Coinbase Drops U.S. Customer Tax Form That Raises False Alarms to IRS

Cryptocurrency exchange Coinbase decided to stop sending customers 1099-Ks, the US tax form that led the US Internal Revenue Service (IRS) to mistakenly believe that traders had underreported their earnings .

The exchange will use Form 1099-MISC instead, at least for customers who earn interest on loans and similar products, he said in a blog post on Tuesday. will likely not receive any type of form from Coinbase to prepare their returns. When asked to comment, a Coinbase spokesperson simply sent CoinDesk a link to the post.

Coinbase said in the article that it will not issue an IRS Form 1099-K for the 2020 tax year. Used by some crypto exchanges to report eligible user transactions, Form 1099-K can often lend. confusing because it only reports the gross proceeds of crypto transactions without taking into account the base price.

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Therefore, sometimes forms can show that all transactions are generating income, even if some actually caused a loss. If you bought a $ 1 coin and sold it for 50 cents, your 50 cent loss would appear to be a gain, for example. This in turn can lead the exchanges to declare a significantly inflated tax burden for the user.

This scenario seems to have played out recently when the IRS sent at least dozens of cryptocurrency users warning that they had underreported their holdings. Such warning letters were also sent to crypto users last year.

Read More: IRS Again Warns Crypto Investors They Underestimated Gains

In its blog post, Coinbase said it will not issue a Form 1099-B either. The crypto exchange’s message 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.

Related: Coinbase to Suspend All Trading on Margin Tomorrow, Citing CFTC Guidelines

But the publication also did not indicate whether, in the absence of a 1099-K form, regular crypto sales would also be recorded on the 1099-MISC forms. Customers who do not receive any forms from Coinbase and who sold or converted the crypto 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, “a lot 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 service provider. portfolio monitoring. While a 1099-K is strictly reserved for recipients receiving over 200 transactions per year valued at over $ 20,000, the 1099-MISC would capture everyone receiving $ 600 and above.

While the switch to 1099-MISC is “not a perfect solution” to the problems encountered in reporting crypto taxes, it could help Coinbase improve its compliance status by subjecting more users to reporting requirements, said Chandrasekera.

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He pointed out that switching to a new form does not solve the “cost basis problem”, as the 1099-MISC form also does not have a place to report the price for which a cryptocurrency may have been purchased. . Even if there was a place in the form, Coinbase wouldn’t necessarily be able to find the information, so it’s up to the user to keep track of the price they bought the assets for, said Chandrasekera, who is a chartered accountant. (CPA).

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