A Coinbase Tax Primer: How to Report IRS Coinbase Transactions

A Coinbase Tax Primer: How to Report IRS Coinbase Transactions

A Coinbase Tax Primer

When it comes to cryptocurrency and tax reporting, many investors will have executed transactions through Coinbase. As a result, it is not uncommon for crypto users to have crypto-related income as a result of engaging with Coinbase. Depending on the amount of income and the type of income, taxpayers may receive a 1099-K from Coinbase — but even if the taxpayer does not receive a 1099-K, they are still required to report the income. In other words, simply not receiving a 1099-K does not exempt the taxpayer from having to file taxes to report their Coinbase transactions. Let’s walk through the basics of some of the more common types of Coinbase transactions and how they may impact your tax filing and requirements.

1099-K and What if You Do Not Receive it?

 The 1099-K is a report that taxpayers may receive from their financial institution detailing various transactions they had during the tax year when the gross amount of payment they received was more than $600. But, even when the Taxpayer does not receive the 1099-K, they are still required to report any income they earned through Coinbase transactions.

Less Than $600 Coinbase Transactions, Still Report?

Yes, even if you receive less than $600 in therefore you do not receive a 1099-K from Coinbase, you are still required to report your Coinbase transactions that are considered income on your U.S. tax return (if you are otherwise required to file a tax return).

Coinbase Income

There are various different types of income that may be taxable. Noting, a distinction is made between income and capital gains in the sense that income is taxed at your ordinary income tax rate, whereas capital gains are taxed as either long-term capital gains (LTCG) or short-term capital gains (STCG) — the latter which is taxed at your ordinary income tax rates. The tax rate for LTCG depends on whether the Taxpayer is in the highest tax bracket or the lowest tax bracket, and the rates vary between 0%, 15%, or 20%.

Let’s look at some of the common types of income:

Mining and Staking Rewards

When a person generates received from Coinbase, those rewards are taxable and typically taxed as other income on a tax return. Typically, the income is based on the FMV on the date it is received by the Taxpayer.

Forks and Airdrops

In addition, if a person receives certain air drops or hard forks that result in additional coins, that income is also taxable. (Since Soft Forks do not result in additional coins, there is no income implication)

Schedule C or Other Income

If a person operates their Crypto as a business, then they may have a schedule C filing requirement if they are self-employed or operating independently — and the income generated via Coinbase may be deemed to be self-employment income. Taxpayers who operate their transactions as a business finally Schedule C and may also be required to pay certain employment taxes self-employed taxpayers are required to do — even if it involves crypto as the ‘currency.’ But, taxpayers in this type of situation can also take certain deductions which can reduce or eliminate any income depending on the amount of income versus the amount of deductions and expenses.

Capital Gains

The most common type of income generated from cryptocurrency is capital gains, let’s take a look at how capital gains work.

Buying Crypto

When a person purchases cryptocurrency, that is not a taxable transaction because all they did was buy the cryptocurrency. In other words, buying cryptocurrency is not taxable on your income tax return, but it is important to know what you paid for it (aka ‘basis’) so that you can establish the basis for when you sell it.

Selling Crypto

When a Taxpayer sells crypto, it is taxable. For example, Aaron purchases cryptocurrency for $100,000 and sells that same cryptocurrency for $120,000. As a result, Aaron has $20,000 of capital gain, and depending on whether he held that capital gain for more than a year or not will determine whether it is a long-term capital gain or short-term capital gain. 

Exchanging Crypto

When a person exchanges one type of cryptocurrency for another type of cryptocurrency, typically this type of transaction is taxable so that any gain received from an increase in the fair market value of the crypto that they received would result in capital gains tax

What About Wash Sales?

A wash sale refers to the selling and then buying securities that generate a loss as part of the first transaction so that when it is repurchased, there is a limit to the losses that can be taken if certain repurchases occur within 30 days of the sale. When a person has received their annual financial report such as a 1099 from Vanguard or Schwab, it will identify various war cells or losses that cannot be claimed. Currently, this rule does not apply to cryptocurrency but chances are it will so something to keep in mind.

Is Gifting Cryptocurrency Taxable

 If a person gives cryptocurrency to another person, that transaction is not taxable. Depending on the value of the gift and if it exceeds the exclusion amount then the person may have to report it on the annual 709 form. Likewise, if a US person receives a gift of cryptocurrency from a foreign non-resident alien, depending on the value of the gift of cryptocurrency or other securities or assets and whether it is from an individual, entity, or trust, will determine if there is a form 3520 reporting requirement — but this will not be identified on the Coinbase 1099 K.

What About Foreign-Held Crypto?

At Golding & Golding, we specialize in international tax and offshore compliance. Over the past several years, a common question for U.S. taxpayers across the globe is whether or not a foreign-based virtual currency such as Bitcoin that is held overseas is reportable for FBAR (Foreign Bank and Financial Account Reporting) or FATCA (Foreign Account Tax Compliance Act) purposes. To date, the IRS has not yet provided a hard and fast rule as to foreign crypto reporting, but there is an updated FBAR publication and proposed regulations pending. Let’s take a brief look at how foreign virtual currency/virtual currency should be reported for FBAR and FATCA purposes.

FinCEN 114 for Virtual Currency

When virtual currency is being held in a foreign financial account or something similar and there is no other currency (such as euros) held within the account, then the account is generally not reportable. It is important to note, that if there is any currency held within the account outside of virtual currency, then the account may become reportable.

As provided by the IRS in pub 5569:

      • “Example:

        • A foreign account holding virtual currency is not reportable on the FBAR (unless it’s a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). These funds aren’t reportable at this time, per FBAR regulations issued by FinCEN February 24, 2011, but FinCEN Notice 2020-2 indicates FinCEN’s intention to propose amending the regulations to include virtual currency as a type of reportable account under 31 CFR 1010.350.”

Hybrid Foreign Accounts and FBAR

When an account is only virtual currency, then it does not have to be reported for FBAR at this time — but the same rule does not apply if it is a hybrid account in which it holds reportable assets in addition to virtual currency. For example, if a taxpayer exchanges their foreign virtual currency for pounds or euros within that account, then it may be considered a hybrid account that requires reporting.

FATCA (Form 8938)

FATCA is different than FBAR and can include additional foreign assets that are not reportable for FBAR. For example, a foreign asset that would be reported for FATCA purposes on Form 8938 is an overseas stock certificate — but this same stock certificate would not usually be subject to FBAR reporting unless it was held within an account. The question then becomes whether foreign virtual currency/virtual currency is considered an asset that is reportable on Form 8938. Since virtual currency is considered an asset — and there is no absolute exclusion from having to report virtual currency for FATCA purposes — chances are virtual currency would be a reportable asset on Form 8938.

PFIC (Form 8621)

PFIC refers to Passive Foreign Investment Companies. Many US taxpayers may find themselves subject to the PFIC rules simply because they own foreign mutual funds or other pooled funds. In the past few years, multiple crypto investment funds have been launched both in the US and abroad. And, if a crypto fund qualifies as a PFIC, then Form 8621 would be required (unless an exception, exclusion or limitation applies).

Notice 2020-2

Notice 2020-2 reflects the fact that FinCEN intends to amend regulations requiring virtual currency to be identified as a reportable account for FBAR purposes – and chances the IRS will extend the reporting rule to FATCA/Form 8938 as well.

      • Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.