Should i include "coinbase earn" crypto currencies in tax returns?

[cv_arv]

My spouse earned some free cryptos from coin base after spending some time learning about them. She has not sold it  at end of year. Should those be reported for tax purposes?

[JohnB5677 · Accepted solution]

No, provided that nothing was sold there is no need to enter anything on your tax return.  Transactions are only taxable once they are closed out.

When you do sell these cryptocurrencies they will have a basis of zero because you didn't pay anything for them.  Whatever proceeds you get when you sell will be taxable.

[rhess2021]

I actually read on a few different sites that this is not true. I did the same on coinbase earn, and looked at their tax info. It looks like crypto rewards are generally considered misc. income when received, and capital gains or losses will be added to that when sold. I may be wrong but this is what it sounds like to me.

[JeffreyR77]

This information provided by Opus17 on March 12, 2020 is still valid.

If you file a tax return, you must report all your income, no matter how little, and even if you don't get reporting forms.

However, did you sell the free cryptocurrency or are you holding it?  If you didn't sell it, you don' have income yet.

Cryptocurrency is treated like property.  You only have taxable income if you sell it for more than you paid for it.  (For example, if you buy a comic book for $1 and sell it for $100, you have $99 of income, but only when you sell.  As long as you are just holding it, it doesn't create income.)

So if the exchange gives you rewards in the form of cryptocurrency, it only creates income when you sell.  Since your cost is zero, all the proceeds are taxable income.  But only when you convert it to real money. 

[rhess2021]

No, I have not sold it. I'm still holding it. But this is where it seems to me to get more complicated for some crypto rewards.

In this (https://www.coindesk.com/crypto-tax-2021-guide) article, under the section "What crypto actions are taxable events in the United States," it mentions that certain "crypto rewards" must be paid income tax upon receipt of the reward earned.

I don't know for sure if this counts with Coinbase Earn, but for instance, the part where it says "Receiving cryptocurrency as a means of payment for carrying out work, including bug bounties," is one that sounds very similar," as well as others such as rewards for mining or staking.

It also says on this Coinbase page (https://www.coinbase.com/learn/tips-and-tutorials/crypto-and-bitcoin-taxes-US) under the section "Forms You May Need; "This 1099-MISC (Miscellaneous Income) Form is used to report rewards/ fees income from staking, Earn and other such programs if a customer has earned $600 or more in a tax year."

The page mentions reporting rewards from "Earn." It says "reporting rewards." Although also, I'm not sure if the tax bit at the end is referring to earning $600 in income taxes, though, or $600 strictly from crypto rewards. Because that would be relevant for me.

So it sounds to me that Coinbase Earn could be an exception to capital gains, based instead as taxable income upon receipt. Hope this makes sense. Thank you.

[DaveF1006]

It depends. IRS has not issued real clear guidelines on the types of income that should be reported, it does specify in this link  "A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, 3 measured in U.S. dollars, as of the date that the virtual currency was received."

It does specify that if you were rewarded additional crypto that wasn't paid for, then this is to be reported as taxable income on your return. it's not a capital gains but it is ordinary income. It will be a capital gains situation if you sell or trade the currency. please read that revenue ruling that I have included.

Edited 04-04-2021|01:47 PM PST]

[rhess2021]

Thank you, I'll take a closer look. Can I assume this income tax works the same with gifted stocks from a stock exchange? Such as a "Get 2 free stocks" type of promotion.

[DaveF1006]

No, not the same thing. Gifted stocks are not reported as income until you sell the stocks unlike crypto. 

[SirOsisOfTheLiver]

That is not the best answer.  There are a lot of wrong answers here.

There are 2 kinds of taxes from a "earn" or "airdrop" which are both taxed the same way.

1)  When you receive them they are taxed as income at the US dollar value they had when you received them.  That also becomes your basis for when you sell them.

2) When you sell them you are taxed as long or short term capital gain on the profit (Sale price - basis)

[s_harizanoff]

I beg to differ. IRS considers air drops and crypto earnings as a taxable event. You should enter $0 for what you paid and the fair market value at the time of the receiving it (for example: you received 1 EOS, which at the time of the event was worth $65). Then IRS will tax you for this $65. It's like winning lottery or receiving prize money. 

This on the other hand raises another question: how much will IRS tax me when I sell this EOS. I believe then you should enter the $65 (the cost basis) and the current EOS price at the time of sale($165 for example) Then IRS is supposed to tax the gain($100)*. 

*Many tax professionals are still confused about crypto. Last time I asked for advice (Turbotax), it turned out I knew more than specialist (no offense), lol. This doesn't mean I know everything, just I believe I'm right about this particular topic.

[GRGanjei]

Hi! I totally agree with your logic!  But I think the IRS changed a rule on us back in 2017. You had said: But only when you convert it to real money. Up to 2017 I believe, one could exchange one crypto for another and not worry about taxes using the rules about like-kind property. The crypto would only be taxed when sold for USD or when exchanged for a real good or service. They changed that in 2018 from what I have read. Now, every crypto conversion is considered a taxable event, where we must consider the original value of the first crypto and compare that to the value of the 2nd crypto we are getting to calculate our loss or gain in USD for tax purposes. 

So, I'm trying to figure out what I'm supposed to do in this scenario. Suppose Coinbase gave me $10 of crypto X for coinbase earn. Then, a little later, I trade that for $12 of crypto Y because X increased in value. But I don't sell. Since I converted however, I think I have to either report it as $10 of income + $2 of gains OR as $0.00 income (it was a gift) but $12.00 of gains once I convert to crypto Y since I paid nothing for the original crypto and now have received $12.00 of bennet from that gift. Either way, I have to report $12.00. About the only way this would make a difference is if I held the original crypto for over a year before exchanging it for another crypto. If I reported the taxable amount of $12 ($0 + $12) when I converted, then I would avoid short term capital gains taxes, where as if I reported the $10.00 gift at the time of receipt and then the $2.00 of gains when I converted, I would be paying short term capital gains on the $10.00.

All this gets very confusing. Purchasing crypto is not supposed to be a taxable event. But airdrops, etc are taxable. But are they taxable upon receipt, or upon being sold for USD or converted to another crypto? 

[DolceDolce]

Directly from Turbo Tax for Tax Year 2020:

Starting this year, the IRS requires taxpayers to indicate if they made any virtual currency transactions during the tax year. Virtual currency includes any type of cryptocurrency.

A transaction involving virtual currency includes any of the following:

- Receipt or transfer of virtual currency for free
- An exchange of virtual currency for goods or services
- A sale of virtual currency
- An exchange of virtual currency for other property (including for another virtual currency)

[mpzmburke24]

Like stock, crypto currency gain/loss is reported only when sold.  It is important to keep records of the acquisition date and cost so when you do sell, you will be able to report the gain/loss.  If you buy and sell crypto the calculations can be overwhelming.  Coinbase does not issue form 1099-B.  There are third-party software companies that will calculate your gain/loss for you and even prepare Schedule D data that can be imported into TurboTax. 

[GeorgeM777]

Yes, you should include on your tax return the value of the cryptocurrencies that you earned.  While you did not mention the term "staking," generally, staking is the process of locking up crypto holdings in order to obtain rewards or earn interest.  Whether what you did to earn interest from your cryptocurrency involved staking or some other form of crypto activity, the tax result is the same, namely, you need to report the interest or other earnings that you received as a result of owning cryptocurrencies.  

[mpzmburke24]

An exchange from crypto X to crypto Y is a sale of crypto X.  The gain/loss for crypto X is the proceeds - cost - fees.  Put more simply, how much did you net when sold or exchanged less how much did you lay out to buy it - all in USD.  The purchase price for crypto Y in this scenario is equal to the proceeds from crypto X.  I'm pretty good at tracking all kinds of data for my investments including capital gain/loss using FIFO.  I've been doing it for decades.  I would consider myself expert with Excel and have built some pretty cool spreadsheets for that very purpose.  That said crypto adds a whole new level of complexity particularly since the fraction of a coin bought and sold is so precise and you are dealing with so many currency conversions.  This year I purchased a subscription to Koinly cryptocurrency tax software.  Sorry TurboTax - love your product, but in this regard, you just aren't there yet.  Maybe next year.  Koinly linked to my coinbase and did everything for me - every transaction, and everything I needed to enter for my taxes.  I'm told if you use TurboTax online, you can link your Koinly output directly.  I have the downloaded software so I had to manually enter each transaction.  It took a little time, but I am comforted knowing I did it right.