Cryptocurrency exchange Coinbase has decided to stop sending customers 1099-Ks, the US tax form that led the Internal Revenue Service (IRS) to mistakenly think that traders had underestimated their earnings.
The exchange will use the 1099-MISC form instead, at least for customers who earn interest on loans and similar products, it said in a blog post on Tuesday, The post seemed to suggest that traders who don’t meet the criteria for 1099- MISC will likely not receive any form of form from Coinbase to prepare their returns. When asked for a comment, a Coinbase spokesperson simply sent CoinDesk a link to the post.
Coinbase said in the post that it will not issue IRS forms 1099-K for fiscal year 2020. Used by some crypto exchanges to report transactions to eligible users, the 1099-K form can often be confusing because it only reports gross proceeds from cryptographic transactions, regardless of the base price.
Therefore, forms can sometimes show all transactions as revenue generating, even though some may have actually caused a loss. If you bought a coin for $ 1 and sold it for 50 cents, your loss of 50 cents would appear to be a gain, for example. This in turn could lead to exchanges reporting a significantly inflated tax burden on the user.
This scenario appears to have occurred recently when the IRS sent out at least dozens of alerts from crypto users warning they had underestimated their holdings. Such warning letters were also sent to crypto users last year.
In its blog post Coinbase said it won’t even issue the 1099-Bs form. The cryptocurrency exchange’s post added that the 1099-MISC forms will be sent to users earning “$ 600 or more in cryptocurrency from Coinbase Earn, USDC Rewards and / or Staking in 2020”. These are income-generating products, similar to bank deposits.
But the post didn’t even indicate whether in the absence of a 1099-K form, regular cryptocurrency sales would also be recorded on the 1099-MISC forms. Customers who do not receive any forms from Coinbase and have sold or converted cryptocurrencies in 2020 are still responsible for reporting to the IRS and should consult a tax professional, Coinbase said.
If 1099-MISC becomes the standard for traders, “many more people will get it because the threshold for getting a 1099-MISC is very low,” said Shehan Chandrasekera, head of tax strategy at CoinTracker, a portfolio monitoring service. . While a 1099-K is strictly for payees who receive more than 200 transactions annually worth more than $ 20,000, the 1099-MISC would capture anyone receiving $ 600 and beyond.
While the move to 1099-MISC “isn’t a perfect solution” to the problems faced in encrypted tax reporting, it could help Coinbase improve its compliance status by subjecting more users to reporting requirements, Chandrasekera said.
He pointed out that switching to a new module does not solve the “underlying cost problem”, because even the 1099-MISC module has no room to report the price a cryptocurrency may have been purchased for. Even if there was a place in the form, Coinbase wouldn’t necessarily be able to find the information, so it’s the user’s responsibility to keep track of the price they bought the assets for, said Chandrasekera, who is a certified public accountant (CPA ).