If you’re like most people, you probably don’t think much about taxes when it comes to your cryptocurrency investments. After all, crypto is still a new and relatively volatile asset class, and the IRS has only recently begun to issue guidance on how to treat it for tax purposes.
But even if you’re not thinking about taxes, the IRS definitely is, and that’s why it’s important to understand the tax implications of your Coinbase account before you get too deep into the world of digital currency.
Here’s what you need to know about taxes and Coinbase:
The Basics of Coinbase and Taxes
Coinbase is one of the most popular cryptocurrency exchanges in operation today. Based in San Francisco, Coinbase allows users to buy and sell popular digital currencies like Bitcoin, Ethereum, and Litecoin.
Coinbase is also one of the most compliant exchanges when it comes to anti-money laundering (AML) and know-your-customer (KYC) regulations.
In order to comply with KYC regulations, Coinbase requires all users to verify their identity with a government-issued ID. This information is then used to generate a Form 1099-K for customers who have made over $20,000 in transactions or have had over 200 transactions in a year.
The 1099-K form is then sent to the IRS along with other information about the customer’s account activity.
This means that if you have a Coinbase account and you’re trading cryptocurrencies on the platform, the IRS will definitely know about it. And that brings us to the next question.
Do You Have to Pay Taxes on Coinbase?
The answer to this question depends on a few factors, but the short answer is yes, you probably do have to pay taxes on your Coinbase account. Here’s why:
The IRS considers cryptocurrency to be property, not currency. This means that every time you buy or sell digital currency on an exchange like Coinbase, you are considered to be making a property transaction.
And property transactions are subject to capital gains taxes.
Capital gains taxes are calculated by taking the difference between what you paid for an asset (in this case cryptocurrency) and what you sold it for. If you sold your crypto for more than you paid for it, you have a capital gain and you will owe taxes on that gain.
If you sold your crypto for less than you paid for it, you have a capital loss and you may be able to deduct that loss from other capital gains or income on your tax return.
For example, let’s say you bought 1 Bitcoin for $10,000 last year. This year, you sell that Bitcoin for $15,000.
That means you have a capital gain of $5,000 ($15,000-$10,000). Depending on your tax bracket, that could mean owing anywhere from $750-$1,500 in capital gains taxes (15%-30% tax rate).