The Coinbase Tax Tool Won't Work For Most Traders

  • The Coinbase tax calculator is aimed at helping its customers calculate their tax returns and uses FIFO and SpecID methods
  • The tax tool will not work for the majority of its customers

Coinbase released a blog yesterday outlining their plans to release an updated tax calculator.  However, the tax calculator will only work for a small percentile of cryptocurrency traders. Calculating taxes with traditional equities and assets is hard enough, the high volatility of crypto-assets as well as their disputed classification makes tax filing even harder.

In the U.S. three of the top financial regulatory bodies – FinCEN, SEC & CFTC – have tentatively classed bitcoin as a commodity, property, money and a security. Different tax laws apply to each classification. But, the IRS has remained relatively constant in its appraisal of crypto-assets.

Their notice on crypto-assets remains accurate today; crypto-assets are treated as property and therefore are subject to capital gains tax even when earnt from mining. Capital gains should also be recorded when transacting crypto to crypto, which for most is the hardest part to comply with. 

Calculator Caveats

Unfortunately, Coinbase’s tax calculator only works for customers that conduct all their crypto-asset exchanges within the confines of the Coinbase exchange. Which is unlikely seeing as they only list a small number of crypto-assets.

The tool is also ineffective for customers that have traded on another exchange, sent or received crypto on a non-Coinbase wallet (which should be everyone according to best practices), participated in an ICO or previously used a non-FIFO cost basis calculation method. 

The Tax Calculator

The blog breaks down how to use the calculator into three parts:

  1. 1. Establish a complete view of your trading activity to determine your cost basis
  2. 2. Calculate your gains/losses
  3. 3. File your taxes

For the first step Coinbase has created a function that will aggregate all buys, sells, sends and receives into a single report for every crypto-asset. This will provide the cost-basis for the tax report and is inclusive of exchange fees.

With the help of a tax professional you can calculate the investment gain and loss in the second step. Essentially it involves subtracting the cost basis from the proceeds of each sale or crypto to crypto exchange.

This is where it gets a little harder as the IRS has not given guidance on how to apply your cost basis. The two most common approaches are FIFO (first in first out) and specific identification. Once all your data is in order you file the report with the IRS.

Coinbase And The IRS

Coinbase received a ‘partial victory’ over the IRS and only had to surrender the identities and full trading histories of 13,000 customers who used the exchange before 2015. Due to the massive rally in 2017 many of these customers would be sitting on substantial capital gains which need to be reported even if they are not liquidated.

Seeing as under 1,000 citizens reported holding crypto-assets last year it is obvious to the IRS that many are avoiding their responsibility to pay tax. Perhaps an easy to use tax calculator will encourage more citizens to pay their taxes.