Cryptocurrency trading giant Coinbase ( COIN ) said new US tax reporting requirements are far too burdensome for many crypto holders and add unnecessary clutter to the country’s tax system.
While the idea is that taxable activity on crypto should be reported in the same way as with stocks, for example, the rules require reporting of transactions in stablecoins — whose value, by definition, does not change — and the small amounts spent on network fees known as gas.
The Nasdaq-listed exchange is currently sending millions of US crypto holders the new 1099-DA forms designed to bring crypto into line with the rest of the financial sector. While all of Coinbase’s customers will be affected to some degree, it is the very large group of retail customers that will be hit with an unnecessary administrative burden on what amounts to small transaction flows, said Lawrence Zlatkin, the company’s director of taxation.
“Honestly, [small retail] The transaction flow is so small, I just don’t know why we spend the effort as a country that is focused on them,” Zlatkin said in an interview. “I just think it does people a disservice when you trade for $50, let’s say you get a form like this and you have to report gains or losses. That’s just not what the tax system should be about.”
For trading platforms, the new system means sharing details of clients’ digital asset transactions with the IRS. Customers are copied using the form so they can voluntarily reconcile their gains and losses with the tax authority.
As is often the case when trying to align crypto with traditional finance, however, there are challenges.
This year, Coinbase will only give the IRS the gross proceeds from the sale of digital assets and not the net value or cost basis. As a result, the onus is on the trader to add what is missing regarding their crypto acquisition cost and actual tax basis. (Coinbase will begin calculating the cost basis on behalf of its customers from the next tax year.)
This will cause some confusion, especially among people who have never owned assets like stocks. And crypto brings its own level of complexity, given how holdings can be shunted between platforms and traded in and out of different coins and tokens.
There are other obvious over-reporting wrinkles in the system that need to be ironed out, Zlatkin said, such as the need to report stablecoin holdings whose value is fixed by design.
“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 USDC transactions? And we report them on our exchange since there is no general exemption for USDC. That, to me, messes up the system.”
Gas fees, the small crypto transactions used to pay blockchain costs, just add to the reporting mess, Zlatkin said.
“Gas fees can be 50 cents, a dime — do we have to disclose that? Is that a valuable use of resources to collect revenue? And I would argue that the answer is no,” he said. “We should focus on where there is real income to get people to voluntarily comply. But not where there is no income, such as in stablecoins or in tiny, tiny transactions that are mostly network fees.”
Coinbase’s goal is to educate and, going forward, create tools that help make the sometimes arduous task of calculating the cost basis of crypto easier, said Ian Unger, the exchange’s director of tax reporting.
When an equity investor sells shares or moves their shares between brokers, those transactions come with transfer statements, so the cost basis is transferred with it, he pointed out.
“That’s not the world we live in today for crypto assets,” 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 so until we get there, there’s going to be a lot of confusion.”
