Coinbase, Coinbase Pro, Gemini, Uphold, Kraken, and other crypto exchanges started issuing 1099-K tax documents to their customers. These documents are sending crypto investors into a world of confusion and panic as they’ve seen unexpectedly large numbers on the forms. It's important to note that these large numbers are NOT what you owe in taxes (*exhale). So the question that everyone is asking is the question that this article addresses: What do I do with my 1099-K?
The IRS treats cryptocurrency as property. This means that cryptocurrencies like Bitcoin, Ethereum, XRP, and other alt-coins must be treated like owning other forms of property (stocks, gold, real-estate) for tax purposes. Just like with other forms of property, you are required to file your capital gains and losses with the IRS at year end. For an in-depth overview of this process, please read our guide covering the fundamentals of crypto taxes.
A 1099-K is an informational form to report credit card transactions and third party network payments that you have received during the year. It is not an "entry" document, meaning you don't need to attach or "include" it in your tax return.
Often times, you receive a 1099-K if you received payments from credit card transactions or payments from a third party network. In the case of cryptocurrency, the third party network (Coinbase, GDAX, Gemini, or another exchange) is required to send you a 1099-K if your payments are over $20,000 or you have over 200 transactions.
For example, if you made 250 trades on Coinbase pro, and all of these trades add up to over $20,000 in volume when each of them are summed together, you will receive a 1099-K.
The gross amount of the reportable payment on your 1099-K does not include any adjustments, and it does not represent any gains or losses you may need to report the IRS. It solely reports the gross proceeds from all transactions you’ve made on the network--in this case Coinbase.
That is a lot of fancy language. Boiled down, the 1099-K shows in aggregate how much you have transacted on a cryptocurrency exchange like Coinbase. But it does not report your total gains or losses!
This 1099-K is automatically sent to the IRS, so they have an idea of your activity on third party exchanges. However, THIS IS NOT the amount that you are on the hook for your taxes.
Whether you receive a 1099-K or not, you are required to report your cryptocurrency transactions on your taxes. But you only pay taxes on your capital gains. If you have losses for the year, you actually can save money on your tax bill. Read more about saving money on your taxes from your crypto losses here.
If you started with $100 of Bitcoin and you sold it for $500 after holding it for six months, you would owe taxes on that $400 gain. Oppositely, if you bought $2,000 of ETH in January of 2018 and traded it into LTC in November, you would likely have incurred a loss and can write this off on your taxes.
Yes, it is required to report your cryptocurrency transactions on your taxes. Every sale and every coin-to-coin trade is a taxable event. These should all get reported on your Form 8949. So whether or not you actually receive a 1099-K, you still need to be filing your crypto taxes.
You need two forms to properly file your crypto taxes: The 8949 and the 1040 Schedule D. List all trades onto your 8949 along with the date of the trade, the date you acquired the crypto, the cost basis, your proceeds, and your gain or loss. Once you have listed every trade, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return. Read more about how to report your crypto on your taxes here.
It could save you time and energy to automate the entire 8949 creation and crypto tax reporting process by uploading your trades into CryptoTrader.Tax. The software will automatically generate your required tax documents which can then be given to your tax professional or uploaded it into tax preparation software like TurboTax.
We thought it was relevant to share the story below that was emailed to us from one of our customers. He received a letter from the IRS that was completely inaccurate as a result of the misleading 1099-K. It's important to note that you are not alone in navigating the murky tax waters. There are thousands of others out there like you. Our team here at CryptoTrader.Tax is here to help. You can reach out to us directly!
This is some long overdue positive feedback that you and your company deserve. I will keep this story as short as I can.
In 2017, I’d traded various crypto currencies with Coinbase and Gdax/CoinbasePro. My initial investment was $100 and I (after many trades) would end the year with total gains of $456. The following tax season, I did report my short term gains (though, not correctly) on my 2017 return.
In early August of 2019 I received a letter from the IRS stating that, due to info received from a third party, I owed $17,318. Not cool!
Coinbase had provided info to the IRS that didn’t match with what I’d entered in my return. The return not being correct was, of course, my mistake. However, I was certain of my $456 gain—not $17,318!
After calls to the IRS and a second letter from them I began to seek out help from CPAs to resolve the issue. One CPA was familiar with crypto issues and estimated that his services would cost $1600. (4 hrs. @$400/hr.). I called around to find an accountant who would charge less. I did take the advice from that CPA and request from Coinbase a copy of what was sent to the IRS. This was a 1099k as I learned from the “letter”. This tax info was not visible anywhere in my Coinbase account, so I asked Coinbase support for a copy. It took 5 weeks for them to email this info to me.
After calling without success to get an accountant who knew or understood crypto issues, I learned about your service and CryptoTrader.Tax. I signed up for a demo, liked what I saw and paid $86 for my report. Your company’s total for my net gain was $454.99 vs. my $456. and that was for hundreds of trades. Excellent work to you all!
With this info from you and another call to the IRS, I was able to finally fix this misunderstanding by faxing over a few forms to the gov’t. I’d add that the last day to petition the tax court was Monday 1/13/20, and I was on the phone with the IRS on the Friday before. I faxed over to them a copy of the correctly filled out form 8949 your company generated and about four other pages.
The whole mess has been closed by the IRS and I have a letter from them stating that.
To recap: Coinbase or your other cryptocurrency exchange sent you a 1099-K because they had to and because you had over $20,000 worth of transactions or over 200 transactions. The IRS was sent a copy of this 1099, so they are aware of your activity. The 1099 does not show the amount you owe in taxes and using it to report taxes would be inaccurate. To properly report your taxes on your trading activity, complete the 8949 and 1040 schedule D.
If you have any crypto tax questions, our team can be reached directly at firstname.lastname@example.org.
*This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.