Cryptocurrency trading giant Coinbase (COIN) says new U.S. tax reporting requirements are too onerous for many cryptocurrency holders and add unnecessary confusion to the country’s tax system.
For example, while the idea is that taxable activity in cryptocurrencies should be reported in the same way as stocks, the rules require reporting of stablecoin transactions (which, by definition, do not change in value) as well as small amounts spent on network fees called gas.
The Nasdaq-listed exchange is currently sending new 1099-DA forms to millions of U.S. cryptocurrency holders in an effort to bring cryptocurrencies in line with the rest of the financial world. Lawrence Zlatkin, the company’s vice president of tax, said that while all Coinbase customers will be affected to some extent, a large number of retail customers are subject to unnecessary administrative burdens due to small transaction traffic.
“Frankly speaking, [small retail] There’s so little transaction flow, I just don’t know why we as a country put so much effort into paying attention to them,” Zlatkin said in an interview. “I just think it’s just going to hurt people when you’re trading $50, like, you get these forms and you have to report gains or losses. This is not the original intention of the tax system. “
For trading platforms, the new system means sharing details of customers’ digital asset transactions with the IRS. Clients use this form to copy so they can voluntarily check their profits and losses with the tax authorities.
However, as is often the case when trying to combine cryptocurrencies with traditional finance, there are challenges.
This year, Coinbase will provide the IRS with only the gross proceeds from digital asset sales, rather than the net value or cost basis. Therefore, it is the responsibility of traders to add the missing content regarding their cryptocurrency acquisition costs and actual tax base. (Coinbase will calculate cost basis on behalf of its customers starting in the next tax year.)
This can create a level of confusion, especially for those who have never owned assets such as stocks. Cryptocurrencies also bring their own complexities when considering how assets can be transferred between platforms and exchanged between various coins and tokens.
Zlatkin said there are other obvious over-reporting issues in the system that need to be addressed, such as the need to report stablecoin holdings, whose values are fixed by design.
“People should pay taxes where their income is earned,” Zlatkin said. “Do you have income on USDC? No, you don’t. So why do we report USDC transactions? We report them on our exchanges because USDC is not fully exempt. To me, that confuses the system.”
Zlatkin said gas fees — small crypto transactions used to cover blockchain costs — only add to the reporting confusion.
“Gas might be 50 cents on the dollar – do we have to disclose that? Is this a valuable use of resources to generate revenue? I think the answer is no,” he said. “We should be focusing on places where there is real revenue and getting people to comply voluntarily. But not where there is no revenue, like stablecoins or tiny transactions that are mostly network fees.”
Ian Unger, Coinbase’s director of tax reporting information, said Coinbase’s goal is to educate and continue to create tools that help simplify the sometimes onerous task of calculating a cryptocurrency’s cost basis.
He noted that when stock investors sell shares or transfer shares between brokers, those transactions come with a transfer statement, so the cost basis is transferred as well.
“This is not the crypto-asset world we live in today,” Unger said in an interview. “It may become easier for people who are buying and selling on one exchange and want to move to another exchange. But we’re not there yet, so there’s going to be a lot of confusion until we get there.” “
