I noticed an interesting problem related to clients with cryptocurrency transactions. The issuer makes 1099 forms with lots of transactions. As a tax preparer, it’s annoying, so I decided to find out why.
The crypto-broker[1] like Robinhood or Coinbase has to issue tax documents, but do they have to make them so difficult to read? Keep reading to find out.
Why do cryptocurrency 1099 forms have so many line items?
A single transaction on a major crypto-broker like Coinbase or Robinhood can generate 40 or more line items on form 1099-B. This has to do with how the crypto-brokers account for transactions. The cryptocurrency they sell you comes from many different sources, and as it currently stands, each source shows up as an individual line item on your tax return.
A seemingly unrelated fact
NIH found that 54% of US currency has at least 1μg of cocaine on it.
NIH study related to cocaine on money.
We don’t usually think of the life of currency, but as we see, it has all kinds of adventures that are more exciting than how we use it. Paper currency or even digital US dollars don’t have a memory. They may have been to a drug dealer, a car dealership, your grandma, and finally, your birthday card. You don’t know or care where your cash has been.
Blockchain transactions (like most[2] crypto-transactions) do have a recorded history. Computers need to review the blockchain transaction history to calculate your available balance. To a computer, the history of your money is the same as the amount of money in your account.
The need for the transaction history is unique to blockchain assets like cryptocurrency. Neither cash nor stocks work this way, so your 1099 is weird.
What is a tax lot?
First, the tax concert you need to understand is reporting a capital gain (or loss).
Any investment (including crypto) needs to be reported to the IRS when you sell it. You need to tell them when you bought it, how much it cost, and how much it was worth when you sold it. This is even true in barter transactions (the IRS issued guidance that specifically said buying goods or services with crypto counts as a sale).
With a stock, this is generally not a problem. If you buy one share of stock, you know how much you paid, when you bought it, and how much you sold it for. All the stock from one transaction gets treated the same.
Information that goes on your tax return:
- How much it cost
- When you bought it
- How much it was worth when you sold it
This isn’t a problem with stock because, like cash, the stock doesn’t remember its history.
Cryptocurrency does, so the cryptobroker treats each fraction of a share differently.
Imagine you are in a store, and you pay with a $10 bill, but before getting your change, the cashier insists on telling you a story about every coin.
Because each fraction of your bitcoin transaction is technically different, the cryptobroker treats it as its own tax lot. The purchase date and cost per share are usually the same, but since they are technically different investments (with their unique histories on the blockchain), they get separated for your taxes.
Thats why you might see 100s of transactions for less than $1 on your 1099. Your cryptobroker tells you a story for each piece of change you received.
Will it be this way forever?
I don’t know.
The IRS hasn’t given any more straightforward guidance and cryptobrokers haven’t (to my knowledge) pressured the IRS to change anything. If there is going to be a change, software makers like TurboTax will probably be the ones to drive it.
Footnotes
[1] Crypto-broker isn’t really a thing. They are brokers who happen to deal in cryptocurrency. For regulatory reasons, Robinhood separated its Cryptocurrency business and stock brokerage business. They have essentially the same function, but they are subject to different regulations.
[2] Not all cryptocurrency transactions are recorded on the blockchain. Some transactions are recorded internally by a custodian. You can lean about how Coinbase handles these types of transactions on their website. In my opinion, it kind of defeats the purpose of the blockchain, but that’s just me.