Cryptocurrency has become a prominent source of earning returns for investors. This return can be either taxed as an income through federal taxation or as a capital gain on the profits realized after selling the assets. Therefore, there is no exemption prevalent in the tax assessment regarding cryptos. Any violation to fulfill these tax obligations will attract civil and criminal consequences, i.e., a fine, imprisonment, or both.
Investors are required to report these cryptocurrency transactions to the tax authorities promptly. This information is shared on their behalf by the crypto exchanges upon which the assets are actively traded. Almost all of the exchanges are known to share trading details with the Internal Revenue Service (IRS).
How does Coinbase operate?
Coinbase, which happens to be the biggest cryptocurrency exchange currently operational in the United States of America, is known for filing these transactions even before individual tax returns are filed. It reports directly to the IRS on a 1099-MISC Form and submits a copy of the form to the investor.
Coinbase prepares two copies of Form 1099-MISC for every crypto trader who happens to earn more than USD 600 in the preceding financial year. One of these copies is dispatched to the IRS, while the other goes to the taxpayer. Even when the staking rewards are less than USD 600, Coinbase reports the amount reflected in the crypto account on Form 1099 MISC.
What is considered income for preparing Form 1099 MISC?
This limit of USD 600 is exhausted by a certain category of transactions. This ‘other income’ is inclusive of the following sources:
- Rewards yielding 7% annual return on holdings such as Ethereum, Cosmos, Tezos, Dai, etc.
- Payments are received in crypto tokens to exchange goods and services on platforms like Coinbase Commerce.
- Incentives earned by Coinbase users for undertaking different transactions.
- Sweepstakes won by the investor in different competitions and prize programs.
- Assets are earned on a separate hard-fork profile operated on Blockchain.
What is the nature of Form 1099 MISC?
All forms of this type are used to report income earned by a taxpayer from sources other than the employer. They refer to the miscellaneous income sources, including the gains and losses from the crypto assets.
Eligibility for Receiving Form 1099 MISC from Coinbase
Coinbase offers Form 1099 MISC to eligible investors. The criteria for eligibility are defined by the following requirements:
- You have an account on Coinbase and execute crypto transactions via this platform.
- You are a citizen of the United States
- Your tax returns are filed in the United States
- You earned USD 600 or more in the previous financial year as rewards and fees on Coinbase and Coinbase Pro.
This means that the person resident of the country and not paying tax or foreigners earning gains from Coinbase would not receive Form 1099-MISC. These entities would have to personally report the crypto-based transactions to the IRS at the assigned time.
Coinbase reports to the IRS at the end of the financial year, i.e., on 31st December. All the formalities are completed before the deadline, the 15th day of April.
What are the requirements for individual reporting?
Coinbase generates official reports for reporting Form 1099 MISC. These reports are the statements prepared by Coinbase to summarise the taxpayer’s transactions in a given financial year and calculate the cumulative earnings on crypto-assets. Taxpayers can refer to these reports and statements for filing their tax returns. These sources include:
- Gain/Loss Report
It concludes every round of transaction and settlement executed on Coinbase. The gains and losses generated from every purchase, sale, and exchange of assets are taken into accord by Coinbase.
- Raw Transaction Report
This report provides the cost basis for every transaction. It determines the long-term capitalization and trading potential of every exchange of crypto assets.
- Contents of the reports
Coinbase provides tax forms; however, these forms only describe the income and the windfall gains from an investment in crypto assets. In addition, the reporting of the transactions is limited to the ones carried through Coinbase. Therefore, if an investor trades on multiple crypto-based platforms, then Form 1099 would not be a conclusive submission for all the transactions. Additional forms would be required to be filed in such a situation.
How does Coinbase assist the investor in filing tax returns?
Coinbase is a dynamic trading platform. It settles around 85% of the trading volume in crypto assets for any investor. In addition to providing the tax forms, it also helps to calculate the taxes. This calculation is useful for filing tax returns at the instance of the investor.
Koinly is the tax calculator for Coinbase. It helps to calculate the right amount by saving your time and money. Kindly undertakes the following tasks on behalf of the investor:
- It determines all the gains from the different forms of trade in crypto assets. These include exchange, trade, swap, stakes, and rewards.
- Coinbase helps to differentiate between the trades that are taxable and that are not.
- It helps to calculate the fair valuation of every gain according to the current foreign exchange rate.
This information helps in the accurate assessment of the tax. Individuals can use this information for filing other tax-related forms that have to be submitted along with Form 1099.
What is a B-Notice?
Investors may receive a B-Notice from the IRS. This happens in case of discrepancies in the filing of tax identification numbers or the legal name of the investor by Coinbase. The investors are required to contact Coinbase Support to resolve the issue.
Coinbase has diversified its roles over time. It no longer operates merely as an exchange to settle the trades. It goes beyond that and offers tax assistance to investors. This helps to ensure transparency in the reporting of crypto-based transactions and reduces the chances of tax evasion. This is an important regulatory compliance and complies with federal law. The volume of reporting has surged in the recent past and is expected to rise in the future.