It’s not the first time that a number of individuals have been notified by the IRS that they have underreported gains on crypto holdings. For a second year running, traders were in for a rude awakening – a sudden alert that taxable earnings had not been disclosed. The forms sent by the IRS include an amount owed to the state. After much digging, it has been concluded that these gains were never realized by traders. Or, that the form used (1099-K) by a number of exchanges happens to show all transactions as generating revenue. Which, for the most part, is woefully incorrect. Therefore, many traders make transactions that result in a net loss but the relevant form submitted to the IRS points to the opposite – a net gain. Much of the fault lies with the fact that the 1099-K will only report gross proceeds without taking the base price into consideration.
Coinbase has flagged this situation and taken the step of removing 1099-Ks from their platform. Instead, traders will receive a 1099-MISC form. This form only applies to customers who earn interest on lending. Customers that do not meet these criteria will not receive an IRS form at all. For those who happen to use the Coinbase platform but do not earn interest on lending and similar products, due diligence will need to be made personally. In this case, traders should most likely contact a tax specialist for further advice. It is important to note that the threshold for a 1099-MISC form is extremely low and it’s apparent that more individuals may actually receive such a form.
The mere confusion surrounding IRS forms and relevant earnings on crypto exchanges has led to an industry-wide debate. The move made by Coinbase will see them improve their compliance status while for the most part, customers should face less issues in this regard.