Many make the mistake of thinking they don’t need to report crypto transactions on their tax returns because they think the IRS can’t find out about it. That is not the case in many circumstances!
The IRS and Congress have both made it abundantly clear that cracking down on unreported crypto gains is a major priority. This was a part of the recent plan to hire more than 80,000 new IRS agents over the next few years.
The tax laws around crypto transactions are ever-changing and it is important that you work with a tax advisor who specializes in crypto tax issues.
What Must be Reported for Crypto Activities?
You are required to report any income that relates to activities involving cryptocurrencies. This includes:
- Capital gains from the sale of crypto
- Crypto received in exchange for providing services
- Crypto received as payment in exchange for goods
- Crypto earned from mining or staking activities
- Crypto received from airdrops or hard forks
- Crypto received as a salary from an employer or payments as an independent contractor
- Any other receipt of crypto from an activity involving virtual currency
You are also required to report income received in connection with owning a company or DAO (Decentralized Autonomous Organization) when the ownership is through holding tokens as opposed to stocks.
What Happens If You Don’t Report Income from Crypto Activities?
Electing not to report crypto income on your tax return is a really bad idea. You can be subject to stiff penalties and even criminal penalties in some cases, including possible jail time. The IRS views the failure to report crypto transactions as tax fraud in most cases.
As of a few years ago, every individual is required to check a box on their tax return indicating whether they had any crypto transactions during the year. This is reported at the top of Form 1040: U.S. Individual Income Tax Return.
You must check “yes” or “no” to the question “[a]t any time during (the relevant tax year), did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency.” You cannot leave this question blank. You do not need to check “yes” here if all you did was purchase and own crypto during the year.
What is Coinbase?
Coinbase is one of the largest cryptocurrency exchange platforms. Users can buy and sell crypto through Coinbase. It is also a public company trading under the ticker symbol COIN.
Although Coinbase has many competitors, it is probably the most recognized exchange in the U.S. Other large exchanges you may have heard of before include:
Does Coinbase Report to the IRS Information About Its Users?
Yes – Coinbase is required to report certain transactions to the IRS every year.
However, Coinbase does not currently report all information relating to your crypto activities. For example, Coinbase does not provide information to the IRS regarding capital gains and losses when you sell crypto.
As a U.S.-based financial company, Coinbase is subject to Know Your Client or Know your Customer (KYC) rules. These KYC rules require Coinbase to collect certain data from users before they may sign up for an account and start trading crypto on Coinbase.
Certain details collected through the KYC process (such as your name, address, and social security number) are then used to report some of your transactions to the IRS. The KYC requirements will vary depending on which country the exchange is based in and where the user resides.
What Does Coinbase Report to the IRS?
At this time, Coinbase is only required to file Forms 1099-MISC with the IRS for any users who receive more than $600 in crypto during the year. Form 1099-MISC only applies to crypto received from staking or any rewards received. The form does not include other crypto transactions such as capital gains from crypto sales.
If you own shares in public companies through a brokerage account, such as Charles Schwab, you will receive a Form 1099-B each year listing your capital gains and losses for the year. Form 1099-B must be filed by all U.S.-based brokers or barter exchanges.
However, Coinbase is not currently required to file Form 1099-B. This means that Coinbase does not file any forms reporting your capital gains or losses to the IRS, at least for now.
Remember that even though you don’t receive a Form 1099-B from Coinbase for your capital gains from crypto trades, you are still required to report all crypto transactions on your tax return. You can access these details by downloading a transaction history report in the reports tab on Coinbase. From this report, you should be able to calculate your gains and losses for the year.
Coinbase Crypto Tax Forms for 2022
If you stake crypto or earn any crypto rewards, Coinbase will provide you with a Form 1099-MISC if you earned more than $600 in crypto for the year. The amount of income listed on the Form 1099-MISC should be reported on your tax return for that year.
You should receive your Form 1099-MISC in January or February following the end of the tax year.
Can the IRS Get Info that Is Not Reported by Coinbase?
Yes – the IRS has the power to get information about users on Coinbase even if that data is not required to be reported to the IRS.
One way this can be done is through what is called a John Doe summons. A John Doe summons allows the government to obtain the names and certain information relating to all taxpayers within a certain group.
The Department of Justice (DOJ) has already started using John Doe summonses to get details about unreported crypto transactions. A John Doe summons was sent to Coinbase seeking details on any customer accounts that had crypto transactions of more than $20,000 in Bitcoin during 2013 to 2015.
The government has a number of different tools they can use to find unreported crypto transactions. The John Doe summons is just one of many ways the IRS will start to crack down on these types of activities in the future. If you have failed to report any past crypto transactions, chances are good that you might receive a letter from Uncle Sam soon.
Do Decentralized Exchanges Report to the IRS?
Coinbase is a centralized exchange (CEX) which means that Coinbase monitors and secures assets on behalf of its users. Because Coinbase is a centralized exchange, it has access to background data and details regarding transactions of its customers.
On the other hand, decentralized exchanges (DEXs) are peer-to-peer platforms meaning that trades happen directly between users without a central intermediary or custodian. Examples of popular decentralized exchanges are Uniswap and 1inch.
Because there is no central intermediary facilitating trades, there is no custodian maintaining data on behalf of users of decentralized exchanges. Such data would not be reported to the IRS because there is no one person or company that has access to or could provide the information.
Given how decentralized exchanges work as opposed to centralized exchanges, some believe that the IRS could never gain the necessary information to find the parties to a trade on a decentralized exchange. Can the government crack down on unreported transactions happening on decentralized exchanges? That still remains to be seen.
There are also some centralized exchanges that are not under the jurisdiction of the IRS and therefore do not report any details to the IRS about its users. However, most of these exchanges do not allow U.S. residents to access the platform.