How to Report Robinhood Crypto Transactions
Robinhood provides a crypto trading platform, similar to crypto exchanges such as Coinbase, Gemini, Bittrex etc. One big difference though is that Robinhood does not allow its users to transfer crypto in or out of its platform. Also, similar to traditional brokerage firms, Robinhood issues a Form 1099-B every year to their customers, including both their sales proceeds and cost basis for each crypto trade. This makes tax reporting very easy because people can rely on the 1099-B to report crypto gains and losses on their tax returns.
Some crypto investors are wondering if they could aggregate crypto trades in their Robinhood account with their crypto transactions in other exchanges and wallets when doing the overall crypto tax calculation. The purpose is to be able to use the "pool" approach to aggregate all the trades and use a cost basis allocation method such as FIFO or Specific Identification to get to a more tax advantageous result.
There are several issues in aggregating Robinhood crypto transactions with other crypto trades:
(1) Since Robinhood issues a 1099-B with basis information, just like a brokerage firm does for stock/mutual fund trades, Robinhood transactions need to be reported on Form 1040 Schedule D and Form 8949 with Box A checked. Crypto trades on other crypto exchanges though, will need to have Box C checked because no 1099-B is provided. The IRS will likely look for amounts under Box A to match the 1099-Bs they received. If you mix Robinhood crypto trades with other crypto trades, one problem you need to deal with is the crypto tax report you generate by using a crypto tax software will not provide the breakdown between Box A and Box C. Also, basis (and probably sales proceeds as well) for your Robinhood trades in the "aggregated" tax report will not match the Robinhood 1099-B. That could potentially lead to an IRS notice.
(2) Similar to most brokerage firms, Robinhood uses the default FIFO method for calculating cost basis when issuing a 1099-B. If you want to use a different basis allocation method (i.e., specific identification method), you will be technically changing the method used by Robinhood in the 1099-B is issued. This will not sit well with the IRS.
Aside from the above two issues, there are two more things we need to consider:
(1) Can a taxpayer report crypto trades reported by Robinhood 1099-B on Schedule D and Form 8949 with Box A checked and using FIFO basis allocation method, while at the same time report their other crypto trades with Box C checked and using a different basis allocation method? Currently, there is no official guidance about this issue.
(2) Is the"pool" approach or aggregate cost basis allocation method allowed? Technically, when you sell a coin on an exchange, you are not supposed to use a cost basis for the same coin sitting in a wallet or on another exchange, because that just doesn't make sense. Some people contacted the IRS about this issue and they were told that all the trades should be calculated within each exchange. In other words, you cannot mix everything together. However, so far there is no official guidance issued, so people continue to use the pool approach. Also, it's very difficult for crypto software companies to design their software in a way to correctly track everything within each crypto account because crypto investors usually move their coins all over the place.
To avoid the above mentioned issues and to make things clean, we would recommend taxpayers to report Robinhood transactions exactly as what's reported on the 1099-B issued by Robinhood, and not aggregate them with other crypto trades when calculating and reporting their crypto gain/loss on a tax return.