you are using the same x,y variables for both
you have to do something like this:
' declare variables
x1=100:y1=200:x2=200:y2=200
do
`Background image
cls
copy bitmap 8,0
`Player one movement and paste
if leftkey() = 1 then dec x1,
if rightkey() = 1 then inc x1,
if upkey()=1 then dec y1
if downkey() = 1 then inc y1
paste sprite 1, x1, y1
`Player two movement and paste
'w
if keystate(17)=1 then dec y2
'a
if keystate(30)=1 then dec x2
's
if keystate(31)=1 then inc y2
'd
if keystate(32)=1 then inc x2
paste sprite 3, x2,y2
sync
loop