Coinbase has disabled its margin trading service, and is also switching out the tax form they send to their users come tax season. According to two new blog posts from the company, the move to cancel margin trading was induced by guidance that the Commodities Futures Trading Commission (CFTC) released in March, and the move to change the tax form was caused by the IRS misinterpreting the previous form Coinbase users were required to send in (1099-k).
Disabling margin trading
Coinbase began terminating its margin trading service on November 25. The margin trading service will be completely disabled in December when the remaining margin positions expire.
Many believe Coinbase’s decision to terminate this service is because of CFTC’s guidance. Given the guidance, it appeared as though Coinbase was bound to run into the same obstacle as Bitfinex, who settled with the CFTC for $75,000 back in 2016 for executing “illegal trades.”
“We believe clear, common-sense regulations for margin lending products are needed to protect and provide peace of mind to U.S. customers,” said Coinbase’s Chief Legal Officer Paul Grewal in the official announcement. “We look forward to working closely with regulators to achieve this goal.”
That being said, the regulatory landscape seems to be the reason Coinbase has decided to disable their service. However, Coinbase seems hopeful that they will have clarity on the issue in the future which might mean that they bring back margin trading sometime in the future.
A new tax form
In Coinbase’s second announcement, they informed their users that they will no longer be issuing the problematic 1099-k when it comes time to report taxes. Instead, Coinbase will issue a 1099-misc to any user that “has received $600 or more in digital currency from Coinbase Earn, USDC Rewards, and/or Staking in 2020 and is subject to U.S. taxes.”
This update comes just several days after a Coinbase user announced that he received a CP2000 notice from the IRS that said he underreported his 2018 earnings from trading on Coinbase. The user accurately reported his taxes, however, the IRS believed he made a mistake because the 1099-k form obfuscated his true earnings—which was actually a $2,000 loss. This is because the 1099-k does not represent any gains or losses you need to report to the IRS; it solely reports the gross proceeds from all transactions you’ve made.
To solve this problem, Coinbase will be distributing 1099-misc forms to its users this year who have received over $600 from specified activities. However, it remains unclear if individuals who profited or lost from trading on Coinbase during the tax year will also receive a 1099-misc form.
Although tax experts believe the 1099-misc is a step up from the 1099-k, they do not believe it is the real solution to the problem
“Even with the new form, you will still have to track your cost basis using a tool like CoinTracker, said Shehan Chandrasekera, head of tax strategy at Cointracker. “Neither 1099-MISC or 1099-K report your cost basis, unfortunately. To calculate your crypto taxes correctly, you need to keep track of the cost basis.”