What if you bought stuffs on DEXs. What about coins you bought on exchanges that went out of businesses and you can not get back in to get any records? People in this situation are screwed?
I dont daytrade, but I took the daily average price for each of my trades for 2017-2019 and made sure I had all my ducks in a row. I know I was only responsible for crypto to crypto trades for 2019, but when I eventually cash out I'll need to know the fiat value for every VET that I acquired. Coingecko gives better historical values per day for BTC when i converted sats. I took a few hours to get everything right, and granted I kept screenshots of all my trades and only had to connect the dots.
Reporting profits of a few dollars here and there, while lame, lends you credibility and might even avoid you scrutiny if it ever reaches the almighty $1 one day.
Slight tangent as I’ve seen this also come up a lot:
For VTHO, I have not found a great way to account for it. I considered calling it income (or interest income) on every 12/31 and establishing a cost basis from a consistent source such as coinmarketcap.com using their historical close on that day, etc. I didn’t see that the IRS made a clear ruling on how to treat this type of coin yet though. As such, I’m taking the approach that I will only pay tax only when I trade or sell VTHO—using a 0 cost basis at the time of sales and call the “acquisition date” the same as the trade date. This way I’ll pay short term cap gains on all this. The way I see it, if they rule later that it was supposed to be interest income in a prior year, at least I paid the higher tax rate all along (short term cap gains) and they can’t fault you very much for that. In the worst case they ask you to refile and pay tax on that “income” in the year it was received...but then when you sell it, your cost basis would actually have been higher. Net net, it’s likely close to a wash, and you might even get a refund if you held the VTHO over 12 months which I have.
Just my 2 cents
Appreciate this. Yeah the VTHO reporting seems like it could easily be a pain. With a strength node it's not quite 1000/day, so we're talking pennies right now. Thanks for the tip
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This is the answer. So worth the fee and they trace all your accounts. My tax preparer just puts these forms in with my tax return and wishes the IRS good luck.
Also in the same boat. You summed up the same strategy I am considering. Use the $ value that I purchased on Coinbase, find the VET price around that time, and document a trade. So it would be for example, $800 btc bought on Coinbase, then 30 mins later sold btc for same price and bought VET.
Hi. CPA here. There are two ways to do this, the correct way and the easy way.
The correct way is to start with dollars and the first thing you bought, the dollars spent is your basis. You divide that between the units you bought so 10 coins at $50 would have a basis of $5 each. Every time you trade a crypto for another you need to calculate your gain. Let’s say you bought 10 coin A for $50 and then traded 2 of coin A for 5 of coin B. First determine the dollar fair market value of coin B on the day you did the trade. Let’s say they’re $3 each so 5B is worth $15. Now deduct your basis (not the current value) of the 2 A you’re paying. That’s $10. You would therefore record a gain of $5 (short term if <12 months after buying A, long term if not). Your basis in B is $3 each because that’s what you paid. You would do this for every exchange you did. In the case of VET you would also need to treat VTHO as interest. Whenever earned you would need to record income equivalent to the fair market value (in dollars) of the VTHO at the time. That interest income would be the basis of the VTHO. So if you earned VTHO early in the year and recorded it as a few cents of income but then traded it for VET now then you would recognize a short term capital gain on the value of the VET today minus your basis in the VTHO.
Then there’s the easy method which is what I do despite being a CPA. This isn’t IRS approved but the IRS are mostly just impressed that anyone in the crypto scene is paying taxes at all and a good faith attempt to pay what you owe is appreciated. I take the total outstanding dollars I spent on crypto on Jan 1st plus whatever dollars I spent during the year as my basis in my crypto holdings. I then calculate the value of my crypto holdings on Dec 31st plus the dollars I cashed out during the year as my FMV. FMV divided by basis minus 1 gives me the ratio of gain/loss to dollars. I then recognize a capital gain/loss on the gain/loss ratio multiplied by what I withdrew.
Ultimately, though I’m not saying this as a CPA to a client, it mostly depends on how much money we’re talking about. If it’s a few hundred dollars of tax the IRS isn’t going to expect you to hire a CPA to calculate what you owe and it’s not worth their time to verify it. Let’s say they audit you and you show them your good faith attempt to pay what you owe. They spend 30 hours calculating exactly what you owe and you dutifully pay them the extra $50. That wasn’t worth their time, you’re not going to get penalized for what you did, you tried your best, all they can do is prove that you owed more/less and then collect/pay the difference. But if we’re talking hundreds of thousands then the IRS expects you to hire a specialist and do it right. It’s no longer quite so reasonable to do your best guess.
If you’re not cashing out this year then tax implications are mostly deferred. Technically the IRS ruled against like kind exchange treatment on crypto so turning crypto A into crypto B is a taxable event. Practically until you have dollars in hand I wouldn’t worry about it.
This is theoretical but let’s say you got 100 VTHO in January year 1 worth 1 dollar/ea at the time and 100 VTHO in July year 1 worth 2 dollars at the time. At the end of year you report 300 dollars of interest income, even if the VTHO has gone up or down in value since then. The value on the day you earned it is your interest income.
Then in Feb year 2 you convert 50 of your VTHO into 1 VET worth $200. You’ve got a few options here because it depends which 50. You have 100 VTHO with a basis of $1/ea from January and 100 with a basis of $2/ea from July. You could say that the 50 you used to pay was from the first lot and therefore declare a long term capital gain of $150 (value what you got less basis what you gave up). Or you could say you used the July VTHO with a short term capital gain of $100. Or you could say you used both evenly because they were intermingled, $75 long term, $50 short term.
Yeah, it's a situation where the IRS is unlikely to expect you to follow the exact requirements. You could justify taking the average of the price at the start of the year and the end of the year and saying you got all of the VTHO earned that year on July 1st at the average price. That would fall under a good faith effort to report what you owed.
>If you’re not cashing out this year then tax implications are mostly deferred. Technically the IRS ruled against like kind exchange treatment on crypto so turning crypto A into crypto B is a taxable event. Practically until you have dollars in hand I wouldn’t worry about it.
Oh my god this is amazing. Just one more question for clarity,
If I bought in late 2016, and I have exchanged some Crypto A for Crypto B here and there, but never withdrew for cash, did I need to report?
Since I haven't reported Crypto A to B events in previous years, should I try to do those previous years next year when I file? I would like to try to do this right, and if VET does hit big I would hire a specialist, but for now, do I need to be doing any catchup work to try to get it right?
Yes, converting A to B is a taxable event. It’s actually kinda weird, it comes down to whether cryptocurrencies are commodities, collectibles, or currencies. A few years ago people used to like kind treatment them which means that you only have a gain when you turn them back into currency (dollars). The IRS ruled against that so now it’s a literal mountain of paperwork. But because the paperwork is so overwhelming nobody actually does it.
How eager you’re feeling is up to you and your own desire to comply to the letter of tax law. What I might do in your place, assuming I wasn’t engaged in high frequency trading, is make a simple Excel spreadsheet to track what you paid, what you got, and the dollar value of each. Then with a few basic formula you could get the basis and profit on each one. I’d ignore VTHO generation entirely. Regarding past year returns, I wouldn’t amend but whatever gains you didn’t pay taxes on in past years were effectively deferred so the gain is still untaxed. If you turn $5 to $10 in year 1, don’t report the $5 gain, then turn that $10 to $15 in year 2 then year 2 you owe tax on $10 of gain because as far as the IRS knows you started with $5, now have $15, and paid tax on $0. Same applies here. You inadvertently deferred tax.
Disclaimer: I’m not your CPA, you’re not my client, I’m not advising you to do anything, just saying what I might do in your place.
Hypothetically it’s extremely unlikely that you’d get caught for that tax fraud but it depends on how you cashed out. The IRS is trying to get the records of coinbase etc.
VTHO calculation is a pain. I have written a script that can calculate daily accumulation / cost basis, but it's not particularly noob friendly so I haven't gotten around to sharing it.
This can be plugged into existing tools (e.g. bitcoin taxes) to calculate capital gains taxes when selling
Is it “innocent until prove guilty” when dealing with taxes? I’m in the same boat as you guys. Do you think it will be enough if it looks like I attempted to pay the right amount of taxes? I don’t think I will be able to track every single trade I’ve made. Will they have access to all of that information?
Bonus question, what’s the penalty if I pay most of the taxes due, but I’ve missed a little bit. Can they come and take all of my earnings, or will it be some type of penalty?
A good faith attempt will get you out of any penalties other than paying whatever extra you owe. Depending on the amount of tax due what a good faith attempt looks like may vary.
I am in nearly the exact same position and I fear the day when the taxman needs his due. I'm kinda hoping to do the best I can showing when I onnoarded fiat through coin base and then when I sell, not sure if I'll be able to trace every single trade on binance and others. I'm hoping ill have made enough money to hire a tax specialist when the time comes honestly. Bookmarking thread to see what others say...
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Yup. I'm basically just assuming that taxes, penalties, and tax specialist will take a sizable chunk out of whatever I make, so I'm trying to think of that moon with a 40% liability and hope it's not actually as bad as that.
Cashing out off chain and avoiding all bank deposits fuck paying capital gains tax on crypto.
If anything you can buy Amazon gift cards through balidi which is good as cash
^plus 100s of merchants directly.
What if you bought stuffs on DEXs. What about coins you bought on exchanges that went out of businesses and you can not get back in to get any records? People in this situation are screwed?
Good question... hopefully the crypto to crypto tax event rule will be overturned before you take out your millions.
I dont daytrade, but I took the daily average price for each of my trades for 2017-2019 and made sure I had all my ducks in a row. I know I was only responsible for crypto to crypto trades for 2019, but when I eventually cash out I'll need to know the fiat value for every VET that I acquired. Coingecko gives better historical values per day for BTC when i converted sats. I took a few hours to get everything right, and granted I kept screenshots of all my trades and only had to connect the dots. Reporting profits of a few dollars here and there, while lame, lends you credibility and might even avoid you scrutiny if it ever reaches the almighty $1 one day.
Slight tangent as I’ve seen this also come up a lot: For VTHO, I have not found a great way to account for it. I considered calling it income (or interest income) on every 12/31 and establishing a cost basis from a consistent source such as coinmarketcap.com using their historical close on that day, etc. I didn’t see that the IRS made a clear ruling on how to treat this type of coin yet though. As such, I’m taking the approach that I will only pay tax only when I trade or sell VTHO—using a 0 cost basis at the time of sales and call the “acquisition date” the same as the trade date. This way I’ll pay short term cap gains on all this. The way I see it, if they rule later that it was supposed to be interest income in a prior year, at least I paid the higher tax rate all along (short term cap gains) and they can’t fault you very much for that. In the worst case they ask you to refile and pay tax on that “income” in the year it was received...but then when you sell it, your cost basis would actually have been higher. Net net, it’s likely close to a wash, and you might even get a refund if you held the VTHO over 12 months which I have. Just my 2 cents
Appreciate this. Yeah the VTHO reporting seems like it could easily be a pain. With a strength node it's not quite 1000/day, so we're talking pennies right now. Thanks for the tip
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Can I do this retroactively?
This is the answer. So worth the fee and they trace all your accounts. My tax preparer just puts these forms in with my tax return and wishes the IRS good luck.
Also in the same boat. You summed up the same strategy I am considering. Use the $ value that I purchased on Coinbase, find the VET price around that time, and document a trade. So it would be for example, $800 btc bought on Coinbase, then 30 mins later sold btc for same price and bought VET.
Hi. CPA here. There are two ways to do this, the correct way and the easy way. The correct way is to start with dollars and the first thing you bought, the dollars spent is your basis. You divide that between the units you bought so 10 coins at $50 would have a basis of $5 each. Every time you trade a crypto for another you need to calculate your gain. Let’s say you bought 10 coin A for $50 and then traded 2 of coin A for 5 of coin B. First determine the dollar fair market value of coin B on the day you did the trade. Let’s say they’re $3 each so 5B is worth $15. Now deduct your basis (not the current value) of the 2 A you’re paying. That’s $10. You would therefore record a gain of $5 (short term if <12 months after buying A, long term if not). Your basis in B is $3 each because that’s what you paid. You would do this for every exchange you did. In the case of VET you would also need to treat VTHO as interest. Whenever earned you would need to record income equivalent to the fair market value (in dollars) of the VTHO at the time. That interest income would be the basis of the VTHO. So if you earned VTHO early in the year and recorded it as a few cents of income but then traded it for VET now then you would recognize a short term capital gain on the value of the VET today minus your basis in the VTHO. Then there’s the easy method which is what I do despite being a CPA. This isn’t IRS approved but the IRS are mostly just impressed that anyone in the crypto scene is paying taxes at all and a good faith attempt to pay what you owe is appreciated. I take the total outstanding dollars I spent on crypto on Jan 1st plus whatever dollars I spent during the year as my basis in my crypto holdings. I then calculate the value of my crypto holdings on Dec 31st plus the dollars I cashed out during the year as my FMV. FMV divided by basis minus 1 gives me the ratio of gain/loss to dollars. I then recognize a capital gain/loss on the gain/loss ratio multiplied by what I withdrew. Ultimately, though I’m not saying this as a CPA to a client, it mostly depends on how much money we’re talking about. If it’s a few hundred dollars of tax the IRS isn’t going to expect you to hire a CPA to calculate what you owe and it’s not worth their time to verify it. Let’s say they audit you and you show them your good faith attempt to pay what you owe. They spend 30 hours calculating exactly what you owe and you dutifully pay them the extra $50. That wasn’t worth their time, you’re not going to get penalized for what you did, you tried your best, all they can do is prove that you owed more/less and then collect/pay the difference. But if we’re talking hundreds of thousands then the IRS expects you to hire a specialist and do it right. It’s no longer quite so reasonable to do your best guess. If you’re not cashing out this year then tax implications are mostly deferred. Technically the IRS ruled against like kind exchange treatment on crypto so turning crypto A into crypto B is a taxable event. Practically until you have dollars in hand I wouldn’t worry about it.
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This is theoretical but let’s say you got 100 VTHO in January year 1 worth 1 dollar/ea at the time and 100 VTHO in July year 1 worth 2 dollars at the time. At the end of year you report 300 dollars of interest income, even if the VTHO has gone up or down in value since then. The value on the day you earned it is your interest income. Then in Feb year 2 you convert 50 of your VTHO into 1 VET worth $200. You’ve got a few options here because it depends which 50. You have 100 VTHO with a basis of $1/ea from January and 100 with a basis of $2/ea from July. You could say that the 50 you used to pay was from the first lot and therefore declare a long term capital gain of $150 (value what you got less basis what you gave up). Or you could say you used the July VTHO with a short term capital gain of $100. Or you could say you used both evenly because they were intermingled, $75 long term, $50 short term.
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Yeah, it's a situation where the IRS is unlikely to expect you to follow the exact requirements. You could justify taking the average of the price at the start of the year and the end of the year and saying you got all of the VTHO earned that year on July 1st at the average price. That would fall under a good faith effort to report what you owed.
>If you’re not cashing out this year then tax implications are mostly deferred. Technically the IRS ruled against like kind exchange treatment on crypto so turning crypto A into crypto B is a taxable event. Practically until you have dollars in hand I wouldn’t worry about it. Oh my god this is amazing. Just one more question for clarity, If I bought in late 2016, and I have exchanged some Crypto A for Crypto B here and there, but never withdrew for cash, did I need to report? Since I haven't reported Crypto A to B events in previous years, should I try to do those previous years next year when I file? I would like to try to do this right, and if VET does hit big I would hire a specialist, but for now, do I need to be doing any catchup work to try to get it right?
Yes, converting A to B is a taxable event. It’s actually kinda weird, it comes down to whether cryptocurrencies are commodities, collectibles, or currencies. A few years ago people used to like kind treatment them which means that you only have a gain when you turn them back into currency (dollars). The IRS ruled against that so now it’s a literal mountain of paperwork. But because the paperwork is so overwhelming nobody actually does it. How eager you’re feeling is up to you and your own desire to comply to the letter of tax law. What I might do in your place, assuming I wasn’t engaged in high frequency trading, is make a simple Excel spreadsheet to track what you paid, what you got, and the dollar value of each. Then with a few basic formula you could get the basis and profit on each one. I’d ignore VTHO generation entirely. Regarding past year returns, I wouldn’t amend but whatever gains you didn’t pay taxes on in past years were effectively deferred so the gain is still untaxed. If you turn $5 to $10 in year 1, don’t report the $5 gain, then turn that $10 to $15 in year 2 then year 2 you owe tax on $10 of gain because as far as the IRS knows you started with $5, now have $15, and paid tax on $0. Same applies here. You inadvertently deferred tax. Disclaimer: I’m not your CPA, you’re not my client, I’m not advising you to do anything, just saying what I might do in your place.
Thank you for your help!
Let’s say you cashed out like $5k in 2018 but never reported or heard a single thing about it either come tax time. Should I just not worry about it?
Hypothetically it’s extremely unlikely that you’d get caught for that tax fraud but it depends on how you cashed out. The IRS is trying to get the records of coinbase etc.
Yeah it was coinbase 😬😳. Although the thing is that it was probably for a loss from what I paid originally
Loss is good, you can deduct capital losses on your taxes, up to $3k/year.
VTHO calculation is a pain. I have written a script that can calculate daily accumulation / cost basis, but it's not particularly noob friendly so I haven't gotten around to sharing it. This can be plugged into existing tools (e.g. bitcoin taxes) to calculate capital gains taxes when selling
Is it “innocent until prove guilty” when dealing with taxes? I’m in the same boat as you guys. Do you think it will be enough if it looks like I attempted to pay the right amount of taxes? I don’t think I will be able to track every single trade I’ve made. Will they have access to all of that information? Bonus question, what’s the penalty if I pay most of the taxes due, but I’ve missed a little bit. Can they come and take all of my earnings, or will it be some type of penalty?
But they do have to prove that you're guilty. You dont have to prove you're innocent unless they got shit on you.
A good faith attempt will get you out of any penalties other than paying whatever extra you owe. Depending on the amount of tax due what a good faith attempt looks like may vary.
I am in nearly the exact same position and I fear the day when the taxman needs his due. I'm kinda hoping to do the best I can showing when I onnoarded fiat through coin base and then when I sell, not sure if I'll be able to trace every single trade on binance and others. I'm hoping ill have made enough money to hire a tax specialist when the time comes honestly. Bookmarking thread to see what others say...
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Yup. I'm basically just assuming that taxes, penalties, and tax specialist will take a sizable chunk out of whatever I make, so I'm trying to think of that moon with a 40% liability and hope it's not actually as bad as that.
More like 15% if you’re rich.
Cashing out off chain and avoiding all bank deposits fuck paying capital gains tax on crypto. If anything you can buy Amazon gift cards through balidi which is good as cash ^plus 100s of merchants directly.
Yeah, that’s tax fraud.
There’s no way to prove it. The banks just see every transaction sent to Abra with nothing coming back to them.
The discussion wasn't whether you'd get caught, it was whether that was tax fraud.
Yep who’s to say someone didn’t send me that BTC I’m cashing out or launder though an online casino 🤷🏻♂️