How to do Your Coinbase Crypto Taxes in the U.S.

If you trade crypto on Coinbase, you might have noticed Coinbase doesn't provide accurate tax information, making crypto tax reporting difficult. I’ve had numerous clients get audited because they submitted the wrong Coinbase tax information!

I'm going to breakdown the problems with some of these Coinbase reports.

As of 2023, Coinbase has three tax reports:

1. 1099-Misc
2. Tax Report (Form 8949)
3. Gain/loss report

Let's start with the 1099-MISC

Coinbase, like other financial institutions, has a responsibility to report certain activities to the IRS to ensure tax compliance. Coinbase sends a tax form called a 1099-MISC (Miscellaneous Income) to both you and the IRS. You'll be issued a 1099-MISC if your Coinbase transactions meet certain criteria, typically if they exceed $600 in value.

The IRS receives a copy of the 1099-MISC form from Coinbase.This is ONE of the MANY ways the IRS tracks your crypto! So, if you don't report the income listed on this form on your tax return, it can trigger an audit or result in penalties.

Here is the problem with this 1099-MISC:

It doesn't include your capital gains or losses. Instead, it focuses on specific types of income, including staking rewards, interest earned, and referral bonuses. These are categorized as miscellaneous income by the IRS. This is NOT ENOUGH information for a crypto tax return!

The IRS is trying to fix this issue. In the future, the IRS wants to roll out form 1099-DA that would include information about gains and losses making it a better tool for taxpayers.

Let’s look at the 8949.

Coinbase provides its users with an IRS Form 8949, detailing their trades for the year. Form 8949 is used to report sales and exchanges of capital assets to the IRS in the U.S. This is super helpful if Coinbase is the only exchange you use. It will provide all your trading information that can also be directly imported into tax software like TurboTax, making the filing process seamless for users.

There is one GIANT flaw with this form. Most crypto traders use multiple exchanges, not just Coinbase. Form 8949 can’t identify activity outside of Coinbase. Transfers of assets between exchanges (e.g., moving Bitcoin from Coinbase to Binance) might show up on the Coinbase 8949 as a 'sale,' but that doesn't capture the entire picture. On the receiving exchange, this might be seen as a 'purchase' or 'deposit.' This can lead to double-counting or misreporting of transactions.

Submitting an incomplete or inaccurate 8949 form can raise red flags with the IRS. I’ve had many clients simply report this 8949 and get audited!

Here is how to PROPERLY report your Coinbase activity:

The last report is the gain loss CSV. A "Gain Loss CSV" is essentially a Comma Separated Values (CSV) file that details all your gains and losses from crypto transactions. This file is essential because it's a comprehensive record of your trades, providing specifics such as the purchase price, selling price, dates, and the resulting gains or losses.

If you are trading on multiple exchanges, this is the form you WANT. By having a gain loss report, you can accurately calculate total taxable gains for the year.

To use the Gain Loss CSVs for tax returns, you need to start by downloading these files from each exchange you've traded on. Next, you should use specialized crypto tax software or spreadsheet tools to consolidate all the data from the different CSVs, ensuring a comprehensive view of all transactions. Bitcoin.tax, Cointracker, and Accointing are a few tax softwares you can use.

It's also essential for you to reconcile and ensure transfers between exchanges are accurately represented, avoiding any misrepresentation of taxable events. After aggregating the data, you can determine your net gains or losses for the year. Given the intricate nature of crypto taxes, it's always advisable to consult with a tax professional familiar with cryptocurrency for accurate reporting and potential tax-saving strategies.

Hopefully this information helps!