v3.22.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
The components of income (loss) before income taxes were attributable to the following regions (in thousands):
Year Ended December 31,
202220212020
Domestic$(3,071,951)$2,977,406$396,709
Foreign7,36949,54112,490
$(3,064,582)$3,026,947$409,199
(Benefit from) provision for income taxes consisted of the following (in thousands):
Year Ended December 31,
202220212020
Current
Federal$1,654$(51,942)$65,269
State3,9854,45618,162
Foreign22,7638,6422,977
Total current28,402(38,844)86,408
Deferred
Federal(361,056)(438,810)1,373
State(126,713)(93,959)(514)
Foreign19,734(25,560)(385)
Total deferred(468,035)(558,329)474
Total (benefit from) provision for income taxes$(439,633)$(597,173)$86,882
The effective income tax rate differs from the statutory federal income tax rate as follows:
Year Ended December 31,
202220212020
Provision for income taxes at U.S. statutory rate21.00 %21.00 %21.00 %
State income taxes, net of federal benefit5.04 (4.67)3.39 
Foreign rate differential(0.02)(1.09)(0.24)
Non-deductible compensation(1.34)0.83 0.99 
Equity compensation(3.43)(31.95)0.27 
Adjustment to prior year provision(0.23)0.14 (0.11)
Research and development credits1.40 (9.60)(1.86)
Change in valuation allowance(6.37)1.65 — 
Foreign tax credit— — (0.05)
Subpart F income— — 0.09 
Foreign Derived Intangible Income (“FDII”)— — (1.50)
Global Intangible Low Taxed Income (“GILTI”)(0.94)— 0.06 
Uncertain tax positions(0.60)3.07 0.46 
CARES Act - NOL Carryback— — (1.20)
Other(0.16)0.89 (0.07)
14.35 %(19.73)%21.23 %
The Company’s effective tax rate of 14.35% for 2022 reflects a tax benefit on pretax loss reduced by certain nondeductible compensation and a valuation allowance recorded on impairment charges. The Company’s effective tax rate of (19.73)% for 2021 reflects a tax benefit on pretax income due primarily to deductible stock option exercises as a result of the Company’s Direct Listing, and research and development credits.
The Company’s effective tax rate for 2021 was significantly lower compared to 2020 due primarily to an increase in 2021 tax benefits from deductible stock options as a result of the Company’s Direct Listing, and an increase in 2021 research and development credits.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities consisted of the following (in thousands):
December 31,
20222021
Deferred tax assets
Safeguarded crypto liabilities$19,086,117$—
Accruals and reserves6,24819,184
Net operating loss carryforward396,613262,574
Lease liability19,96726,338
Tax credit carryforward301,862285,029
Stock-based compensation24,52750,292
Intangibles27,0227,339
Capitalized expenses415,981—
Capital losses - realized / unrealized225,21137,932
Gross deferred tax assets20,503,548688,688
Less valuation allowance(252,258)(54,383)
Total deferred tax assets20,251,290634,305
Deferred tax liabilities
Safeguarded crypto assets(19,086,117)—
State taxes(23,212)(973)
Depreciation and amortization(35,893)(15,937)
Prepaid expenses(5,938)(3,439)
Right of use asset(18,246)(24,347)
Installment gain(13,443)(15,859)
Other(21,650)(203)
Total deferred tax liabilities(19,204,499)(60,758)
Total net deferred tax assets$1,046,791$573,547
As of December 31, 2022, the Company had $1.0 billion in net deferred tax assets. At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. On the basis of this evaluation, only the portion of the deferred tax asset that is more likely than not to be realized was recognized. However, if the Company is not able to generate sufficient taxable income from its operations in the future, then a valuation allowance to reduce the Company’s U.S. deferred tax assets may be required, which would increase the Company’s expenses in the period the allowance is recognized.
A valuation allowance of $252.3 million and $54.4 million was recorded against the Company’s net deferred tax asset balance as of December 31, 2022 and 2021, respectively. The valuation allowance as of December 31, 2022 includes allowances primarily related to realized and unrealized capital losses on digital assets and Coinbase Ventures investments, and California research and development credits.
In accordance with the Company’s adoption of SAB 121, a deferred tax asset and deferred tax liability are being disclosed relating to safeguarded customer crypto assets and liabilities. A deferred tax asset is reported on the safeguarded liability, and an offsetting deferred tax liability, measured at the same amount, is reported on the safeguarded assets.
As of December 31, 2022, the Company had U.S. federal net operating loss carryforwards of $1.3 billion, and as of December 31, 2021 the Company estimated a U.S. federal net operating loss carryforwards of $873.6 million. On the Company’s 2021 tax return, the Company elected to capitalize expenses which replaced the estimated 2021 net operating loss carryforward into 2022. The U.S. federal net operating losses carry forward indefinitely. Additionally, the Company had U.S. state net operating losses of $1.4 billion as of December 31, 2022. Generally, California and other significant U.S. states have a twenty-year carryforward for net operating losses.
Activity related to the Company’s unrecognized tax benefits consisted of the following (in thousands):
Year Ended December 31,
202220212020
Balance, beginning of year$111,019 $12,807 $10,344 
Settlements(6,128)— — 
Increase related to tax positions taken during a prior year13,940 — 212 
Decreases related to tax positions taken during a prior year(9,187)— (882)
Increases related to tax positions taken during the current year14,462 98,212 3,133 
Balance, end of year$124,106 $111,019 $12,807 
As of December 31, 2022 and 2021, the Company had $124.1 million and $111.0 million, respectively, of unrecognized tax benefits, of which $114.4 million and $84.9 million, respectively, would reduce income tax expense and affect the effective tax rate, if recognized. It is reasonably possible that the balance of unrecognized tax benefits could decrease within the next twelve months as a result of audit closures. The potential reduction in unrecognized tax benefits is $2.2 million, of which $1.8 million would favorably impact the Company’s effective tax rate. The Company accounts for interest and penalties related to exposures as a component of income tax expense. The Company recorded $0.5 million and $0.3 million of accrued interest and penalties, respectively, as of December 31, 2022 and $0.6 million and $0.4 million of accrued interest and penalties, respectively, as of December 31, 2021.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Currently these statutes of limitations are open from 2020 forward for the U.S., 2018 forward for California, 2021 forward for the United Kingdom, and 2018 forward for Ireland. During 2022, the IRS completed the audit of the Company’s U.S. federal income tax returns for years 2017 to 2019, and the state of California completed the audit of the Company’s income tax returns for 2016 to 2017.