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The Taxing Coinbase-IRS Dilemma: And Now, 1099-B Reporting?

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"The 1099-B solution being suggested by Coinbase CEO Brian Armstrong isn’t going to help matters unless they are dealing solely with investors who keep their assets within the Coinbase ecosystem. As soon as a customer removes bitcoin from Coinbase, you have to track the valuation changes along the way."

Perry Woodin, CEO of Node40

It goes without saying that the IRS request for Coinbase user records promises to be contentious. In a recent Medium post, Coinbase CEO Brian Armstrong’s proposed the use of  form 1099-B, the same tax form companies like Fidelity and Charles Schwab use, as a means of mitigating the reporting concerns that the IRS has alleged.

Form 1099-B is a form typically issued by a broker or barter exchange that captures the proceeds of a person’s stock transactions. The sale of stock results in either a loss or gain, which must be reported to the IRS at tax time.

Here at BTCManager, we asked Perry Woodin, the CEO of the blockchain governance company Node40 to offer some insights on whether 1099-Bs would serve as a step in the right direction in terms alleviating tax reporting concerns.

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Why do you think Coinbase's CEO is Offering an Olive Branch of sorts to the IRS to Indicate they would be Willing to try the 1099-B Form?

Coinbase is in a tough spot. Proposing to provide form 1099-B is ideal for customers who never leave the Coinbase environment, but it isn’t a solution for clients who transact with bitcoin. The offer seems more like a signal to the IRS that Coinbase is willing to work towards a reasonable solution. This should not be a surprise. Coinbase has a reputation of working with regulators and staying on top of compliance issues. It’s part of what makes Coinbase the most popular Bitcoin exchange in the United States.

So Why would this System be Deeply Flawed?

The only way I see the 1099-B working is if Coinbase customers never remove their assets from the Coinbase ecosystem. As soon as a customer moves bitcoin away from Coinbase (e.g. to a Bitcoin wallet on their phone), Coinbase loses the cost basis. Once the cost basis is lost, it is impossible to determine any short- or long-term gains or losses. The 1099-B form asks for data that Coinbase simply does not have access to and is nearly impossible for a customer to accurately calculate without using a service like Node40’s (soon to be released) digital currency accounting software.

And Your Prediction on what’s the Next Installment in this Ongoing Coinbase-IRS saga?

I fully expect the IRS will be given access to the Coinbase customer list. Once that happens there will be increased interest from people who hold cryptocurrency to report the tax liability.

Your Final Thoughts?

Whether or not you agree with the approach taken by the IRS, one thing is clear; if you have realized gains or income from digital currency, the IRS wants to know about it. The IRS has a remarkable track record when it comes to litigating cases. Anyone who thinks they can avoid paying their tax obligation simply because they are transacting in bitcoin is playing with fire. My suggestion to those who wants to be in compliance is to self-report. Do not wait for the taxman to come knocking.