Coinbase tax VP explains IRS crypto reporting rules and 1099-DA filing burden

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript. Lawrence Zlatkin: Stablecoins are designed to be stable and consistent and traded at par with the US dollar. Yes, there have been examples where there have been deep pegging. I'm not going to go into Luna and other extreme cases, but even Usdc has pegged for a period of time during the Silicon Valley bank crisis. But 99.9% of the time it's intended to trade within a fraction of decimal of the US dollar. So in essence, we're not reporting a gain or loss. So it's over reporting of data. [00:00:30] There's no fundamental purpose for that. I would just argue that the only reason for that is surveillance. Blake Oliver: Are you an accountant with a continuing education requirement? You can earn free Nasba approved CPE for listening to this episode, just visit earmarked app in your web browser. Take a short quiz and get your certificate. Blake Oliver: Hey everyone, and welcome to the earmark podcast. Today I'm joined by Lawrence Zlatkin, vice president of tax at Coinbase. Lawrence has [00:01:00] a front row seat to some of the biggest tax questions in digital assets, from 1099 Da reporting and cost basis challenges to the broader policy debates shaping crypto taxation in Washington. In this conversation, we'll break down what tax pros need to know now and where the rules may be headed next. Lawrence, welcome to the earmark podcast. Lawrence Zlatkin: It's a pleasure. Glad to glad to be here. As I said, everyone wants to talk about tax as a friend of mine. So all good. Blake Oliver: So Lawrence, our audience is [00:01:30] mostly tax and accounting professionals. And crypto is an area where a lot of firms are trying to separate what actually matters from all of the noise. So today I want to keep this practical. We're going to talk about 1099 d a cost basis. Why crypto taxes still so hard to define how stablecoins fit into the picture, what's happening in Washington and what tax pros should be watching next. But I want to start with the 1099 question, because for a lot of practitioners, That's the first place crypto [00:02:00] tax is becoming real in our day to day client work. So can you tell me what is this form? What do accountants need to know about what it does and and what it doesn't do? Lawrence Zlatkin: So what's new this year is the issuance of what's called a 1099 d a d a for digital assets. It's actually very similar or intended to be very similar to A 1099 B, which should be something that's native to most of your, your listening audience in that it's supposed to be the analog for crypto, for centralized [00:02:30] custodial exchanges to what Fidelity or ETrade do for their customers with stocks and securities. So it takes investments and it sort of puts them in a form. And the whole construct of the US information reporting system is based on the notion that this form goes to customers. It provides information to complete tax returns. It also goes to the government, and the government then uses it to match and audit whether taxpayers are actually complying with the tax laws. That's the fundamental purpose of this. So Das are new [00:03:00] for crypto, but there shouldn't be new just overall construct shouldn't be new for tax accountants or in fact, most taxpayers. Blake Oliver: So one of the issues with 1099, the other kinds of 1099 is that what gets reported on the form isn't always what we actually report to the IRS. There's like a reconciliation that needs to happen. Is that similar here? Lawrence Zlatkin: It's identical. Yes. And I like to tell people this is just simply a perspective, if you will, a window into what our taxpayers are doing. But it's [00:03:30] you should always keep track of books and records, your investments, how you've transacted. Ultimately, you have the best books and records. If the IRS questions you, then you just have the right to rebut their assumptions or to answer their questions. But fundamentally, you are in control of your tax data. Blake Oliver: So what is the form include and and what is it not like? What's what's missing that we need to fill in? Lawrence Zlatkin: So it's a little bit more of a skeletal version this year. Um, and that was very done intentionally. Maybe, [00:04:00] um, maybe we should have been more ambitious. I mean, bear in mind that we are implementing the system in barely 18 months after regulations have been issued, the trend ten nine B system was developed over a period of years, five years, and even longer for gross proceeds. So what we're doing this year is we're reporting customers who the customers are on our exchange and gross proceeds for transactions that occur on our exchange, while we're not including is basis, um, we're including bases for our customers for informational [00:04:30] purposes, but that information is not actually going to the government. So basis information is absent this year. And that's probably the biggest challenge I think, for digital assets generally, it's the whole issue of how you define gain or loss, whether you over report gains or losses. Um, you know, just basically accuracy. If you're missing cost basis, it's probably more pronounced for digital assets than I think for traditional stocks and securities and other investments for the simple reason that people do more things with crypto than they do elsewhere. And [00:05:00] there's I've been harping on this for a while. There's some degree of overreporting that occurs just by the nature of the industry and the ecosystem itself. So that's, that's can be overwhelming. It also can lead to, I think, potential errors and accuracies and may result in a letter from the IRS as to why you are not doing X or Y. But fundamentally, what's happening this year is the IRS is going to get a statement of our customers and basically gross proceeds from transactions. Blake Oliver: Okay. So the, [00:05:30] the gross amount that I was sent in crypto gets reported to the government, but not my basis in that. Correct. Okay. Can you give me an example to help illustrate what basis means when it comes to crypto? Lawrence Zlatkin: Basis is very similar. It's a it's a concept we use in tax and really in an investment parlance for determining your essentially your investment basis is basically what costs went into acquiring [00:06:00] the piece of property or whatever security you're actually holding. And that's sort of like your carrying cost, if you will, for what you own. And when you dispose of something, presumably, or hopefully you have an amount realized. Again, I'm using a technical jargon that amount realized in this case, it's a taxable transaction, which is why it gets into the calculus. And that presumably will be in fiat, for example, but it can be in other crypto. That amount realized lest your investment basis determines your gain or loss. So that's why it's really [00:06:30] fundamental to evaluate that because otherwise you're missing a really important link for. And again, the tax system is based on income. It's based on gain or loss. It's not based on gross proceeds. Blake Oliver: Okay. So we have a reporting system where the gross proceeds are reported, but the tax is due on my realized gain. And that is not being reported. So let me let me make sure I have this right. I'm going to give you a transaction. So I have [00:07:00] $100 worth of Bitcoin. Or rather I sell Bitcoin and I receive 100 USD for it. The 100 USD, that's what gets reported to the IRS. But let's say I bought that amount of Bitcoin for $90. Originally I only have a gain of $10. That's where the tax is. The tax is computed on that amount. But the IRS doesn't get that information this year. Lawrence Zlatkin: So next year we [00:07:30] will start reporting bases where we have it again. That's an important distinction that exists probably with the rest of Tradfi, because we don't always have basis information that could be true in Tradfi as well when people move things around. But, but it's, it's much more common in our industry because people are constantly moving. Not everyone, but if, if you're doing everything on Coinbase, we will report that to the government and that 90 in your example will go to the government as well. And therefore, that ten of gain that you just described will [00:08:00] go to the government and that will match. And if that's the simple thing that people do, and I encourage people to just use Coinbase, I think we're a wonderful platform. You can do. We're trying to become the everything exchange. So people should be doing as much as they can on Coinbase. But if you don't, if you move things around, if you move things to a non-custodial wallet, if you do other types of things, um, that, that 10th May not be captured and reported to the government. Blake Oliver: And that will create then a discrepancy that will have to reconcile. I mean, how's the [00:08:30] IRS going to use this information? Like what's the utility of the gross receipts? If the tax is computed on the gain and they don't have that information, like what's what's the point of it? Lawrence Zlatkin: So you're ahead of the curve in asking that question. Fundamentally, the government's concern has been that there's been underreporting and noncompliance in the ecosystem generally. So what this achieves from their standpoint is they find out who's really participating. So right now all they've essentially seen is you probably have noticed there's a question it's varied for [00:09:00] like the last five years. Um, it's kind of gobbledygook in general. Anyhow, just like whether you hold own or ever transacted in crypto. It's like right after your name and your address, basically. Um, so that's the only thing Iris has essentially had to go on as to whether people were transacting in crypto. Um, right now they will receive a form that basically also says, not only do we have like whoever answers that question, but rather we'll know what