Tax implications for crypto

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CaptainW
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Re: Tax implications for crypto

Postby CaptainW » Thu Feb 01, 2018

Long John wrote:Coinbase / GDAX does keep a record of cash purchases, and it is fairly easy to access those and add them up. I am not sure what documentation IRS would require to support that.

The maneuverings on other exchanges are irrelevant, I believe, unless there is a cash payout at one of them. For most people the key numbers are total cash in and total payouts at Coinbase. Again correct me if I'm wrong, it appears there is no reporting to IRS if your total payouts are less than $20K in a year, and whether you report that is your business and at your risk.


This is speculation on my part but I'm guessing it will be treated similar to gambling winnings. If you go to the casino and hit a jackpot for 5k, the casino will send a W2G for that amount regardless of how much you may have invested before hitting the taxable payout. Many uninformed players actually pay taxes on those reported winnings despite having lost money in the process.
The answer is (for gaming anyway) to keep a personal log of wins and losses (I like redundancy). You can write off losses up to the amount of winnings. If you're lazy the casino will provide a record IF you were using a player's card. However, these records are often incorrect and the IRS actually prefers a personal log.
If the exchanges aren't providing itemized profit/loss statements, I'd guess this same method will work with crypto's.
Two things I've learned; file late and if questioned or audited, overwhelm them with paperwork. I've been audited by two states in back to back years (probably 10-12 years ago). In both cases I'd filed early but I sent them hundreds of documents and they dropped it. Since then I file very late or get an extension and I haven't been questioned since.

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Re: Tax implications for crypto

Postby rahbii » Thu Feb 01, 2018

We're all gonna have loss carryovers and get tax reductions! HA! Eat that CONgress.

They don't like it when they can't take credit for the wealth effect...I mean there's gotta be a lot of 'why didn't we think of that' in the room. So they tax it (to make up for missing it completely) and short it (to make up for missing it completely)....and in the process give us all a $3000 tax break every year. Geniuses they are!
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Long John
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Re: Tax implications for crypto

Postby Long John » Tue Feb 06, 2018

I realize some of this has been discussed already. Ignore if it is of no use to you. Also, I do not mean to join the debate over the inequities of the U.S. tax system or how unwisely taxes are spent. This is only to write down my research on how it affects my crypto dealings. Perhaps someone who doesn't want to read the whole thread and the scattered comments in other threads might find it useful.

So I approached the subject of taxing my crypto profits with some naivete. It seemed fairly simple in concept: If I put $10K into the cash/crypto portal (Coinbase) and took $20K out, I would pay tax on the $10K profit. All the maneuverings in between were irrelevant. Not so.

Then I came to understand that it was more granular than that. If I topped certain thresholds, $20K and (not "or") 200 payment transactions, Coinbase/GDAX would report every crypto-to-cash sale to the IRS. Now, in the second half of the year I cashed out my fiat investment (broke even as far as taxation, to my mind), left the profit in crypto and did a lot of trading of crypto to cash and back again in GDAX to build BTC position. But no way I converted to cash 200 times, so I was in the clear. Again, not so.

There had been some ambiguity and different interpretations on whether trading crypto for crypto was an immediately taxable event or "in-kind" trading. Well, my party of choice, under direction of the bankers the president appointed to run his administration, passed a tax bill that among other things removed that crypto ambiguity. Crypto was now stated to be "real property" and every crypto-to-crypto trade was clearly stated to be a taxable event. If I trade Bitcoin for Ether for Litecoin for Bitcoin for Ether for USD etc., each one of those swaps is a taxable event. And profit or loss on each trade is determined by USD value at the time of each trade. Ack! This explained the impossibly huge dollar amount of payments reported by Coinbase on my form 1099-K. Every granular intra-crypto trade in GDAX was added up. Each was considered a "payment." No differentiation between crypto-to-crypto and crypto-to-cash.

Of course, all those payments don't reflect any cost-basis. The profit or loss on each is up to me to figure out, using Coinbase's transaction history. What a nightmare, but at least there are records to refer to. Oh, for my naive idea that I would simply pay tax on cash taken out exceeding cash put in.

Some specific thoughts I would appreciate comments on:
- The tax law that was passed is not retroactive. It does not govern 2017 taxes. Perhaps the ambiquity regarding intra-crypto trades remains for that tax year? Still, Coinbase added them all up on the 1099 and sent the total to IRS.
- Bittrex, where I also traded, even though it is US-based did not notify me of a form 1099 like Coinbase did. If they sent one to IRS, they would have had to provide one to me, too.
- Form 1099-K is called an "information" form. My accountant (whom I have not yet buried under actual transaction records) told me the IRS does not use it the same way as a W-2 to verify income. Since there is no cost-basis reflected, the 1099 is essentially useless (on its own) as a means of determining capital gains.
- However (my thought) it does tell the IRS that I was very active on Coinbase, and thus not reporting crypto gains or losses at all would be dangerous and invite additional scrutiny you may not want. Better to report and discourage them with a pile of paperwork. :lol:
- Trading on foreign exchanges like Binance is beyond the reach of IRS scrutiny. So at least the crypto-crypto trades aren't all added up. But unless I plan to die with my crypto assets in Hong Kong, it has to be taxed eventually.
- The only way to (legally) avoid taxes on crypto is to buy and never sell. Which to me means to donate my money to the crypto market, but that's another conversation.

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Re: Tax implications for crypto

Postby Rik Bitter » Tue Feb 06, 2018

Long John wrote:- The only way to (legally) avoid taxes on crypto is to buy and never sell. Which to me means to donate my money to the crypto market, but that's another conversation.


What about turning your crypto into something other than cash, like buying PMs. I seem to remember at least one of the large bullion dealers were accepting BTC as tender. Would that be reported to the IRS?
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Long John
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Re: Tax implications for crypto

Postby Long John » Tue Feb 06, 2018

Rik Bitter wrote:What about turning your crypto into something other than cash, like buying PMs. I seem to remember at least one of the large bullion dealers were accepting BTC as tender. Would that be reported to the IRS?

Yes, using crypto to buy goods or services is regarded the same as cashing out. Unfortunately. As far as whether and how it's reported, I don't know. I guess it depends. Using Bitcoin to buy gold from a bullion dealer is probably not safe from the IRS. Sending some Bitcoin into a friend's wallet for his gold/silver, might be. But BTC's blockchain is not truly private in the way Monero is.

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Re: Tax implications for crypto

Postby jcz1 » Tue Feb 06, 2018

If you get a 1099 and don't include it on your tax form, you are asking for trouble. They cross-reference the heck out of those things. An exmaple: I worked as independent contractor for an organization which sent me a 1099 for the amount they paid me. Although I included that on my taxes, somehow the IRS missed it (Fed ID vs SSN perhaps), but not for me, for the organization. That organization then came after me asking me why I didn't report it. The IRS wouldn't allow their dedcuction for that payment because they said I didn't report it. These things are all done by computers, so checking your SSN for 1099 reporting is very simple to do.

LJ is correct that the 1099 may not show cost basis (1099-B now does when it can). So you are free to add whatever cost basis you want, just be prepared to prove it if audited. I don't believe you need to prove it when filing, as LJ seems to imply by talking about burying them with paperwork.

If you don't get a 1099, you are certainly free to decide that you don't owe taxes. The IRS may or may not agree, and may or may not ever find out. Remember that they did go after Coinbase retroactively for amounts that do not meet the current 1099 threshold, so it is possible that they do so again.

If you know you owe taxes and decide not to pay them because the IRS likely doesn't know and won't catch you, you are breaking the law. Feel free to pick and choose which laws should be followed, like the border crossing laws.

The argument that it never came out of coinbase won't hold. If I sell a stock and leave the money in my brokerage account, the IRS says so what.

If you want to claim like-kind for 2017, there are tax forms required for that exchange also.

Lastly, everyone is free to hide these things off-shore, just like the very wealthy and some companies do, even though many Americans frown upon the elites avoiding taxes like that.
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Long John
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Re: Tax implications for crypto

Postby Long John » Tue Feb 06, 2018

jcz1 wrote:LJ is correct that the 1099 may not show cost basis (1099-B now does when it can). So you are free to add whatever cost basis you want, just be prepared to prove it if audited. I don't believe you need to prove it when filing, as LJ seems to imply by talking about burying them with paperwork.

The 1099-K from Coinbase absolutely does not show cost basis. Simply "payment" toials by month, and a year total. My "paperwork" idea (I was somewhat joking) was based on the shaky theory that too much paperwork was safer than no paperwork at all when it comes to knocking down a large 1099 figure.

Example: Say I took out of Coinbase the same amount I put in, $25K. As far as I'm concerned for 2017 taxes, I broke even and whatever profit still resides in crypto is for taxation later, if it remains profit. (My idea, not the IRS's) The 1099-K shows a total of $100K in "payments" because it totted up every trade of every kind. Since I have no cash on Coinbase, only crypto, I want to claim all the cost basis I can, including the $25K cash I put in initially. Sadly, the big value drop after Jan. 1 is of no use to me for 2017 taxes. Anyway, if I claim tens of thousands in cost basis to make that $100K figure reflect reality, but do not show any proof, IRS will be more likely to come down on me than if I send them all the paperwork on my hundreds of trades that they want so badly to tax individually.

Like I said, a shaky theory and I was partly joking. Hence the :lol:

Burying them in paperwork might actually piss them off and backfire, drawing attention rather than avoiding it.

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Re: Tax implications for crypto

Postby jcz1 » Tue Feb 06, 2018

There's no way the idea of what stays in Coinbase matters one bit to the IRS, just as what I leave in Etrade doesn't matter.
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Rik Bitter
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Re: Tax implications for crypto

Postby Rik Bitter » Tue Feb 06, 2018

Long John wrote:
jcz1 wrote:LJ is correct that the 1099 may not show cost basis (1099-B now does when it can). So you are free to add whatever cost basis you want, just be prepared to prove it if audited. I don't believe you need to prove it when filing, as LJ seems to imply by talking about burying them with paperwork.

The 1099-K from Coinbase absolutely does not show cost basis. Simply "payment" toials by month, and a year total. My "paperwork" idea (I was somewhat joking) was based on the shaky theory that too much paperwork was safer than no paperwork at all when it comes to knocking down a large 1099 figure.

Example: Say I took out of Coinbase the same amount I put in, $25K. As far as I'm concerned for 2017 taxes, I broke even and whatever profit still resides in crypto is for taxation later, if it remains profit. (My idea, not the IRS's) The 1099-K shows a total of $100K in "payments" because it totted up every trade of every kind. Since I have no cash on Coinbase, only crypto, I want to claim all the cost basis I can, including the $25K cash I put in initially. Sadly, the big value drop after Jan. 1 is of no use to me for 2017 taxes. Anyway, if I claim tens of thousands in cost basis to make that $100K figure reflect reality, but do not show any proof, IRS will be more likely to come down on me than if I send them all the paperwork on my hundreds of trades that they want so badly to tax individually.

Like I said, a shaky theory and I was partly joking. Hence the :lol:

Burying them in paperwork might actually piss them off and backfire, drawing attention rather than avoiding it.


Given that the 1099-K only shows USD coming out of Coinbase. How would you go about proving a capital loss (like many would be crypto-tycoons are likely to) in 2018?
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Re: Tax implications for crypto

Postby jcz1 » Tue Feb 06, 2018

Rik Bitter wrote:
Given that the 1099-K only shows USD coming out of Coinbase. How would you go about proving a capital loss (like many would be crypto-tycoons are likely to) in 2018?


On the tax form, there is no "proof" needed to show cost basis, just like for stocks (pre-2011 or when the issuer doesn't know your cost basis). You just need to be able to prove it if audited. It sounds like Coinbase provides some sort of information to help with this, just not on the 1099.

And it is my understanding the Coinbase 1099s don't show only the USD coming out of Coinbase, they show the total for every trade made on the exchange during the year.

Since the IRS wants to treat crypto like an asset, I just keep going back to stocks. For instance, let's say I bought 25k worth of stock however long ago, and in 2017 it was worth 100k, so I sold 3/4 and moved that 75k from etrade to my bank. I still have the original 25k in etrade, but that 75k is 3/4 taxable anyway. (I wish I had that problem. :cry: )
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Long John
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Re: Tax implications for crypto

Postby Long John » Tue Feb 06, 2018

Rik Bitter wrote:Given that the 1099-K only shows USD coming out of Coinbase. How would you go about proving a capital loss (like many would be crypto-tycoons are likely to) in 2018?

As I said, the 1099-K shows a total of every trade, whether it's crypto-to-cash or crypto-to-crypto. This is not me guessing. I have my 1099-K, and the round-figure example I used is not far from my actual numbers. I need to figure out my cost-basis for making those trades, including the value I spent in crypto and cash, and any fees.

If only it were just a matter of the cash taken out of Coinbase vs. the cash put in, or even the cash transactions within Coinbase, I would be a happy crypto adventurer. and taxes would be a snap ... though I might be a little grumbly at giving up some of the profit. Better than showing a loss, which is how this year is shaping up so far.

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Re: Tax implications for crypto

Postby Purple and Gold » Wed Feb 07, 2018

Long John wrote:
Rik Bitter wrote:Given that the 1099-K only shows USD coming out of Coinbase. How would you go about proving a capital loss (like many would be crypto-tycoons are likely to) in 2018?

As I said, the 1099-K shows a total of every trade, whether it's crypto-to-cash or crypto-to-crypto. This is not me guessing. I have my 1099-K, and the round-figure example I used is not far from my actual numbers. I need to figure out my cost-basis for making those trades, including the value I spent in crypto and cash, and any fees.


You have to ask yourself, just who is making these finite investment tax decisions?
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Re: Tax implications for crypto

Postby Long John » Wed Feb 14, 2018

Moved from the Fad or Trend thread.

jcz1 wrote:
Long John wrote:Much easier to figure out my tax liability: cash out minus cash in equals capital gain. Done.


It's interesting how you think you can decide what your tax liability is. :roll:

If your method worked for stocks, people might not have any tax liability until they needed the money in retirement. Guess what - it doesn't work that way.


The one coherent sentence you quoted was in the midst of other sentences that got mangled, with key parts dropped out (I was too tired to post, obviously). The point I was getting at is the intra-crypto trading on a foreign exchange is not added up on a 1099 and fed to the IRS. All the IRS knows about is when the crypto comes back to the reporting US exchange (Coinbase). If I ever want to enjoy the profits from the crypto that's still on Binance or wherever, I have to bring it back to the reporting exchange and IRS scrutiny, so no dodging the taxman.

Does IRS want me to untangle every crypto-to-crypto trade made on a Hong Kong exchange and calculate the profit or loss based on USD value at the time of each trade? Yes, they do. Can they do anything about it, or even know about it, if I choose instead to report the end result based on my 1099 form? Currently, no. They also don't know about the profit you made on your yard sales last summer, or more relevant to us here at BS, on your nonbusiness dealings in precious metal if you choose not to report it.

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Re: Tax implications for crypto

Postby silverpv » Wed Feb 14, 2018

Long John wrote:
Does IRS want me to untangle every crypto-to-crypto trade made on a Hong Kong exchange and calculate the profit or loss based on USD value at the time of each trade? Yes, they do. Can they do anything about it, or even know about it, if I choose instead to report the end result based on my 1099 form? Currently, no. They also don't know about the profit you made on your yard sales last summer, or more relevant to us here at BS, on your nonbusiness dealings in precious metal if you choose not to report it.


I never dodge the tax man. I report everything 100% accurately. why would anyone not do that? :angel:

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Re: Tax implications for crypto

Postby jcz1 » Wed Feb 14, 2018

Long John wrote: The point I was getting at is the intra-crypto trading on a foreign exchange is not added up on a 1099 and fed to the IRS. All the IRS knows about is when the crypto comes back to the reporting US exchange (Coinbase). If I ever want to enjoy the profits from the crypto that's still on Binance or wherever, I have to bring it back to the reporting exchange and IRS scrutiny, so no dodging the taxman.

Does IRS want me to untangle every crypto-to-crypto trade made on a Hong Kong exchange and calculate the profit or loss based on USD value at the time of each trade? Yes, they do. Can they do anything about it, or even know about it, if I choose instead to report the end result based on my 1099 form? Currently, no.


I think I understand what you are saying: the IRS still gets the same amount of tax using your method. This could actually work, but only if you do it each year. If you start and end each year with zero crypto, then your USD in vs out could be used to determine gains/losses.

But taxes must be paid on taxable-event gains each year, you cannot simply delay them until some future date of your choosing. Again, just like stocks (in normal accounts, not tax-advantaged accounts like IRAs which do exactly that).

I'm pointing this out so no one assumes this is a legal strategy and does the same thing without knowing otherwise.
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Re: Tax implications for crypto

Postby Rik Bitter » Thu Feb 15, 2018

Long John wrote:
Rik Bitter wrote:What about turning your crypto into something other than cash, like buying PMs. I seem to remember at least one of the large bullion dealers were accepting BTC as tender. Would that be reported to the IRS?

Yes, using crypto to buy goods or services is regarded the same as cashing out. Unfortunately. As far as whether and how it's reported, I don't know. I guess it depends. Using Bitcoin to buy gold from a bullion dealer is probably not safe from the IRS. Sending some Bitcoin into a friend's wallet for his gold/silver, might be. But BTC's blockchain is not truly private in the way Monero is.


So Bitcoin isn't money? It has to be turned into USD to actually buy something. What if I move it to a wallet? Is that the same as converting it to USD for tax purposes?
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Re: Tax implications for crypto

Postby Long John » Thu Feb 15, 2018

Rik Bitter wrote:So Bitcoin isn't money? It has to be turned into USD to actually buy something. What if I move it to a wallet? Is that the same as converting it to USD for tax purposes?

Bitcoin can be used to buy some things directly. You can buy precious metals from the major bullion houses; in fact they offer a slight discount if you pay in Bitcoin. Once in awhile you read about someone who buys a house or a boat or a car with Bitcoin. Can you imagine buying a house with Bitcoin you paid a total of a couple hundred dollars for back in the day? :shock: But generally speaking, yes, cashing out is necessary to spend it at present. I've done it; no big deal. It adds a step or two and a few days to the process, but it's not any harder than withdrawing cash from your savings account. Do it right, and there's not even any fees, beyond the tax bite if you made gains.

From what I understand, under the new tax laws every crypto transaction other than paying fiat for the crypto in the first place is considered to be a taxable event. Selling for cash, trading for another crypto, moving it to another exchange or wallet: all are considered "payments." If you rack up more than $20,000 in "payments" in a year, Coinbase will send you (and IRS) a 1099 form with the total split up by month. This is not your profit. (I wish!) It just adds up every transaction other than your cash buys. Coinbase is federally insured and located in the U.S., so is required to do this. They are not required to show you what your actual profit or loss is, and they don't. Which makes things difficult for people with a complex jumble of trades over the course of a year.

If you fall below the 1099 threshold or own everything outside the U.S., but still have capital gains from owning crypto, by all means report it all. Pay your taxes. Brush your teeth. Call your mother. Do things properly. There, duty done.

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Re: Tax implications for crypto

Postby Recluse » Thu Feb 15, 2018

Has anybody received a 1099 from Bittrex?
According to their About Us "Built and operated in the United States"

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Re: Tax implications for crypto

Postby Long John » Thu Feb 15, 2018

Recluse wrote:Has anybody received a 1099 from Bittrex?
According to their About Us "Built and operated in the United States"

No, which surprised me. I do very little business there now, but I traded almost exclusively there from April to September last year. Every bit of profit I made on Bittrex eventually came back through Coinbase, which did produce a form 1099, so I'm not exactly pushing to get it pre-taxed on Bittrex as well.

But I have not seen anyone state that Bittrex issued them a 1099. Maybe the fact that they're not a "money transmitter" like Coinbase is a factor. Or it is possible Bittrex doesn't intend to do it until pushed, as Coinbase was by IRS legal action last year. The court did not give IRS everything it wanted from Coinbase in terms of past records, far from it, but the action did put Coinbase on notice for the 2017 tax year going forward.

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Re: Tax implications for crypto

Postby Rik Bitter » Thu Feb 15, 2018

Long John wrote:
Recluse wrote:Has anybody received a 1099 from Bittrex?
According to their About Us "Built and operated in the United States"

No, which surprised me. I do very little business there now, but I traded almost exclusively there from April to September last year. Every bit of profit I made on Bittrex eventually came back through Coinbase, which did produce a form 1099, so I'm not exactly pushing to get it pre-taxed on Bittrex as well.

But I have not seen anyone state that Bittrex issued them a 1099. Maybe the fact that they're not a "money transmitter" like Coinbase is a factor. Or it is possible Bittrex doesn't intend to do it until pushed, as Coinbase was by IRS legal action last year. The court did not give IRS everything it wanted from Coinbase in terms of past records, far from it, but the action did put Coinbase on notice for the 2017 tax year going forward.


Apologies for all the dumb questions. Lets just say Bittrex did issue 1099s. In that scenario, I then moved BTC from from Coinbase to Bittrex and then purchased some gold from Provident with BTC within the same tax year. Would I see the same BTC reported on two separate 1099s?
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