Coinbase describes recent U.S. tax-reporting regulations for cryptocurrency as disorganized and unclear.

Coinbase’s tax specialists have cautioned that the IRS’s 1099-DA tax form for reporting digital asset profits carries a risk of excessive reporting.

Coinbase app opening screen on mobile phone (appshunter.io/Unsplash/Modified by CoinDesk)

Key points:

• During the initial year of implementation, exchanges will only report gross crypto transaction profits, necessitating customers to determine their cost basis independently.
• A significant number of unaware retail customers will be required to declare gains and losses on minor transactions, complicating the revenue system.
• Coinbase indicated that the IRS is unnecessarily including dollar-pegged stablecoins like USDC in its gross reporting.

Coinbase (COIN), a leading cryptocurrency trading platform, stated that the new tax reporting regulations in the U.S. impose excessive burdens on many crypto holders, contributing to unwarranted complexity in the nation’s tax system.

The intention is to ensure that taxable activities related to crypto are reported similarly to those involving equities, yet the regulations mandate the reporting of transactions in stablecoins—whose value remains constant—and the minor amounts spent on network fees referred to as gas.

The Nasdaq-listed exchange is currently dispatching millions of new 1099-DA forms to American crypto holders, intended to align crypto with traditional financial practices. While all customers of Coinbase will experience some level of impact, it is the substantial body of retail clients that faces an unnecessary administrative load concerning small transaction flows, according to Lawrence Zlatkin, the company’s VP of tax.

“Honestly, [small retail] transactional flow is so minimal, I simply don’t understand why we are focusing national efforts on them,” Zlatkin stated in an interview. “I believe it is a disservice to individuals when you trade a small amount, say, 50 dollars, and receive a form like this, necessitating the reporting of gains or losses. That is not the purpose of the tax system.”

For trading platforms, the new regulations require them to share customer digital asset transaction details with the IRS. Customers receive copies of the form so they can voluntarily reconcile their gains and losses with the tax authority.

However, as is frequently the case when attempting to harmonize crypto with conventional finance, challenges arise.

This year, Coinbase will only provide the IRS with the gross proceeds from digital asset sales, omitting the net value or cost basis. Consequently, the responsibility falls on the trader to supply any missing information regarding their crypto acquisition costs and actual tax basis. (Coinbase plans to begin calculating cost basis for its customers starting next tax year.)

This may lead to some confusion, especially among individuals who have never owned traditional assets like stocks. Additionally, crypto introduces its own set of complexities, as holdings can be transferred between platforms and exchanged for various coins and tokens.

Zlatkin noted that there are additional evident over-reporting issues in the system that require resolution, such as the obligation to report stablecoin holdings, which are designed to have a fixed value.

“Individuals should pay taxes where they earn income,” Zlatkin stated. “Is there income on USDC? No, there isn’t. So why are we reporting USDC transactions? We are recording those on our exchange since there is no general exemption for USDC. That, in my view, complicates the system.”

Gas fees, which are small transactions used to cover blockchain expenses, further contribute to the reporting complexity, Zlatkin added.

“Gas fees could be as little as 50 cents or a dollar—must we disclose that? Is that a productive use of resources to collect revenue? I would argue that the answer is no,” he stated. “We should concentrate on areas where there is genuine income to encourage voluntary compliance, not on transactions with no income, such as stablecoins or negligible transactions that mainly consist of network fees.”

Coinbase aims to educate users and, in the future, develop tools to facilitate the often challenging process of calculating cost basis for crypto, as stated by Ian Unger, the exchange’s director of tax reporting information.

When an equities investor liquidates stocks or transfers shares between brokers, these transactions come with transfer statements, allowing the cost basis to accompany them, he noted.

“That is not the current reality for crypto assets,” Unger remarked in an interview. “There could be a future where some of this becomes simpler for those who buy and sell on one exchange and wish to transfer to another. However, we are not there yet, and until then, confusion will persist.”