Does the IRS Have Your Coinbase Data?

Crypto investors are often unclear about their duties when it comes to filing taxes. The following guide examines the rules that Coinbase users should be aware of when it comes to tax season.

What Information Did Coinbase Collect?

Though all crypto investors must report their capital gains, Coinbase has become well-known for working closely with the U.S. Internal Revenue Service (IRS). 

Coinbase fought a summons in late 2016 when the IRS asked for data relating to over 500,000 users. This data includes:

• Name
• Date of birth
• Residential address
• Taxpayer ID number
• Account statements and invoices
• Transaction logs, including balance and wallet addresses

Coinbase eventually provided data on 13,000 users instead of the 500,000 initially requested. The exchange informed each of these 13,000 users in February 2018, two years after the summons, that their data had been sent to the IRS.

Two Kinds of Coinbase Trading Data

There are two ways the IRS may have users’ trading data.

If a trader handled $20,000 or more worth of cryptocurrency in 200 or more transactions on Coinbase between 2013 and 2015, the IRS likely received their information. This includes buying, selling, sending, or receiving crypto through the exchange.

This also includes trading in smaller sums that amounted to $20,000 or more over the course of those three years.

However, if a trader has filled out a Form 1099-K for Coinbase, it’s likely that the IRS also has their information.

Since the 2018 tax year, Coinbase has sent Form 1099-Ks to traders with over 200 orders in a tax year. In some states, these forms were sent to traders with orders equal to $20,000 or more. 

However, other states have a much lower threshold, with the Washington D.C. limit at just $600.

Form 1099-K

A Form 1099-K is a tax form aimed at helping people to report self-income to the IRS. 

Crypto exchanges sometimes send these forms out to cover their liabilities from a regulatory standpoint. However, unfortunately, these forms do not report net gains and losses as a crypto trader, leaving traders with a lot of legwork for tax reporting.

The Coinbase tax resource page recently stated that Coinbase would no longer be sending out Form 1099-Ks.

Form 1099-MISC

Traders may also receive a Form 1099-MISC from Coinbase.

If a Coinbase user received $600 or more in cryptocurrency from Coinbase Earn, Staking, or USDC rewards in 2019, they would receive this form which details the amount of income they’ve received from Coinbase. 

Like a Form 1099-K, a copy of the Form 1099-MISC will be sent to the IRS.

Getting Crypto Taxes Right

By law, traders are required to pay taxes on any income earned as a U.S. citizen.

The IRS began sending out warning letters to traders from 2019 onwards, including letter 6173, 6174, and 6174-A notices and the more serious CP2000 notice. The IRS likely received the information on who to send these letters to from Coinbase.

This means the IRS is willing and able to investigate whether crypto traders owe money on taxes and audit and pursue those that haven’t paid.

How to Pay Crypto Taxes

Here are a few ground rules for tax and crypto in the U.S.

• The IRS states that crypto is property, not a currency.
• If traders spent or sold crypto and the realized value (sale price) is higher than what they paid for it, they owe taxes on that profit.
• There is no longer a personal deduction for theft losses, so lost/stolen crypto is still taxable.
• You can write off capital losses of up to $3,000 on crypto trades.
• The IRS may miscalculate your liability as higher than it really is.

That last point is critical. 

In some cases, the IRS has been viewing sales of crypto and failing to account for the cost that the crypto was bought for (i.e., taxing someone for $30,000 profit for selling 1 BTC without realizing that the BTC was bought for $20,000, leaving only $10,000 in taxable profits).

Record keeping crucial in this case. When buying assets like stocks and bonds, record-keeping is handled in part by the broker. Crypto users are left to fend for themselves, however, so keeping thorough records can help prevent any miscalculations from the IRS when it comes time to pay taxes.

This article does not constitute financial advice but acts as a resource to learn more about crypto taxes. 

For professional advice, readers are advised to contact a professional tax attorney, financial advisor, or a crypto tax specialist.