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Coinbase says new U.S. crypto tax reporting rules are confusing and complex
Major cryptocurrency market player Coinbase (COIN) said that new U.S. tax reporting requirements are excessively burdensome for many cryptocurrency holders and create unnecessary clutter in the country’s tax system.
Although the idea is that taxable activity with cryptocurrency should be reported in the same way as activities with stocks, the rules require reporting transactions involving stablecoins — whose value by definition does not change — as well as small amounts spent on network fees known as gas.
“Currently, Coinbase, whose shares are listed on Nasdaq, is sending new 1099-DA forms to millions of American cryptocurrency holders, intended to align crypto with other financial assets. While this will affect all Coinbase customers to some degree, it is a very large group of retail customers that faces unnecessary administrative burdens associated with small transactions,” said Lawrence Zlatkin, the company’s vice president of tax.
“Frankly, small retail transactions are so tiny that I simply don’t understand why we, as a country, are spending effort on them. I think it harms people when you trade, for example, $50, receive such a form and must report a gain or loss. That is not what the tax system should be for.”
For trading platforms, the new system means transmitting information about customers’ digital-asset transactions to the U.S. Internal Revenue Service (IRS). Customers receive a copy of the form so that they can voluntarily reconcile their gains and losses with tax authorities.
However, as often happens when attempting to integrate cryptocurrency into traditional finance, problems arise.
This year Coinbase will report to the IRS only the gross proceeds from digital-asset sales, rather than net value or cost basis. As a result, responsibility for adding the missing information about the purchase cost of cryptocurrency and the actual tax basis falls on the trader.
(Coinbase will begin calculating cost basis for its customers starting next tax year).
This will cause some confusion, especially among people who have never owned assets such as stocks. Cryptocurrency itself also creates certain complexities, given how assets can move between platforms and be exchanged among different coins and tokens.
According to Zlatkin, there are also other obvious problems with excessive reporting in the system that need to be addressed, such as the requirement to report stablecoins, whose value is inherently fixed.
“People should pay taxes where they earn income,” Zlatkin said. “Do you earn income from $USDC? No, you don’t. So why are we reporting $USDC transactions? We report them on our exchange because there is no general tax exemption for $USDC. In my view, this clutters the system.”
Gas fees and small cryptocurrency transactions used to pay blockchain expenses only worsen the reporting problem.
“A transaction fee may be 50 cents or a dollar — do we have to disclose that? Is that an appropriate use of resources for revenue collection? I would suggest the answer is no. We should focus on cases where there is real income to encourage voluntary compliance. But not where there is no income, such as with stablecoins or very small transactions that consist mostly of network fees.”
“The goal of Coinbase is to educate and eventually create tools that help simplify the sometimes burdensome task of calculating crypto cost basis,” said Ian Unger, the exchange’s director of tax reporting.
Ian Unger noted that when an investor sells stocks or transfers them between brokers, those transactions come with transfer statements, so the cost basis moves with them.
“That is not the world we live in today with crypto assets,” Unger said in an interview. “Perhaps in the future some of these processes will become easier for people who buy and sell on one exchange and want to move to another. But we haven’t reached that point yet, and until we do, there will be a lot of confusion.”
See also: "South Korea’s second-largest cryptocurrency exchange may be suspended for up to six months"
