Crypto Taxes and Accounting

Filing Your Coinbase Taxes? Here's The Complete Guide To Coinbase Tax Documents

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May 24, 2021
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    Coinbase is the most popular crypto exchange in the United States with over 50 million users. While many exchanges cater to enthusiasts, Coinbase targeted mainstream consumers with its easy-to-use app and regulatory compliance. The company also has a $255 million insurance policy and has never been successfully hacked—unlike many of its competitors.

    While it has a pristine security and compliance record, the company has seen its fair share of controversies over the past few years. The company turned over the records of 13,000 users with at least $20,000 in any one transaction type between 2013 and 2015 to the IRS, and more recently, began submitting 1099-Ks to the IRS for high-value customers.

    Let’s take a look at what Coinbase users should know about Coinbase tax documents and what forms you should provide accountants.

    Does Coinbase Report to The IRS? IRS Targets Cryptocurrency Holders

    The IRS (International Revenue Services) estimated that about 2.5% of the $450 billion tax gap—or more than $11 billion—came from unreported cryptocurrency tax liabilities in 2018. In the same year, the tax agency filed a lawsuit against Coinbase to unveil the identities of about 13,000 customers engaged in high-value transactions in an attempt to track down some of these unreported tax liabilities.

    In 2019, the IRS sent over 10,000 letters to taxpayers that it suspected of under-reporting cryptocurrency liabilities and updated tax form 1040 with a question regarding cryptocurrencies. By adding the mandatory question, the IRS is both gathering data and setting a trap of sorts for taxpayers, since lying on a tax document or incorrect tax reporting is perjury—a felony under federal law.

    The tax agency also began to engage blockchain experts in order to track down taxpayers that may have tried to hide crypto tax liabilities to avoid paying what they owe. In May 2020, the IRS sent out a statement of work to request help from independent blockchain experts to reconcile taxpayers' reported crypto capital gains and losses on tax returns.

    Coinbase Taxes: Why did I get a 1099-MISC form?

    Coinbase filed 1099-Ks for qualifying customers with 200 transactions whose total value exceeds $20,000 and that meet other criteria for the tax years 2017 through 2019. These forms report the aggregate value of transactions on Coinbase—not total capital gains or losses—and are automatically sent to the IRS to provide them with an idea of trading activity.

    Many Coinbase users were confused by the 1099-Ks and ended up overpaying taxes since the form doesn’t include the original cost basis of transactions or other associated expenses. Without using a crypto tax solution or accountant, many users may have paid taxes on the gross amount rather than calculating their lower capital gain amount.

    In 2020, Coinbase said that it will issue 1099 MISC for U.S. customers that received more than $600 in cryptocurrency through Coinbase Earn, USDC rewards, and/or staking income for the year. It must be noted that it is unclear if Coinbase will report regular cryptocurrency trading activity, such as cashing out crypto or exchanging currencies, on Form 1099-MISC.

    Crypto Taxes: How To Make Sure You're Paying The Right Amount?

    Coinbase users that sold cryptocurrencies for a gain or loss, converted one cryptocurrency to another or earned $600 or more in rewards may be on the hook for federal or state taxes. The second point—crypto-to-crypto transactions—is the most common source of confusion among taxpayers. You owe capital gains even if you didn’t sell crypto for cash.

    Coinbase recommends the use of third-party crypto tax software to accurately calculate capital gains or losses. While it’s possible to reconcile transactions by hand, crypto tax software automates the process to ensure that no transactions are missed, and every calculation is done correctly. That way, you can avoid any potentially costly mistakes.

    The key tax forms that you may need to submit include:

    • Schedule 1: This is where you report income from sources other than wages, interest and dividends.
    • Schedule D: This is where you calculate your total capital gain or loss that appears on Form 1040.
    • Form 8949: This is where you list out each capital gain or loss from crypto investments.

    Taxpayers with a significant number of crypto transactions and/or assets should also consider engaging an experienced accountant. For instance, crypto miners and full-time traders may be able to deduct certain expenses from their gains to lower their tax bill. Taxpayers with simple taxes can also use tools like TurboTax that support basic crypto transactions.

    In addition to submitting the right tax forms, there are many other ways to cut down on crypto tax bills, ranging from choosing the right accounting method to harvesting tax losses.

    How ZenLedger Can Help

    ZenLedger makes it easy to import transactions across multiple wallets and exchanges, automatically compute capital gains or losses and pre-fill the tax forms you need. In addition to the basics, the platform simplifies DeFi and other complex crypto transactions, as well as identifies opportunities to harvest tax losses throughout the year. 

    Coinbase Tax Documents
    ZenLedger’s easy-to-use interface. Source: ZenLedger

    Unlike other black box crypto tax solutions, ZenLedger is transparent about how calculations are made in order to support taxpayers in the event of an audit. You can easily generate a grand unified accounting spreadsheet that includes your entire transaction history across all wallets and exchanges along with the associated tax calculations.

    If you need professional support, ZenLedger can introduce you to a crypto tax professional (e.g., a tax attorney, CPA or Enrolled Agent) to get your crypto and non-crypto taxes done quickly and accurately using the smartest tax strategies. These plans range from $750 to $2,500 per year depending on your number of transactions, total asset value and number of tax forms.

    Get started for free or learn about prepared plans

    Here's A Checklist of Tips On How To Save on Coinbase Taxes

    Consider Donations

    You can donate cryptocurrencies to 501(c)(3) charities in order to avoid paying capital gains tax and realize the associated tax credit or deduction. In addition, the charity will receive the full value without paying any taxes.

    Invest for the Long Run

    Cryptocurrency gains typically fall under two categories, short-term and long-term gains. Short-term gains are taxed at the ordinary income tax bracket whereas long-term gains are taxed as capital gains at a lower tax rate.

    Use an IRA or 401(k)

    Certain types of IRAs and 401(k)s are eligible to hold cryptocurrency investments. In many cases, you can deduct contributions from your current taxes or, in the case of Roth IRAs, avoid paying taxes on capital gains.

    Harvest Tax Losses

    Tax loss harvesting involves selling a losing position in the current tax year to realize the loss and offset any gains. Unlike stocks, you can immediately replace the asset in your portfolio after realizing the loss.

    Gift Crypto to Others

    You can currently give away up to $15,000 without paying taxes each year. While recipients may be liable to pay tax if they use, sell or trade the assets, it can be a great way to share wealth with family or friends.

    The Bottom Line

    Coinbase is the most popular crypto exchange in the United States. Over the past few years, the IRS has been cracking down on underreported cryptocurrency gains. Coinbase users should be aware of what the exchange is reporting to tax authorities and how to accurately report their capital gains or losses to avoid any potential problems.

    FAQs

    1. What Is Form 1099-K?

    Certain US cryptocurrency exchanges issue Form 1099-Ks. This form is issued to users with more than 200 transactions and at least $20,000 gross volume in the said year. Form 1099 k reports all the annual gross receipts coming in from cryptocurrency trading.

    2. How do I get my 1099 from Coinbase?

    Coinbase issues the IRS Form 1099-MISC for rewards and/ or fees through Coinbase.com, Coinbase Pro, and Coinbase Prime. It must be noted that the form is available only to American citizens and non-US customers will not receive any forms from Coinbase.

    3. Do I have to report Coinbase gains on taxes?

    Yes, you'll need to report your cryptocurrency capital gains and losses on your taxes because even if you do not, Coinbase does report your crypto activity to the IRS if you meet certain criteria (you should be a Coinbase customer; a US person for tax purposes; should have earned $600 or more in rewards or fees from Coinbase Earn, USDC Rewards, and/or Staking). If you don't report your crypto activity, Coinbase still would, and not doing so would be considered tax fraud.

    4. Is Coinbase earn taxable?

    Coinbase earnings are taxable only when you transfer, sell, exchange or do something with it. Coinbase earns just sitting idly in your wallet is not taxable.

    ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!

    Get Started Now

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    Simplifying DeFi and Cryptocurrency Taxes for Investors and Tax Professionals

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