Cryptocurrency trading giant Coinbase (COIN) said new US tax reporting requirements are too onerous for many crypto holders and add unnecessary clutter to the country’s tax system.
While the idea is that taxable activity on cryptocurrencies should be reported in the same way as for stocks, for example, the rules require reporting transactions in stablecoins – whose value, by definition, does not change – and small amounts spent on network fees known as gas.
The Nasdaq-listed exchange is currently sending millions of U.S. crypto holders new 1099-DA forms designed to bring crypto in line with the rest of finance. While all of Coinbase’s customers will be affected to some extent, it’s the very large group of retail customers who face unnecessary administrative burden on what amounts to small transaction flows, said Lawrence Zlatkin, the company’s vice president of tax.
” Frankly, [small retail] The transactional flow is so small, I just don’t know why we’re spending effort as a country to achieve this,” Zlatkin said in an interview. “I just think it’s a disservice to people when you’re trading $50, say, you get a form like this and you have to report your wins or losses. That’s simply not the purpose of the tax system.”
For trading platforms, the new system involves sharing details of customers’ digital asset transactions with the IRS. Clients are copied using the form, so that they can voluntarily reconcile their gains and losses with the tax authorities.
As is often the case when trying to align crypto with traditional finance, however, there are challenges.
This year, Coinbase will only provide gross proceeds from digital asset sales to the IRS, not net worth or cost basis. As a result, it is up to the trader to add what is missing regarding their crypto acquisition costs and actual tax basis. (Coinbase will begin calculating cost basis on behalf of its customers starting in the next fiscal year.)
This will cause some degree of confusion, especially among people who have never owned assets such as stocks. And crypto brings its own level of complexity, given how holdings can be moved between platforms and exchanged between various coins and tokens.
There are other obvious over-reporting issues in the system that need to be addressed, Zlatkin said, such as the need to report holdings of stablecoins, whose value, by design, is fixed.
“People should pay taxes where they have income,” Zlatkin said. “Do you have any revenue on USDC? No, you don’t. So why do we report USDC transactions? And we report them on our exchange because there is no blanket exemption for USDC. That, in my opinion, clutters the system.”
Gas fees, small crypto transactions used to pay blockchain costs, only add to the reporting clutter, Zlatkin said.
“Gas fees can be 50 cents on the dollar. Do we have to disclose that? Is that a valuable use of resources to raise revenue? And I would say the answer is no,” he said. “We should focus on areas where there is real revenue to incentivize people to voluntarily comply. But not where there is no revenue, like in stablecoins or in tiny transactions that are mostly network fees.”
Coinbase’s goal is to educate and, in the future, create tools that make the sometimes onerous task of calculating cost basis on crypto easier, said Ian Unger, the exchange’s director of tax reporting information.
When an equity investor sells shares or transfers their shares between brokers, these transactions are accompanied by transfer statements, so the cost basis is transferred with it, he pointed out.
“This is not the world we live in today for crypto assets,” Unger said in an interview. “There could be a world where it 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 until we get there, there will be a lot of confusion.
