did not state whether regular crypto sales would also be recorded on the 1099-MISC forms without a 1099-K form. Customers who did not receive forms from Coinbase and who sold or converted crypto in 2020 are still responsible for reporting to the IRS and should consult a tax advisor, Coinbase said.
If the 1099-MISC became the standard for traders, "a lot more people will get it because the threshold for getting a 1099-MISC is very low," said Shehan Chandrasekera, director of tax strategy at CoinTracker, a portfolio monitoring service. While a 1099-K is intended solely for payees who receive more than 200 transactions per year worth over $ 20,000, the 1099-MISC would capture anyone who receives $ 600 or more.
While moving to the 1099-MISC is "not a perfect solution" to crypto tax reporting issues, it could help Coinbase improve its compliance status by adding more users to reporting requirements, Chandrasekera said.
He pointed out that moving to a new form does not solve the "cost base" problem, as the 1099-MISC form also does not provide space for specifying the price for which a cryptocurrency may have been purchased. Even if there was a place on the form, Coinbase would not necessarily be able to find the information, so it is the responsibility of the user to keep track of the price at which they bought the assets, said Chandrasekera, a chartered accountant (CPA).