Did you receive a Form 1099-K from Coinbase? If this is your first time filing your taxes after you started trading cryptocurrency, you might not know what to do with the form. Even when you know what the form is, this isn’t an easy area of tax law to figure out on your own. Here’s some information to help you get started and know what to ask your CPA.
What Is a 1099-K?
A Form 1099-K is an IRS form that companies like Coinbase use to report certain financial transactions. It’s similar to a W-2 from an employer or a 1099-INT for bank interest, except it reports that you received money, not necessarily that that money is income. The point of a 1099-K is to tell the IRS to look to see if people who receive a lot of money are reporting the related income on their taxes.
When Does Coinbase Send a 1099-K?
Coinbase only sends a 1099-K if you have a Pro, Prime, or Merchant account and meet transaction thresholds. If you have a basic account, you won’t get a 1099-K no matter how much you trade.
The threshold for receiving a 1099-K is typically if you had at least 200 transactions totaling to $20,000 or more. You need to be over both numbers, not just one.
In addition to the standard threshold, you will receive a 1099-K if you live in one of these states, have any number of transactions, and have gross proceeds totaling to the threshold for your state or higher.
- Arkansas: $2,500
- District of Columbia: $600
- Massachusetts: $600
- Mississippi: $600
- Missouri: $1,200
- New Jersey: $1,000
- Vermont: $600
Does This Mean I Have to Pay Taxes on Cryptocurrency?
The reason that you’re getting a 1099-K is that you could have to pay taxes on cryptocurrency. Getting a 1099-K doesn’t mean that all or even part of the amount on the form is taxable. Similarly, you could have to pay taxes on cryptocurrency even if you don’t get a 1099-K.
What Cryptocurrency Transactions Are Taxable?
Cryptocurrency is taxed as if you are selling or receiving property. These are some common taxable transactions.
- Mining cryptocurrency. The cryptocurrency you receive from mining is payment for the service of offering your computer’s processing power. Related expenses may be deductible from this income.
- Selling cryptocurrency. When you sell cryptocurrency, you pay tax on any gain over what you bought it for.
- Trading for a different type of cryptocurrency. Trading one type of cryptocurrency for another, even when you never receive cash, is the same as selling one type and buying the other. Note that some CPAs have previously suggested that this would not be taxable under the like-kind exchange rule. The Tax Cuts and Jobs Act of 2018 limited the like-kind exchange rule to real property (for example, a house or other real estate), so it doesn’t apply to cryptocurrency swaps.
- Paying for goods or services. This would be considered a sale of the cryptocurrency — typically equal in value to the cash fair market value of the good or service received.
- Being paid in cryptocurrency. If you receive payment in cryptocurrency for your goods, services, or employment, it’s the same as if you were paid in cash.
Note that in many of these cases, your taxes may not be equal to the full amount of the transaction (more on that below).
What Cryptocurrency Transactions Aren’t Taxable?
There are a few situations where you wouldn’t need to pay taxes on cryptocurrency transactions. The most common situations include the following.
- Buying and holding. Buying cryptocurrency doesn’t create a taxable event on its own. A buy would only be taxable if you got the cash from something that is taxable. You also don’t pay taxes while you’re holding cryptocurrency. If the cryptocurrency goes up, the increase is only taxable upon sale or disposition.
- Charitable donations. If you donate cryptocurrency to a qualified charity or non-profit organization, you may be exempt from taxes on any untaxed gains. To do so, you need to carefully follow the IRS rules for how to complete the donation including not selling for cash before you donate.
- Transfers to yourself. If you transfer cryptocurrency between wallets or your own accounts, this is not a taxable event. Note that you must ensure that you transfer the actual cryptocurrency rather than selling it and rebuying it — even at the same price.
Keep in mind that you may also qualify for less common exceptions to taxation and that mistakes could mean you wouldn’t qualify for the above exceptions.
How Do You Determine Your Taxes for a Cryptocurrency Sale?
Figuring out your taxes takes a few steps, but it boils down to paying tax on the difference between what you sold it for and what you bought it for. These are the key concepts you need to know.
Basis is what you bought it for. This is the cash price if you paid cash. If you traded goods and services for your cryptocurrency, your basis is the cash fair market value of those goods and services at the time of the trade.
Selling price is the concept as basis, except it’s at the time of the sale instead of the time of the purchase.
If you have multiple purchases or sales, you need to identify which cryptocurrency you’re buying and selling. For a simple example, let’s say you bought one coin at $1, then another coin at $2, and then a third coin at $3 and are now selling one coin at $2. Did you gain $1, lose $1, or make nothing?
- Under the first-in, first-out (FIFO) method, you say you sold the first coin you bought. That’s the $1 coin, so your gain is $1 ($2 – $1).
- Under the last-in, first-out (LIFO) method, you say you sold the last coin you bought. That’s the $3 coin, so you have a $1 loss.
- Under the average-cost method, you take the average cost of all of your purchases. In this example, the average is $2, so you have no gain or loss.
- Under the specific-identification method, you can pick any of your three coins to sell just as if you had three physical items on a shelf and could grab any of them. You calculate your gain or loss based on whichever coin you chose.
You can choose whichever method works in your favor. Often, you’ll want to take a lower gain to have less taxes. Sometimes, you might want to take a higher gain if you have other deductions to offset the taxes or think your tax rate will go up in the future.
Cryptocurrency sales are taxed as capital gains. Short-term sales (selling something you held for less than one year) are taxed at your ordinary income tax rates.
Long-term sales (if you held longer than one year) are taxed at capital gains tax rates of 0%, 15%, or 20%.
- 0% applies if your income tax bracket is 10% or all but the highest income in the 12% bracket.
- 20% applies if your income tax bracket is 37%.
- 15% applies to everyone else.
What Can You Do If Your 1099-K Is Wrong?
If you believe your 1099-K is wrong, call or write to Coinbase to ask them to fix it. If they refuse, you can file your taxes based on your own information but could get a letter from the IRS in the future. It may help to include a written explanation of why your tax return is different than your 1099-K when you file.
What If I Already Filed My Tax Return Before I Got a 1099-K From Coinbase?
If you already filed your tax return and need to include taxable income from cryptocurrency transactions, you will need to file an amended return. If you had no taxable income or already included the income on your tax return, you don’t need to do anything.
What If I Don’t Have Money to Pay the Taxes?
Cryptocurrency transactions almost never have income tax withholding. If you don’t have the money to pay your tax bill — often because you weren’t aware of cryptocurrency taxes and didn’t set money aside — you will need to make payment arrangements.
The best option is often a low-interest credit card or loan if you can obtain one. Otherwise, you may need to use an IRS installment agreement, but interest and penalties continue to apply until you pay your balance.
What If I Didn’t Report Cryptocurrency Gains in Previous Years?
If you didn’t know you had to report cryptocurrency income in previous years, you should generally file an amended return with that income. You’ll owe back taxes, interest, and penalties, but these will increase even more if the IRS later finds out you didn’t pay your taxes.
The IRS usually has three years to assess back taxes, but this increases to six years if you understated your income by 25% or more. If you never filed a tax return at all (with your non-crypto income) or the IRS believes you fraudulently evaded taxes, there is no time limit.
What If the IRS Thinks I Earned More Than I Did?
The IRS computers try to match your 1099-K against your tax return, but this can create problems since the amount on your 1099-K is rarely the amount of your taxable income. Keep all of your records showing your basis, ID methods, and tax calculations for at least six years. That way, if you get a letter from the IRS, you can provide this information to show that you correctly completed your tax return.
Talk to a CPA About Your Coinbase 1099-K
Even if you now think cryptocurrency taxes sound simple, actually reading your 1099-K, figuring out where to get the other information you need, understanding if any unusual exceptions apply, and properly filling out the needed IRS forms can all be difficult tasks. Take the burden off your shoulders by consulting a tax professional at Founder’s CPA.
We specialize in cryptocurrency and other investment taxes and can help you pick a tax strategy that saves you money while making tax filing a breeze. If you’ve gotten a Coinbase 1099-K or are thinking about investing in cryptocurrency, contact us now for a free consultation.