Popular US-based cryptocurrency exchange Coinbase issued tax documents to many of its account holders over the past few weeks, stirring up confusion among many crypto investors. This confusion escalated to panic among some investors who saw unexpectedly large figures on the forms provided by the exchange.
If you bought or sold cryptocurrencies last year, you must report your activities to the IRS. Remember, the 1099-K you received from Coinbase last week was sent to the IRS as well. If you don’t address it in your tax returns this year, you’re all but guaranteed an audit.
Tax evasion will get you in big trouble, but smart tax planning is a good way to avoid excessive payments to the IRS. The skilled cryptocurrency accountants at Happy Tax can get you the tax advice and planning you need to minimize tax exposure on your virtual currency assets.
What is a 1099-K, and Why Did I Get One?
Form 1099-K is an informational form used to report credit card and third party network payments you’ve received this year. You should receive a Form 1099-K if you received payment from credit card transactions or gross payments from a third-party payment network. Payments through a third party network must be reported on a 1099-K if they are in excess of $20,000 over at least 200 transactions. The third-party payment settlement entity – in this case, Coinbase – is responsible for sending you a 1099-K if you meet these qualifications.
As required by the tax code, Coinbase issued 1099-K forms to all qualifying customers. You should have received one if you performed at least 200 trades that totaled $20,000 or more ($600 or more for residents of Vermont or Massachusetts) in value during the 2017 calendar year and your account is for business use. Coinbase also sent out 1099-K forms to anyone whose GDAX sale volume exceeded the $20,000 threshold.
The gross amount of the reportable payment on your 1099-K does not include any adjustments, and it does not represent any gains or losses you may need to report the IRS. Rather, it reports the gross proceeds from all transactions you’ve made on the network. The dollar amount of each transaction listed on the 1099-K is determined on the date of the transaction, but it isn’t the same as the cost basis you use to figure out your capital gains taxes.
I Didn’t Get a 1099-K – Do I Still Need to Report my Trading Activity to the IRS?
Yes. Coinbase issued 1099-K forms to business and GDAX account holders who performed at least 200 transactions totaling at least $20,000 in value. However, this is not the end of the story. You are required to report all cryptocurrency income – no matter how big or small – on your tax returns as capital gains. Capital gains rules apply to taxpayers who buy and sell cryptocurrencies for investment purposes, as well as people who spend virtual currencies on goods and services.
Although the Form 1099-K is only issued to certain investors, don’t let this fool you into thinking you don’t need to report cryptocurrency income. Every sale of cryptocurrencies is a taxable event that you must report to the IRS.
How Do I Report My Cryptocurrency Income to the IRS?
When you’re figuring out how to report your cryptocurrency gains on your 2017 income tax return, start by finding out your cost basis. Your basis is the cost you actually paid for a virtual currency when you purchased it, adjusted for any related costs.
The 1099-K you may have received does not establish your cost basis. Rather, it shows all of the transactions that passed through Coinbase in a given calendar year. You must report your cost basis to the IRS using a Form 8949.
Like other capital assets, your tax rate depends on how long you held a particular coin before you sold it, as well as the price you bought in and the price you sold out. So, the IRS requires you to report what cryptocurrency you bought, the price you paid for it, the value of the virtual or traditional currency you exchanged it for, costs related to the exchange, your gains or losses, and the date that it occurred. However, the asset is not actually taxed until you sell it. This is when you “realize” your gains or losses on the investment.
Many investors have used the helpful online tools available at Bitcoin.tax to generate the forms they need to accurately report their cryptocurrency gains to the IRS. You can use this tool to create a Form 8949 from account history data downloaded from your exchange. The IRS will look at your Form 8949 and Form 1099-K together to assess whether you are accurately reporting your cryptocurrency activity on your tax returns.
Your Form 1099-K gross receipts do not need to match up exactly with your Form 8949, but you will need to substantiate any differences between them. After all, the whole purpose of this exercise is to catch potential tax evaders. If you believe the 1099-K form you received from Coinbase is inaccurate, contact the exchange immediately. The form will need to be amended and re-submitted to the IRS if it has any errors, and this may impact your tax filing this year.
If you’ve received a 1099-K from Coinbase, be sure to work with a qualified tax professional to make sure that your return is accurate and complete. It’s a good idea for any cryptocurrency investor to work with an accountant or qualified tax expert when filing taxes this year. This advice should be heeded especially among investors who made lots of trades.
A good CPA can help you avoid tax liability by managing your assets in a smart way. However, your regular accountant probably isn’t up to speed on the evolving landscape of cryptocurrency tax policies. If you’ve invested in Bitcoin or other virtual currencies, contact the trained cryptocurrency accountants at Happy Tax to make sure you’re prepared for tax season.