Does eToro Report to the IRS?

Does eToro Report to the IRS?

Robert McDougall 

January 8, 2024

Cryptocurrency

eToro’s rise as a trading platform since 2007 has been well documented. Since the years have passed, the platform’s seen an exponential growth in overall trades and users. Currently, eToro has over 25 million users worldwide. 

In 2014, eToro added support for its first cryptocurrency: Bitcoin. Since then the platform has gone on to support over 75 cryptocurrencies, becoming one of the market’s leading online brokerages. 

However, despite that success there’s still some confusion that persists regarding the platform’s tax reporting policies. So what is eToro’s approach to tax reporting and more importantly does eToro report to the IRS? Let’s find out. 

Tax Obligations and Trading

Understanding first how your earnings in cryptocurrencies can be taxed is crucial to develop a complete understanding of eToro's approach to tax reporting. 

From what we could gather, the IRS in their Notice 2014-2021 on digital assets considered cryptocurrency a form of property. Essentially subjecting cryptocurrency earnings to two types of taxation: 

  • Capital Gains tax when you dispose of cryptocurrency;
  • Income tax when you earn cryptocurrency. 

In the section below, we’ll be diving deep into how both of these taxes work in cryptocurrency trading. 

How is Capital Gains Tax Applied When Disposing of Crypto Assets?

In regards to cryptocurrency, capital gains tax is applied when you dispose of it. This tax is actually a percentage of the capital gain or loss you receive from disposing of the asset. Disposals include:

  • Trading your cryptocurrency for another crypto asset.
  • Selling your cryptocurrency.
  • Using your crypto to make a purchase.

To put simply, any profit or gain you receive from the sale of a cryptocurrency can be subject to a capital gains tax. 

The exact percentage of this tax though depends on two factors:

  • The exact amount of your realized gains.
  • The amount of time you held your cryptocurrency before trading or selling it.

From what we know, if you hold your cryptocurrency and then dispose of it within a 12 month period then you’ll only be subject to ordinary income tax rates which can range from 10% to 37% of your capital gain.

On the other hand, if you hold your cryptocurrency for more than 12 months before selling it or trading it then your gains will qualify for a preferential long term capital gains tax rate, which is usually lower than the ordinary income tax rate. This tax rate can vary between 0% to 20%

How is Standard Income Tax Applied on Earnings from Cryptocurrency?

We just learned how short term capital gain from selling or trading crypto is treated the same as your ordinary income. Thus, the same logic carries over to tax rates. 

However, this begs the question: When do you owe ordinary income tax on your crypto earnings? Well, this tax can be levied on an investor on three major events.

When you Earn Rewards From Mining Crypto 

Whether you’re part of a crypto mining pool or mining individually, the earnings you receive from your mining activities can be considered ordinary income. 

Thus, the total value of the cryptocurrency you’ve mined can be considered taxable income and then taxed at your ordinary income rates. 

When you Earn Rewards From a Crypto Airdrop

During a marketing campaign the company behind a new cryptocurrency may randomly airdrop some free tokens in a large number of wallets. If you receive these airdropped tokens, the fair market value of these coins is considered as your ordinary income. 

This makes the earnings taxable according to your ordinary income tax rates. You’re thus required to file your total airdropped earnings on your tax return.

eToro’s Approach to Tax Reporting

eToro uses the FIFO (first in first out) method to calculate the capital gains or losses for its users. The method requires you to count the first coin that you purchase as the first coin that is counted for sale. 

Let’s consider an example: Suppose you buy 1 ETH for $2,000. After a few months you again buy 1 ETH but this time for $2,500. After some time you decide to sell 1 ETH for $3,000. 

Now, if you use the FIFO method, the first ETH that you bought for $2,000 becomes the cost basis. The total capital gain that you’ve accumulated then becomes $1,000 after subtracting the cost basis from the selling price. 

After calculating their users’ capital gain, eToro issues multiple tax forms to its users annually to provide them with a summary of their trading activities and transactions on the platform. These forms include:

  • Form 1099-MISC to investors who earn more than $600 during the tax year.
  • Form 1099-B which contains their detailed capital gains and losses.
  • Form 1099-K which contains details about their monthly transactions.

Each of these forms can be a bit tricky to understand for newbie crypto investors so let’s break them down one by one. Additionally, I’ll also be mentioning some tools eToro offers that can help make tax reporting easier for you. 

Form 1099-MISC

From what we know, eToro issues form 1099-MISC only to US-based users of the platform. This form reports all the miscellaneous income an individual or business has earned during the tax year. 

In eToro’s case, this form contains all the non-investing income an individual has received during the tax year. This includes their refer a friend bonus or their eToro options reward points. 

The reward points are granted for initiating your initial deposit on the platform and engaging in options contract trading within your account.

These accumulated reward points become redeemable at the conclusion of the subsequent month. Importantly, it's worth noting that form 1099-MISC does not require attachment to the tax return submitted to the IRS; its sole purpose is to assist in calculating and reporting the total cryptocurrency income.

Form 1099-B

Form 1099-B’s basic purpose is to track the disposal of capital assets. The form contains important details about your cost basis, gross proceeds and short term capital gains and losses that you’ve accumulated over the previous tax year. 

The form itself is thoroughly detailed and includes a detailed description of your assets, dates of transactions, proceeds from selling and exchanging cryptocurrencies and any other adjustments. 

Once again we should mention that attaching this form to your tax return is not necessary. It’s only there to provide you with the total short investment gain or loss you’ve received through the previous tax year so that you can calculate and file your capital gains tax with the IRS. 

Form 1099-K

eToro sends form 1099-K to investors who’ve made more than 200 transactions that are more than $20,000 in volume. It's basically an informational form that reports the number of credit card transactions and network payments you’ve received throughout the previous tax year. 

It’s important to note the distinction between this and form 1099-B; this form only shows your gross transactional volume instead of your taxable capital gains and losses. 

Just like the other two, this form does not need to be attached to your tax return as the total transactional volume is not something you need to report.

Tools eToro Offers to Help Users Track Their Transactions

eToro offers plenty of help to its users when it comes to tracking their crypto tax records. To view your crypto tax reports directly, users can navigate to the “account” section on the eToro Investment platform. From there they can view their crypto tax reports directly. 

Alternatively, you could also visit the eToro Options app and find your consolidated 1099 form in the “documents” section of the settings screen. To add to that, eToro also recently collaborated with Regnology to embed EasyTax, a cloud based tax reporting solution into their infrastructure. 

Here’s what the product manager at eToro had to say about it:

 “The collaboration with Regnology and the use of their EasyTax solution allows us to produce high quality and country-specific tax reports for our clients”.

Does eToro Report to the IRS?

To give you the short answer: yes, eToro does indeed report to the IRS. Whenever eToro creates and sends a 1099-MISC form to its users, it also sends an identical copy to the IRS. 

Keep in mind that form 1099-MISC is only issued when a person makes over $600 worth of trades on the platform. These include referrals, capital gains and other adjustments. 

Additionally, US President Joe Biden also passed the Bipartisan Infrastructure Deal in 2021 that requires all cryptocurrency brokers to report all crypto transactions to the IRS via form 1099-B. 

Thus, we could see eToro sending an identical copy of users’ form 1099-B to the IRS in the future as well.

Implications for eToro Users

If there’s anything to takeaway from the information we’ve just detailed — it’s that the exchange is extremely diligent in providing its users with all the tax information they need. 

Thus, the onus is now on eToro’s users to fill up the forms detailing their earnings from the platform and evaluate where they currently stand. 

Investors on the platform must calculate their own gains and losses and back them up with the extensive transaction history that eToro provides. Without data to back up their claim users can fall victim to poor reporting which can result in some serious tax repercussions. 

Tips for Maintaining Tax Compliance

We understand the problems you may face when trying to file your crypto tax returns. To help you out, we’ve come up with some tips that can help you stay tax compliant:

  • All tax returns of the previous year have to be filed with the IRS by January 31st of the following year. Make sure to report all your gains and losses on time because you might incur penalties if you don’t.
  • Employ the use of a crypto tax calculator like ZenLedger to help you accurately calculate your tax returns as quickly as possible by importing your transaction history from eToro directly.
  • Investing in a good crypto tax lawyer is also a good idea provided you want to speed up the filing of your eToro tax.

Comparative Analysis with Other Trading Platforms

As I’ve mentioned before, eToro is extremely comprehensive in providing their users with every detail of the taxable income they’ve generated on the platform. However, it’s still worth comparing how eToro’s taxing approach stacks up with other reputable exchanges.

eToro Taxation Approach

Binance Taxation Approach

KuCoin Taxation Approach

Issues Form 1099-MISC

Issues Form 1099-B

Issues Form 1099-K

 Issues Form 1099-MISC

Isn’t licensed to operate in the U.S so they don’t report to the IRS

Conclusion

eToro is one of the most popular online crypto brokerages in the world. Plus, it’s also one of the first social trading platforms allowing its 25 million user base to mirror the transactions of successful traders. 

Created all the way back in 2014 the exchange now reports directly to the IRS and covers all its users’ capital gains and losses. The responsibility then falls on the investors using the platform to report their taxes on a regular basis and fill up the forms they send. 

Hopefully, the information we’ve provided in this article will be enough to help you remain compliant with your tax obligations. However, remember that this is general information only and is not tax, legal, or financial advice. We recommend you consult a tax professional for specific advice for your situation.


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