Cryptocurrency trading giant Coinbase (COIN) said the new U.S. tax reporting requirements are too onerous for many crypto holders and will cause unnecessary confusion in the country’s tax system.
For example, while there is a belief that taxable activity in cryptocurrencies should be reported in the same way as stocks, the rules require reporting transactions in stablecoins (which, by definition, do not change in value) and smaller transactions that are spent on network fees, known as gas.
The Nasdaq-listed exchange is now sending millions of US crypto holders a new 1099-DA form designed to harmonize cryptocurrencies with other finances. All of Coinbase’s customers will be affected to some degree, but it’s a very large group of retail customers who are being hit with an unnecessary administrative burden that equates to small transaction flows, said Lawrence Zlatkin, the company’s vice president of tax.
“Frankly, the flow of (small retail) trade is very small. I don’t see why as a country we would focus our efforts on these,” Zlatkin said in an interview. “I think it just puts people at a disadvantage when they’re making a $50 transaction and then having to receive a document like this and report a profit or loss. That’s not the purpose of the tax system.”
For trading platforms, the new system means sharing details of customers’ digital asset transactions with the IRS. Customers are copied using the form so they can voluntarily reconcile their profits and losses with the tax authorities.
However, as is often the case when trying to integrate cryptocurrencies with traditional finance, there are challenges.
This year, Coinbase will only provide the IRS with the gross proceeds of digital asset sales, not the net value or cost basis. As a result, the onus is on the trader to add what is missing in terms of the acquisition cost and actual tax base of the virtual currency. (Coinbase will begin calculating the cost basis on behalf of its customers starting next tax year.)
This will cause some confusion, especially among people who have never owned assets such as stocks. And cryptocurrencies bring a unique level of complexity when considering how holdings are distributed across platforms and exchanged between different coins and tokens.
Zlatkin said there are other obvious over-reporting wrinkles in the system that need to be ironed out. For example, the need to report holdings in stablecoins whose value is fixed by design.
“People should pay taxes where they earn,” Zlatkin said. “Do you have any income? $USDC?No, it’s not. So why report it? $USDC transaction? And since there is no blanket exemption, we report them on the exchange. $USDC. To me it clutters the system. ”
Gas fees, which are small cryptocurrency transactions used to pay for blockchain costs, only add to the complexity of reporting, Zlatkin said.
“Gas prices may be $1.50, but do we need to disclose that? Is that a use of valuable resources to collect revenue? And I would definitely say the answer is no,” he said. “To get people to comply voluntarily, we should focus on where there is real revenue, but not where there is no revenue, such as stablecoins or small transactions that are mostly network fees.”
Coinbase’s goal is to educate and create tools that make the sometimes tedious task of calculating a cryptocurrency’s cost basis easier, said Ian Unger, the exchange’s director of tax reporting information.
He pointed out that when equity investors sell stocks or move stocks between brokerages, those transactions are accompanied by a transfer statement, so the cost basis is transferred along with it.
“This is not the world we live in today when it comes to crypto assets,” Unger said in an interview. But we are not there yet, and there will be a lot of confusion until we get there. ”
