Cryptocurrency trading giant Coinbase (COIN) said new US tax filing requirements are too burdensome for many cryptocurrency holders and add unnecessary clutter to the country’s tax system.
While the idea is that taxable activity in cryptocurrencies should be reported in the same way as stocks, for example, the rules require reporting transactions in stablecoins (whose value, by definition, does not change) and small amounts spent on network fees known as gas.
The Nasdaq-listed exchange is currently sending millions of American cryptocurrency holders new 1099-DA forms designed to bring cryptocurrencies in line with the rest of finance. While all Coinbase customers will be affected to some extent, it is the large group of retail customers that are affected by unnecessary administrative burden on what amounts to small transaction flows, said Lawrence Zlatkin, the company’s vice president of tax.
“Frankly, [small retail] “The flow of transactions is so small, I just don’t know why we are devoting efforts as a country focused on them,” Zlatkin said in an interview. “I just think it’s a disservice to people when you’re trading $50, say, that you get a form like this and you have to report profits or losses. That’s just not what the tax system is supposed to be about.”
For trading platforms, the new system means sharing details of clients’ digital asset transactions with the IRS. Clients receive a copy via the form, so they can voluntarily reconcile their profits and losses with the tax authority.
However, as is often the case when trying to align cryptocurrencies with traditional finance, there are challenges.
This year, Coinbase will provide the IRS only the gross proceeds from digital asset sales, and not the net value or cost. As a result, the onus is on the trader to add what is missing regarding their cryptocurrency acquisition costs and their actual tax base. (Coinbase will begin calculating cost basis on behalf of its clients starting in the next fiscal year.)
This will cause a degree of confusion, especially among people who have never owned assets such as shares. And cryptocurrencies carry their own level of complexity, as holdings can drift between platforms and be traded in and out of various coins and tokens.
There are other obvious wrinkles in the system about overreporting that need to be fixed, Zlatkin said, such as the need to report holdings of stablecoins, whose value, by design, is fixed.
“People should pay taxes where they have income,” Zlatkin said. “Do you have income in USDC? No, you don’t. So why do we report transactions in USDC? And we report them on our exchange, since there is no blanket exemption for USDC. That, to me, overwhelms the system.”
Gas fees, the small crypto transactions used to pay blockchain costs, simply add to the reporting mess, Zlatkin said.
“Gas rates could be 50 cents or a dollar. Do we have to disclose that? Is that a valuable use of resources to raise revenue? And I would say the answer is no,” he said. “We should focus on where there is real revenue to get people to comply voluntarily. But not where there is no revenue, like on stablecoins or on tiny transactions that are mostly network fees.”
Coinbase’s goal is to educate and, in the future, create tools that help ease the sometimes onerous task of calculating cost basis in cryptocurrencies, said Ian Unger, the exchange’s chief information officer for tax reporting.
When a stock investor sells stock or moves his stock between brokers, those transactions come with transfer statements, so the cost basis is transferred with them, he noted.
“That’s not the world we live in today for cryptoassets,” Unger said in an interview. “There could be a world where some of this becomes easier for those who buy and sell on one exchange and want to move to another exchange. But we’re not there yet, and until we get there, there will be a lot of confusion.”
