IRS Reporting Issues

[Bsims]

In a recent post, Chi_archie pointed out that beginning in 2018 the IRS will consider any trade of cryptocurrencies to be a taxable event. This will create much confusion with very few knowns and lots of unknowns. I've started this thread as a place to discuss this issue. I'll start by re-posting a couple of my earlier ones.

http://bitcoinist.com/cryptocurrency...ose-tax-break/

[Bsims]

OK, let's assume the IRS's wet dream comes true and they get access to all US base exchanges and their customer's transactions. Now what. I know, we'll look for when a customer buys some BTC with USD and later sells some BTC for USD. Great, consider it like a stock transaction and tax him on his gain or loss.

But wait, suppose he uses the BTC to buy some LTC and later sells LTC to buy some XRP, and so on. Now how do I assign USD gains and losses on these transactions. Yes, it technically could be done, but it would be very tricky and require the knowledge of the equivalent USD value at the moment of the transactions. Somehow this strikes me as beyond their capabilities.

But they could take an easier way out. Just say, Ole Bill, you deposited x dollars at Coinbase and later withdrew y dollars. We'll tax you on the difference. So, how do they account for the BTC that disappeared, like converted to a debit or gift card. Or even worse, those BTC that went to an offshore sports book, only to be lost forever.

I'm 73 years old. By the time they figure this out, I'll be long gone and won't give a rat's ass.

[Bsims]

This will really be a mess. I have a real concern about how the IRS will decide to handle these trades. The natural way to handle two transactions would be to subtract the difference between the selling price and the purchase price. But these could be in different currencies, so a simple subtraction isn’t possible. The most likely scenerio is the example I cited in a post on 10/27.

“But wait, suppose he uses the BTC to buy some LTC and later sells LTC to buy some XRP, and so on. Now how do I assign USD gains and losses on these transactions. Yes, it technically could be done, but it would be very tricky and require the knowledge of the equivalent USD value at the moment of the transactions. Somehow this strikes me as beyond their capabilities.”

Unfortunately, the IRS probably won’t issue guidelines on how to do this for a good while. We’ll be on our own to decide what records to keep. Any thoughts?

[Bsims]

Ideally, the IRS would require the U.S. exchanges to produce a report for each customer detailing these trades and totaling them. But what about the non U.S. based exchanges?

I think it would be prudent to develop a spreadsheet tracking these trades. Any thoughts about what information should be saved?

[mrpapageorgio]

The reason of it being a mess is why I wouldn't worry too much about an audit until you start getting into the mid 5-figures of how much you have invested (basically are you living off of it or do you have a large amount invested in it). They aren't going to be able to figure out how much you owe without doing some serious accounting and likely won't be worth it to them to pursue until it gets to that level. I wouldn't be shocked though if they go back and retool it when they find out it's not going to be as easy as they put it on paper to implement.

With that said (and I'm not a tax lawyer, just my personal opinion).

I would probably create an excel sheet listing date and time (so you can lookup exact price at that time if you have to) of transaction, what you bought (crypto), what you bought it with (BTC or USD if buying one of the big 4 on Coinbase) and how much you paid. For the last part, it might be worth it to just do the conversion right then and there and have everything converted to USD so you're not having to go back and lookup the prices.

For like kind exchanges, I would probably list the exchange as 2 separate sales. So if I'm buying XRP with BTC. I would list it as two transactions with 1 being that I sold the BTC for USD (price at the time of exchange), then the other being I bought XRP for USD. However, if I just bought BTC and was immediately using it to buy XRP, I would just list one transaction of buying XRP since the price difference is likely negligible and wouldn't make a difference tax wise (unless it shot up a lot in the 10 minutes you spent transferring it). I would only worry about basis if I was using crypto I had previously held to buy a different alt.

[EasyTiger]

Curious. Does anyone know the tax regulations regarding fiat currency trading? Just wondering how the FX traders handle this as it may give insight as to how to handle crypto trading. I would think that essentially the same principles apply.

[Bsims]

I like the idea of making 2 entries for each trade. It should be easier to match later. I also plan on adding the USD equivalent for each trade. Since most of mine are limit trades I don't know when they occur exactly, so I'll probably will use the midpoint of the high and low on the date of the trade. That should suffice.

It did occur to me that these would be like currency exchanges. Hopefully someone will answer Easy Tiger's question.

[Waterstpub87]

OK, let's assume the IRS's wet dream comes true and they get access to all US base exchanges and their customer's transactions. Now what. I know, we'll look for when a customer buys some BTC with USD and later sells some BTC for USD. Great, consider it like a stock transaction and tax him on his gain or loss.

But wait, suppose he uses the BTC to buy some LTC and later sells LTC to buy some XRP, and so on. Now how do I assign USD gains and losses on these transactions. Yes, it technically could be done, but it would be very tricky and require the knowledge of the equivalent USD value at the moment of the transactions. Somehow this strikes me as beyond their capabilities.

But they could take an easier way out. Just say, Ole Bill, you deposited x dollars at Coinbase and later withdrew y dollars. We'll tax you on the difference. So, how do they account for the BTC that disappeared, like converted to a debit or gift card. Or even worse, those BTC that went to an offshore sports book, only to be lost forever.

I'm 73 years old. By the time they figure this out, I'll be long gone and won't give a rat's ass.

Definitely not beyond their capabilities.

They would have prices on those things over time. Easy to make a conversion from XRP to LTC if you have historical prices. If you aren't exchanging currency for currency (Trade 2 XRP for 1 LTC ect.) and instead are converting to USD each time, much easier.

If they can figure out gains and losses on for tax purposes on complex, illiquid financial products, they can easily do so on liquid crypto currencies.

[RoyBacon]

I used a BTC accounting software last year. It cost like $200 for a single use. I inputted all my exchanges data and put them perfectly on the tax forms. I did have to go through and assign some missing values but it was super easy.

[RoyBacon]

bitcoin.tax

It's been a year since I've used them and it wasn't cheap - but super slick and way above expectations.

[Bsims]

I decided to save details of all my transactions starting at the first of 2018. I am using a ledger type approach in Excel. Following are the columns I've defined.

Entry ID # - A number I'm assigning to each transaction so I can match them up again.
Exchange - Name of the exchange involved.
Date - Date of the transaction (not going to bother with the time since I wouldn't know it on limit trades).
Entry Type - the type of entry.
Coin - The coin involved.
Number - Number of coins involved.
$ Per Coin - I'll fill these in later (plan on using the average of open, close, high, and low for the day).
Total $ - Number of coins time price per coin.

Entry Type - I started with "Balance" which is the number of coins I held at each exchange at the beginning of the year. This is a positive number. There is one entry per coin per exchange or wallet (in my case there were 17 entries).

Next I transferred some ETH from one exchange to another. I had 3 entries for this. First was a negative number of coins from the first exchange with entry type "X-Out". Then I had a "X-In" entry for the second exchange with a positive number. Finally, I had an entry type of "Fee" with a negative number accounting for the fee with the appropriate coin and exchange.

I then made a trade at the second exchange, and again I had 3 entries. These were a "Sold", "Bought", and "Fee". The sold had a negative number, the bought a positive, and the fee was negative. Again, I'll be adding the price per coin at a later date when I download the prices for each coin for each day.

This approach using positive and negative numbers and separating out the exchange and coin has an added benefit. I used a pivot table and generated the number of coins I have at each exchange (or wallet).

This is my initial approach. If anyone sees any problems or shortcomings, let me know before we get too far in the year.

[Bsims]

GDAX has posted a note Called "Tax Reporting Guidelines". It included 3 links. One was to IRS Notice 2014-21 which has the cryptocurrency reporting guidelines for 2017 and prior. It defines cryptocurrencies as property. Pretty vague relative to my situation.

Second link was to your accounts page which allows to to download your previous transactions. Not exactly a user friendly spreadsheet. It would take some work to match transactions

Finally was a link to their FAQ pages that deals with tax reporting. Apparently I will received a 1099-K in January for last year. I hope it is straight forward and eliminates the need to process individual transactions. I would not be surprised if everyone of their customers gets one for 2018.

[Bsims]

Just curious, what do other U.S. citizens plan to do relative to taxes?

[Arky]

Sounds to me that Coinbase won't even issue a 1099K form unless you have made 20k+ in purchases from them. What are we to make of that? That everyone under 20K is small potatoes tax-wise? That if you are just dabbling around with a few small crypto coin investments to not sweat it?

If I have growth in my 401k, I don't pay taxes because it stays in the 401k. If I make a withdrawal, then I get taxed. Sounds like the coins are going to be treated differently? Growth taxes?

I keep spreadsheets and records of every coin and alt-coin I purchase with date and value. My sheets are based on USD value not coin value. I do not keep records of every time I turn LTC into ETH so I can purchase say, ADA. All fees and exchange fees in the purchase of the ADA are computed from the starting purchase price of the LTC. For example, if I bought $500 worth of LTC and it ended up in a purchase of ADA, then I have $500 worth of ADA even though the value of the ADA is only $483 in actual USD at time of purchase. That's as far as I am going to take it. Eheh. Sorry, if it needs to be more detailed than that, then YOU (IRS) tell me what I owe....

I'm not above paying taxes but the little guy needs bottom-line forms and documents issued from the exchanges to assist him come tax time. Otherwise, this sounds to me like the rules of self-employment - figure out what you owe us (IRS) as best you can.

[advantageU]

What if the IRS mandates Coinbase to license every individual trader who makes deposit of any size to their website? Make the registration cost money, and have every user contribute a flat fee. Is this way too simplistic of an approach?

[ans61201]

Less than 1% of people claimed crypto profits who made them. The IRS does not have the manpower for every small fish. If you get audited this stuff will be important. They will be happy if you report your end profit. Deposited X, withdrew Y owe Z.

Good to keep track in small chance of an audit. In a couple years may be more important.

[Nova99]

bitcoin.tax

It's been a year since I've used them and it wasn't cheap - but super slick and way above expectations.

+1, I have a spreadsheet but i only traced the btc value and not the usd on the trade dates. Their service allows you to import what you can export from the exchanges, its just a lot easier and cleaner to use since it will convert the value of BTC into usd for the taxman.

[Bsims]

bitcoin.tax

It's been a year since I've used them and it wasn't cheap - but super slick and way above expectations.

I signed up as a test. Their website isn't clear on the fees. It said starting at $29.95 but doesn't offer a chart of fees based on transaction volumes. You mentioned $200. About how many transactions did that cover?

[Bsims]

I looked into IRS guidelines for reporting FOREX transactions and found this bit of information from the IRS.

https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

The operative paragraph supports the contention that all events will need to be converted to U.S. dollars.

"Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income."

Following is a link to a very good video about this issue.

https://www.youtube.com/watch?v=q5VCq3pX3ys&feature=youtu.be

[Nova99]

29.95 for up to 10000 transactions.

99.95 for unlimited transaction for one calendar year.

It does have the disclaimer that what they calculate is for informational purposes only and they cannot guarantee IRS will come back for more.

[Bsims]

After developing my ledger approach to keeping track of transactions, I decided my enthusiasm for manually entering these was minimal. This was particularly true when I wanted to go back to 2015 when I started messing with this stuff. Complicating the matter further is the fact that a lot of my trades weren't simple, but involved multiple sub-transactions some of which were pretty small.

So I decided to go to each site I use for crypto stuff and exported whatever they had for transaction history. I then wrote a program with separate code for each site's format and generating a ledger with most of the fields I defined earlier. I generated a ledger for the pre-2018 transactions and balanced my coin count to my status at each site at the end of last year. Getting it to balance was a challenge, but I actually got there. Then I added the 2018 transactions and happily was able to get it to balance where I stand today.

One major issue was how to assign a USD price to each coin when a transaction occurred. So I built a history file that contained the date, the coin, and the open, high, low, and close value for that day. I then computed the average of these 4 and used this to update my ledger file with the USD amount. If I'm ever forced to deal with the IRS on my transactions, I'm pretty certain they would accept this workaround as reasonable.

Now with the ledger in place, I'll be able to write code to come up with about any report I desire. This could include a trade by trade gain or loss and the transaction dates involved. I'll also be able to generate a daily status report by fetching the current coin prices from the internet. And finally, I'll be able to create some reports detailing how my transactions performed.

It's been a pretty big effort, but coding is a hobby for me so it's been entertaining. Now I feel comfortable that I have my crypto stuff finally organized.

[RoyBacon]

29.95 for up to 10000 transactions.

99.95 for unlimited transaction for one calendar year.

It does have the disclaimer that what they calculate is for informational purposes only and they cannot guarantee IRS will come back for more.

I did the $99. I had a gazillion transactions from 4 different exchanges. I was stressing for a solution. A CPA quoted me $3k to unfvck my stuff manually. I'll gladly use bitcoin.tax this year.

[Bsims]

Nothing focuses the mind on the details like writing a program to deal with actual data. I've now made enough progress on my program to create a ledger of transactions and movements of crypto-currencies for the last 3 years. I've also began the process of generating reports for my own uses as well as potentially to be used in reporting to the IRS. Bottom line, it's a lot more complicated than the IRS or users are going to be willing to hear. Following are 3 examples.

Case 1 - A simple transaction. You by some coin with USD and later sell some portion of your holdings for USD. This is pretty straight forward and can be considered like a stock trade. Total proceeds out minus cost in gives you the desired net gain or loss.

Case 2 - Similar to case 1, except instead of using USD for the purchase or sale, you use another coin. The IRS will be interested in the USD equivalents of this transaction. If you can assign the USD value of the coins in question at the time of the transactions, then these could be reported. But assigning these equivalents can only really be done at the moment of the transactions. Assigning these won't be easy for past transactions or limit orders that are filled at some unspecified time.

Case 3 - After the initial purchase, you move the coins to another exchange where they are later sold. You could ignore the exchanges involved and simply treat the initial purchase and sale like Case 2. But there are lots of issues involved, some follow.

• If one of the exchanges reports to the IRS, they might consider a transfer out as a sale. Likewise, they might report a transfer in as a purchase.
• You definitely would want to match the data sent to the IRS, so you would have to treat the transfers as beginning and ending sales.
• But what about the gain or loss because of the transfers. There are fees, and changing USD equivalents due to time delays (not to mention that each exchange prices the coins differently in terms of USD's).
• Would you want to handle foreign exchanges that don't report to the IRS differently?

Unfortunately some of these issues won't be resolved unless the IRS issues some very specific guidelines. Even then, we won't know what reporting the exchanges will do until after the end of 2018. So I guess the message is to keep the data and stay flexible.

[Ro0k]

cointracking.info will let you import trades or input them manually and spit out a tax form at the end of the year.

[Bsims]

I signed up with Bitcoin.tax. It looks like a pretty good system. They offer years before 2017 free and 2017 for $29.95. I created upload files for 2015 and 2016. The site generated good reports for each of those years.

For 2017, I created API's for the exchanges that I used last year. Their instructions were good. They pulled down data from the sites. I created upload files for the sports books by considering them as an exchange. Now I am in the process of trying to reconcile their reports with the ones I'm generating from my ledger system.

I have two observations. First they only deal with purchases and sales and not transfers between the exchanges. Thus they are ignoring my case 3 above and using case 2 for the reports. That's fine.

The other one is that they record all transactions. I would prefer to lump them all together and simply report cash in and cash out. Not sure what approach I will take this year.

[TheMoneyShot]

If you guys are very serious an eager to report your Bitcoin trades...

A simple Excel spreadsheet will do.

What do you think sales reps and small businesses use for reporting at the end of the year?

I don't understand why you would pay anyone to sort out your trades?

[Bsims]

I started out with simple Excel spreadsheets a few years back. But as the volume of my trades increased, the amount of time it was taking to enter the data became burdensome. Periodically, I'd have to go back and enter trades I'd missed. In the process I'm currently going through, I've not only discovered that I missed trades, but made some errors on others.

I'm not eager to pay taxes and would have been perfectly content to keep ignoring them. But once the U.S. based exchanges started supplying 1099-K's and potentially other reports to the IRS, we were screwed. From what I understand, these reports might not accurately report your transactions and may vastly overstate your income.

I'm pretty certain I could ignore this issue for a couple of years before the IRS catches up. By then, I'll likely be long gone. I just don't want my wife getting a knock on the door some day saying she owed thousands of dollars in back taxes and not having a way of disputing it.

[soxwin1917]

I started out with simple Excel spreadsheets a few years back. But as the volume of my trades increased, the amount of time it was taking to enter the data became burdensome. Periodically, I'd have to go back and enter trades I'd missed. In the process I'm currently going through, I've not only discovered that I missed trades, but made some errors on others.

I'm not eager to pay taxes and would have been perfectly content to keep ignoring them. But once the U.S. based exchanges started supplying 1099-K's and potentially other reports to the IRS, we were screwed. From what I understand, these reports might not accurately report your transactions and may vastly overstate your income.

I'm pretty certain I could ignore this issue for a couple of years before the IRS catches up. By then, I'll likely be long gone. I just don't want my wife getting a knock on the door some day saying she owed thousands of dollars in back taxes and not having a way of disputing it.

You're a good man, Bsims. I wish some of the younger guys here recognized how much they can learn from you. Please keep sharing your insights.

[TheMoneyShot]

You're a good man, Bsims. I wish some of the younger guys here recognized how much they can learn from you. Please keep sharing your insights.

BSims is very intuitive. His heart is in the right place. Probably worries a tad too much about it though.

I will say this... all 1099-K's are suppose to be mailed or emailed to the user. If a 1099-K wasn't reported.... and you had small gains... I really wouldn't open up a can of worms on this.

[Optional]

He doesn't seem like a worrier to me. Just old enough and wise enough to see life could be a lot simpler in a few years time if he prepares for what is inevitable as he goes, in real time, whilst he can remember all the details.

Bsims is planning to be a "winner" basically.

Many gamblers don't think or plan that way as we don't have high expectations for our results deep down.

[Roscoe_Word]

I'm currently awaiting word from my accountant on the interpretation of my Coinbase 1099 form. What's confusing to me, (and didn't appear straightforward to her when I showed her) was the lone marked box on the form. Mine said $1625. I just use BTC to transfer funds and not as an investment in itself. (I don't know how to handicap it, LOL).

I know I definitely didn't profit $1625 from my BTC holdings. This box was marked "transactions", but it gives a tax person the impression that it's gross profits. I'm thinking there's no way around this, and that I'm gonna have to submit an erroneous gross profit of $1625.

Part of the "benefits" of residing in Taxachusettes.

[Optional]

^^^ Is there a system to get private tax rulings from the govt there?

If I had that problem here I could submit a simple online query to the tax office with my list of transactions and explanation of what I was doing with them and almost certainly get that problem wiped before submitting my tax return.

[TheMoneyShot]

I'm currently awaiting word from my accountant on the interpretation of my Coinbase 1099 form. What's confusing to me, (and didn't appear straightforward to her when I showed her) was the lone marked box on the form. Mine said $1625. I just use BTC to transfer funds and not as an investment in itself. (I don't know how to handicap it, LOL).

I know I definitely didn't profit $1625 from my BTC holdings. This box was marked "transactions", but it gives a tax person the impression that it's gross profits. I'm thinking there's no way around this, and that I'm gonna have to submit an erroneous gross profit of $1625.

Part of the "benefits" of residing in Taxachusettes.

Is there a box listed as 1a. And the total amount is in that box?

Also, starting with box 5a.... does it list gains for each month all the way to box 5L?

Just trying to get an understanding of what Coinbase was reporting. Thanks.

[Roscoe_Word]

^^^ Is there a system to get private tax rulings from the govt there?

If I had that problem here I could submit a simple online query to the tax office with my list of transactions and explanation of what I was doing with them and almost certainly get that problem wiped before submitting my tax return.

Yea, there might be that, Opti.

I think my best bet is gonna be to let my accountant figure it out, whereas she is the expert.

I'll be hearing from her soon, and (for the SBR members from Vermont or Mass) post what she says. (If I can understand her LOL)

[Roscoe_Word]

Is there a box listed as 1a. And the total amount is in that box?

Also, starting with box 5a.... does it list gains for each month all the way to box 5L?

Just trying to get an understanding of what Coinbase was reporting. Thanks.

I'll check that out a little later in the day, MS. Maybe I could post a snip shot and redact private info, although I don't think I know how. Will get back to you on this, brother.