Cryptocurrency exchange Coinbase has decided to discontinue sending customers 1099-Ks, the U.S. tax form which led the Internal Revenue Service (IRS) to mistakenly think traders had underreported their gains.
The exchange will instead use the 1099-MISC form, at least for customers who earn interest on lending and similar products, it said in a Tuesday blog post, The post appeared to suggest that traders who do not meet the criteria for the 1099-MISC will likely not receive any kind of forms from Coinbase to help prepare their returns. When asked for comment, a Coinbase spokesperson simply sent CoinDesk a link to the post.
Coinbase said in the post that it will not issue IRS form 1099-Ks for the 2020 tax year. Used by some crypto exchanges to report transactions for eligible users, the 1099-K form can often be confusing because it reports only the gross proceeds of crypto transactions, without taking the base price into account.
Hence, the forms can sometimes show all transactions as generating revenue even if some may have actually caused a loss. If you bought a coin for $1 and sold it for 50 cents, your 50 cent loss would appear to be a gain, for example. This in turn may lead to exchanges reporting a significantly inflated tax burden for the user.
This scenario seems to have played out recently when the IRS sent at least dozens of crypto users notices warning that they had underreported their holdings. Such warning letters had also been sent to crypto users last year.
In its blog post Coinbase said that it will not issue form 1099-Bs either. The crypto exchange’s post added that 1099-MISC forms will 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.
But the post also did not indicate whether in the absence of a form 1099-K, regular crypto sales would be recorded on the 1099-MISC forms as well. Customers who don’t receive any forms from Coinbase and sold or converted crypto in 2020 are still responsible for reporting to the IRS and should consult a tax professional, Coinbase said.
If the 1099-MISC became standard for traders, “a lot more people are gonna 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. Whereas a 1099-K is strictly for payees receiving more than 200 transactions a year worth over $20,000, the 1099-MISC would capture everyone getting $600 and up.
While switching to the 1099-MISC is “not a perfect solution” to problems faced in crypto tax reporting, it could help Coinbase improve its compliance status by subjecting more users to reporting requirements, Chandrasekera said.
He pointed out that the switch to a new form doesn’t solve the “cost basis issue,” because the 1099-MISC form also has no place to report the price a cryptocurrency may have been purchased for. Even if there were a place in the form, Coinbase wouldn’t necessarily be able to find the information, therefore making it the user’s responsibility to keep track of the price for which they bought the assets, said Chandrasekera, who is a certified public accountant (CPA).