Coinbase offers a a variety of report tools with its services. This includes a tax report that helps estimate the tax calculations of gain/loss and the period of gain/loss (short term or long term). This is called "Cost Basis for Taxes (BETA)". In this article I peer review the Coinbase beta tax report and provide thoughts and common pitfalls to watch out for (which Coinbase has appropriately disclaimed).
Summary
- I have examined the tax report of my Bitcoin wallet and have concluded that there some very useful information related to tax filing season. Kudos to the Company for putting the right foot forward in providing this information to users to assist with taxes. Despite some of the limitations of the report discussed in this review , these reports will make my life much easier, not harder, in accounting for cryptocurrency transactions in the U.S.
- However, the beta tax report is not a perfect reflection of U.S. tax law (Coinbase doesn't claim the reports to be such, see disclaimers below). The accurate U.S. tax results could be much different, especially if transactions have occurred outside of Coinbase (transferring to external exchanges or wallets).
- For users who have transferred from Coinbase to cold storage and not made a transfer for other crypto nor received air drops, this transfer might be reflected as a taxable event by Coinbase when it shouldn't be. However, on the flip-side, the use of the transferred crypto for other purchases, exchanges, ICO's etc. could be taxable events that would not be captured by the Coinbase report. So for someone who transferred to another exchange and immediately spent it, or transferred to an ICO, this is a good general estimate (but not accurate in all cases, consult an advisor).
- In fact, even just transferring to an external wallet and HOLD'ing could have consequences due to all of 2017's forks/airdrops .
- It would seem to me, based on my tax report, the Company might not be accounting for the tax implications of the BCH fork event itself in the beta tax report. I also did not see my $10 referral get picked up in the report.
Takeaway Thus, although Coinbase's tool is an amazing help, this beta tax report should not be relied on alone in determining tax consequences or a year, contact an advisor (as they point out too).
Below is a guide to downloading and interpreting the information within report, as well as a discussion of some of the limitations of the report. The Company's disclaimers tell a lot about the limitations in the reports to help protect the user from miscalculating taxes. The disclaimers also provide a great framework for discussion.
First - Create a Beta Tax Report
After logging in to Coinbase (using multi-factored authentication on a secure device), access the feature to download a report at https://www.coinbase.com/reports. Navigate this link manually, best practice is do not clink links
Once you have navigated to this page, you can click "create report" and fill out the form below to have a beta tax report emailed to you (or you can download from the report page):
An example of a report will be shown at the end. As you will see I don't hold funds on Coinbase for security reasons
Second, here a a few disclaimers in the report which I will interpret
- 1.This report does not constitute legal or tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Coinbase disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns.
- 2.This tool considers all sends and receives as taxable events, even if that is not the case. As such, this tool WILL NOT BE ACCURATE if you have sent cryptocurrency to a non-Coinbase wallet, another exchange (including GDAX), an external storage device, or if you have participated in an ICO.
- 3.We use a FIFO (first in first out) method for this report. For all digital asset transactions the prices are calculated based on the market price at the time of transaction. If you have more specific records, please update the field in question and recalculate capital gains as sale proceeds minus cost basis.
Disclaimer #1
The first disclaimer is a boiler plate legal disclaimer (similar to the disclaimer that I have at the bottom of my blogs).
Disclaimer #2
The disclaimer identified four events where the Coinbase report shows a gain/loss that might not be accurate:
- Transferring cryptocurrency from Coinbase to an external wallet
- Transferring cryptocurrency from Coinbase to an exchange.
- Transferring cryptocurrency from Coinbase to cold storage.
- Transferring cryptocurrency from Coinbaseto an ICO.
I agree with all four of these statements. Once cryptocurrency leaves the Coinbase wallet, Coinbse has no way of knowing what you really did with that currency (possible exception is their subsidiary GDAX which they are still not tracking per the disclaimer).
For example, if you transfer out of cold storage in order to participate in ICO's, trade on a decentralized exchange, centralized exchange, or just hold in cold storage/stake - there are taxable events occurring. Therefore, the beta tax report conservatively reports a transfer out of the Coinbase wallets as a gain/loss.
Example of Where this is Useful: For a user who immediately spent the cryptocurrency that was transferred out of Coinbase (i.e. transfer to Bittrex/Binance and immediately buy ER 20 tokens), the U.S. tax gain loss on the exchange of Bitcoin for other crypto may be similar (but not exact) compared to what Coinbase has calculated in the tax report as a short term gain on the sent quantity. *On the other hand this could cause doubling up if you are using a report from another exchange for gains/losses, this is where an accountant/advisor comes in handy.
Example of Where this is Not Useful: A user transfers Bitcoin funds to cold storage and HOLD's (does not trade for other cryptocurrency). The user does not receive any significant air drops in their cold storage wallet. Thus, the gain/loss reported on the tax report is not applicable as there is no gain/loss under U.S tax principles. There is no gain/loss because no crypto has been sold/exchanged for U.S. or other property (other than the liquidation for purposes of fundin the deminimis in-kind fees).
Disclaimer #3
The disclaimer indicates that cost basis is tracked on a first-in-first-out (FIFO) basis. This means, the first cryptocurrency purchased/deposited in a wallet is the first cryptocurrency that is deemed to be sent/sold out of the wallet. This results in the latest cryptocurrency purchases remaining in the wallet at the end of the year. The FIFO method results in the following conditions:
- The cryptocurrency purchases are divided into lots based on the sell date. This is particularly important because one inaccurate event in the report (or missing event) means all of the lots are inaccurate.
- The gain/loss is the USD value of the sold/sent crypto minus the cost basis of the lot.
The disclaimer indicates if more specific basis identification is available, it is recommended you use that. This in my view is just a general disclaimer because FIFO method is technically intended for securities but not expressly permitted for cryptocurrencies that aren't securities.
Third - Review and Understand the Beta Tax Report
Here is my report (with identifying details stripped out), I have color-coded so you can see how various purchases were broken into lots that correspond to the sales. Otherwise, if you aren't financially savvy person, when downloading the report it may all looks like numbers on a screen.
Tip The file downloads as a CSV format which might not save the formatting changes when the file is saved, however you can save as MS excel and then play with formatting/numbers.
Buyer Report (with lot # and buy # lined up by me)
Seller Report (with lot # and sale # lined up by me)
Crypto Tax - Other Identified Potential Pitfalls
Rounding, Transferring from Other Coinbase Wallets, etc.
In general, the purchases agree to my Coinbase purchase (including accounting for fees in basis). I did notice a couple discrepancies that might just be my lack of diligence on the source data:
I noticed the sell $ amount per my wallet didn't match the amount on the lots in the report (above). This may be deminimis transaction fees but I did not investigate as the variance was so small.
Also, I was having trouble reconciling a transfer I made between the original BTC wallet on my account and a second BTC wallet that I had set up (which has the data above). I was expecting a lot transfer of $300 but the basis transfer was $415 (and apparently transferred on a different later date). However, before assuming the report is bugged, I need to do more diligence to make sure I am looking at the same pair of transactions correctly. I cannot fault CB with a user error on my end, so I will dig deeper and follow up in the comments section if I figure it out.
Airdrops
I downloaded the Bitcoin Cash beta tax report for 2017 (I had a small airdrop of BCH deposited by Coinbase). There was no data in the report showing a gain related to the deposit of the forked currency. This leads me to believe the beta tax report might not be accounting for the tax implications of the fork event itself. The BCH fork event (and other forks where the U.S. person owns their private keys) is likely taxable in the U.S. under the economic benefit doctrine (subject to guidance in the future). More information in part 2 of my E-Book: https://steemit.com/money/@cryptotax/crypto-tax-series-e-book-february-2018-edition-u-s
On my to-do list is to re-run the report to make sure I ran the correct date range parameters (tax year 2017). If data shows up I will edit this section or follow up in the comments.
Referral Fees
I received one $9.99 of free Bitcoin for a friend using my referral link. This appears to not have been reflected in my 2017 report. The receipt of a referral fee in the form of Bitcoin (property) for services is generally taxable under tax principles (see Section 83).
Summary and Conclusion
See top of this article
Picture credit - Cover: https://pixabay.com/en/users/Leamsii-4568039/
Various Coinbase screenshots, artwork is their property as far as I know
Picture Credit - Golden: https://pixabay.com/en/users/mohamed_hassan-5229782/
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.