PSA: Coinbase combined income from 2022 and 2023 in the 1099-MISC form issued today

Today, Coinbase released 1099-MISC forms documenting other income from sources like ETH staking (and is a value that will be reported to the IRS). Depending on how you did your taxes last year, the number might be higher than expected because Coinbase combined income values from 2022 and 2023.

The 1099-MISC form illustrates confusion over how to handle staking income, which in general is realized on the date when it is rewarded, and is based on fair market value at that point in time. Coinbase interpreted tax law to mean that since rewards could not be unstaked, that this taxable event did not occur until after the Shappella upgrade (mid-April 2023). The cumulative value of all staked rewards were counted on this date in April, at an ETH price of $1840. Thus, they combined all staking income from 2022 and 2023 into a single 1099-MISC form if more than >$600 in value.

However, a more conservative interpretation of tax precedent/unknowns is that the taxable income event occurred when the rewards were received, regardless of ability to unstake. A grey area here is whether a user had "dominion and control" over the staking rewards at this point in time (Revenue Ruling 2023-14). Most people would argue "no" but a counter perspective is that because Coinbase offered cbETH wrapping, liquidity was possible before unstaking became available which creates a unique domain scenario. Another difference is that the value of all rewards received before mid-April may have a range of price values reflecting market conditions, so the total USD will differ from Coinbase estimates which grouped all pre-unstaking rewards together. As another PSA, the records produced by Coinbase may show conflicting information if referring to monthly statements vs. raw transaction data vs. general trade summaries.

A second surprise (for myself at least) is that Coinbase also counted indirect accrual of wrapped income distributions (e.g. from holding cbETH) to the "other income" category. This may be unexpected because these rewards were not listed under monthly statements by Coinbase, or summarized under lifetime earn rewards. In addition, raw transaction records of wrapped income were labeled differently than most rewards, and may have been missed by external tax software that is used to standardized terms like "income". The accrued rewards will not show under your cbETH total balance, but it will indirectly count as income even if you did not opt to stake cbETH and if you purchased it on the open market vs. wrapping of ETH2 (i.e. trade ratio that is dynamic rather than fixed).

If you didn't pay for staking income in 2022 (because Coinbase didn't provide a 1099-MISC at that point in time) then report what is shown in the current form if you are an American taxpayer.

If you did pay for staking income from Coinbase in 2022, which is most common if exporting all history to a crypto specific tax software or paying taxes even if official forms are not provided, then you might be in a bit of a pickle. From what I understand via talking with the IRS, local dept of revenue, and tax advisors, the best option is to paper file taxes with a detailed letter as to why the 1099-MISC values from Coinbase do not match your tax calculations for 2023. If taking this route, be prepared for everything to take longer (months to process) and that you are likely to receive a CP2000 form in the mail from the IRS asking for additional documentation and/or payment.

The conflicting information on when to count staked or wrapped income can create additional headaches if trying to make estimated quarterly tax payments or if you tried to keep your income within specific tax brackets.

Keep in mind, all of this interpretation of when staking counts as income is also subject to retroactively change in the future under upcoming lawsuits or decisions by Congress.

Regardless of Reddit opinions, talk to a CPA for additional clarification if needed.