Mini data sheet on tax implications for cryptocurrency trading in the United States

[The Beast1]

^^ The problem isn't a problem of taxes, but more of a problem of convertibility. The government could very easily disallow Coinbase's operations stateside.

If the US disallows cryptocurrency convertibility you'll have to go through more hoops to convert your bitcoins to a foreign legal currency and then into dollars.

This would destroy the value of bitcoin and other cryptocurrencies in the short term. Whether it rebounds is to be seen.

I don't know about your logic, here... or maybe you are missing some facts are assuming some fact differently from me?

In the USA, there are a few vehicles in which folks can go through banks to trade in crypto currencies, including Coinbase, Gemini and possibly a few others.

There are also ways to trade in crypto currencies without going through banks, such as local bitcoin or just meeting people directly.

It seems that when other countries have attempted to make bitcoin's illegal then the use of direct trades and local bitcoins increased.

Sure making cryptos illegal could cause a lot of suppression and cause a large number of folks to discontinue its use. It could also depress crypto value in some ways, and push uses into the black market or other jurisdictions. Such legislation to blanketly make cryptos illegal does not seem like a very likely and/or logical next play for legislators - even though they make such token gestures from time to time.

Not sure why you're confused bud, you have reasoned everything correctly in your post.

Ease of conversion is why bitcoin is loved so much. Yes you can trade it in person. I don't know about you JJG , but i've never seen anyone ever perform a real life bitcoin transaction. While such an event would highlight the importance of bitcoin's more underused features (like in person currency), it would still be a psychological blow to the psyche of many investors.

The reasons for restrictions are numerous to count and it's an immediate threat to TPTB's abilities for control. I would be watchful for any rumors from regulatory agencies in the states about restrictions on companies that perform exchange operations.

It pays to be wary of such psychological triggers. Cryptocurrencies are unknown waters.

 

[JayJuanGee]

^^ The problem isn't a problem of taxes, but more of a problem of convertibility. The government could very easily disallow Coinbase's operations stateside.

If the US disallows cryptocurrency convertibility you'll have to go through more hoops to convert your bitcoins to a foreign legal currency and then into dollars.

This would destroy the value of bitcoin and other cryptocurrencies in the short term. Whether it rebounds is to be seen.

I don't know about your logic, here... or maybe you are missing some facts are assuming some fact differently from me?

In the USA, there are a few vehicles in which folks can go through banks to trade in crypto currencies, including Coinbase, Gemini and possibly a few others.

There are also ways to trade in crypto currencies without going through banks, such as local bitcoin or just meeting people directly.

It seems that when other countries have attempted to make bitcoin's illegal then the use of direct trades and local bitcoins increased.

Sure making cryptos illegal could cause a lot of suppression and cause a large number of folks to discontinue its use. It could also depress crypto value in some ways, and push uses into the black market or other jurisdictions. Such legislation to blanketly make cryptos illegal does not seem like a very likely and/or logical next play for legislators - even though they make such token gestures from time to time.

Not sure why you're confused bud, you have reasoned everything correctly in your post.

Ease of conversion is why bitcoin is loved so much. Yes you can trade it in person. I don't know about you JJG , but i've never seen anyone ever perform a real life bitcoin transaction. While such an event would highlight the importance of bitcoin's more underused features (like in person currency), it would still be a psychological blow to the psyche of many investors.

The reasons for restrictions are numerous to count and it's an immediate threat to TPTB's abilities for control. I would be watchful for any rumors from regulatory agencies in the states about restrictions on companies that perform exchange operations.

It pays to be wary of such psychological triggers. Cryptocurrencies are unknown waters.

I suppose that I am confused because your post seems to be an attempt at logic that is not really in touch with a large number of material and relevant facts.

Bitcoin is used all over the world and expanding, and even if it is not widespread in a consumer sense, there is a large amount of adoption. The same is true for other cryptocurrencies, and generally, they are not being used in day to day transactions.

The theme of government regulations comes up a lot, and there are frequently various threats to regulate in some jurisdictions and various attempts at implementing regulations, but there are reversals of those regulatory attempts too. Bitcoin and cryptocurrencies continue to grow, and if you had not noticed, there has been more than a 10x increase in the total crypto market cap in less than a year, and sure some of that market cap is fake and smoke and mirrors, but it adds up to quite more than $100 billion just in the coins - and that is not including the multitude of surrounding investments and infrastructure.

In other words, to me it seems as if you are over simplifying how "easy" it would be for any government(s) to wave their magical wand and go "poof" to crypto, and if you ever heard of wack-a-mole, you might hear about that soon, no?

I don't want to be patronizing, but I guess I was suggesting that your facts do not seem to support your logic, but you still seem to want to argue whatever facts that you have provided, so in that regard, maybe we can just agree to disagree because it does not seem that we are on the same page in terms of material facts.

On the other hand, if some other guy wants to chime in here, to explain in one direction or another, then maybe that could help this threat of government regulations topic that seems to be part of the point you are raising?

 

[The Beast1]

^^ The problem isn't a problem of taxes, but more of a problem of convertibility. The government could very easily disallow Coinbase's operations stateside.

If the US disallows cryptocurrency convertibility you'll have to go through more hoops to convert your bitcoins to a foreign legal currency and then into dollars.

This would destroy the value of bitcoin and other cryptocurrencies in the short term. Whether it rebounds is to be seen.

I don't know about your logic, here... or maybe you are missing some facts are assuming some fact differently from me?

In the USA, there are a few vehicles in which folks can go through banks to trade in crypto currencies, including Coinbase, Gemini and possibly a few others.

There are also ways to trade in crypto currencies without going through banks, such as local bitcoin or just meeting people directly.

It seems that when other countries have attempted to make bitcoin's illegal then the use of direct trades and local bitcoins increased.

Sure making cryptos illegal could cause a lot of suppression and cause a large number of folks to discontinue its use. It could also depress crypto value in some ways, and push uses into the black market or other jurisdictions. Such legislation to blanketly make cryptos illegal does not seem like a very likely and/or logical next play for legislators - even though they make such token gestures from time to time.

Not sure why you're confused bud, you have reasoned everything correctly in your post.

Ease of conversion is why bitcoin is loved so much. Yes you can trade it in person. I don't know about you JJG , but i've never seen anyone ever perform a real life bitcoin transaction. While such an event would highlight the importance of bitcoin's more underused features (like in person currency), it would still be a psychological blow to the psyche of many investors.

The reasons for restrictions are numerous to count and it's an immediate threat to TPTB's abilities for control. I would be watchful for any rumors from regulatory agencies in the states about restrictions on companies that perform exchange operations.

It pays to be wary of such psychological triggers. Cryptocurrencies are unknown waters.

I suppose that I am confused because your post seems to be an attempt at logic that is not really in touch with a large number of material and relevant facts.

Bitcoin is used all over the world and expanding, and even if it is not widespread in a consumer sense, there is a large amount of adoption. The same is true for other cryptocurrencies, and generally, they are not being used in day to day transactions.

The theme of government regulations comes up a lot, and there are frequently various threats to regulate in some jurisdictions and various attempts at implementing regulations, but there are reversals of those regulatory attempts too. Bitcoin and cryptocurrencies continue to grow, and if you had not noticed, there has been more than a 10x increase in the total crypto market cap in less than a year, and sure some of that market cap is fake and smoke and mirrors, but it adds up to quite more than $100 billion just in the coins - and that is not including the multitude of surrounding investments and infrastructure.

In other words, to me it seems as if you are over simplifying how "easy" it would be for any government(s) to wave their magical wand and go "poof" to crypto, and if you ever heard of wack-a-mole, you might hear about that soon, no?

I don't want to be patronizing, but I guess I was suggesting that your facts do not seem to support your logic, but you still seem to want to argue whatever facts that you have provided, so in that regard, maybe we can just agree to disagree because it does not seem that we are on the same page in terms of material facts.

On the other hand, if some other guy wants to chime in here, to explain in one direction or another, then maybe that could help this threat of government regulations topic that seems to be part of the point you are raising?

What are you trying to argue JJG? Relax, you're in agreement with me.

Take some time to re-read my post. I wasn't attacking your emotional investment in cryptocurrencies. Instead I was merely bringing up concerns that should be weighed and considered.

Governments around the world can and have very much waved their regulatory wands to make our lives more difficult . The US government was able to make foreign banks spit up private information on citizens abroad and desecrate the basic fabric of trust every US based tech vendors' security. When it comes to digital anything, it's best to be err on the side of caution, especially when it has such a strong ability to usurp the financial systems of the rich and powerful.

Don't think for a second uncle sam can't make things wicked miserable for us. I'd be quite unhappy if my investment collapsed in value because some nitwit at the SEC made some arbitrary ruling.

First it's taxes, but what's next? I constantly scan the horizon for changes in the regulatory atmosphere. Shit like this can change on a dime!

 

[JayJuanGee]

[edited out]

What are you trying to argue JJG? Relax, you're in agreement with me.

This is my relaxed state.

Seemed to me that you were suggesting that Governments have some ability to snuff out or stifle crypto, and I largely disagree that either they will do it or that they really are able to do it and the facts are also that they tend to chicken out. They threaten without really being able to do anything. At least so far, and you seem to be giving a lot more credence to their threat in a sort of hypothetical and theoretical sense that makes little sense to me.

Take some time to re-read my post. I wasn't attacking your emotional investment in cryptocurrencies. Instead I was merely bringing up concerns that should be weighed and considered.

I think that you are confusing emotional investment with experience and research.

So, if you do not have much if any experience or research then you will make hypotheticals that make little to no sense, but if you have experience and research, the hypotheticals and theory cause confusion when they seem to be floating in some kind of world that is not tied to facts on the ground... That is what I am suggesting about your theories.

Governments around the world can and have very much waved their regulatory wands to make our lives more difficult .

That is true, but apply that to crypto. Yes, they may be plotting, and yes there may be certain things that they can do, but there is also wack-a-mole, too.

Sure, I am invested in bitcoin, and I am prepared for the price to go either direction, and I am still thinking that your theoretical suggestion about what goverments might do is a bit of a stretch in terms of directly affecting price.

Currently our most tangent and imminent material threats to price seems to be something other than government regulations..

The US government was able to make foreign banks spit up private information on citizens abroad and desecrate the basic fabric of trust every US based tech vendors' security. When it comes to digital anything, it's best to be err on the side of caution, especially when it has such a strong ability to usurp the financial systems of the rich and powerful.

No one is suggesting that the government might try things, and surely they can go after various centralized systems and quasi-centralized systems. There are parts of crypto that are centralized and parts of crypto that are decentralized. They are going to have a lot more difficulties with the decentralized components of crypto, and we will see how some of this plays out... in other words, the government threat to decentralized systems does not appear to be imminent at the moment, except the extent to which they may be attempting to manipulate behind the scenes.. which is a bit of another story.

Don't think for a second uncle sam can't make things wicked miserable for us.

Of course governments can go after individuals, and of course they can pass laws to make confusion. No one is saying that they cannot do those kinds of things.

I'd be quite unhappy if my investment collapsed in value because some nitwit at the SEC made some arbitrary ruling.

Of course, they make arbitrary, unjust and biased rulings all the time.. We have heard of Ross Ubricht, right? in prison for his involvement in silk road and apparently a scapegoat who is serving time in order to serve as an example of government power over individuals.

 

[redbeard]

Thanks IJ!

Question:

Couldn't we just hold USD on the exchanges (Coinbase, GDAX, etc.)? As long as it's not being transferred to ACH, it shouldn't be a taxable event. Similar to a stock exchange, you're just keeping it in "cash market" until transferring out. The money is still in the hands of the exchange.

Also, I don't think we paid taxes on PredictIt until we cashed out.

 

[Travel Museums]

Good question redbeard. I'd love to hear an answer to this. Holding usd in my Coinbase/GDAX would allow me to day trade a lot easier. I'm just concerned if this is a taxable event.

 

[LouEvilSlugger]

Good question redbeard. I'd love to hear an answer to this. Holding usd in my Coinbase/GDAX would allow me to day trade a lot easier. I'm just concerned if this is a taxable event.

Only cashing out is taxable.

https://www.bitcoin.tax/ (Coinbase allows a similar service I think)

 

[redbeard]

re:

Good question redbeard. I'd love to hear an answer to this. Holding usd in my Coinbase/GDAX would allow me to day trade a lot easier. I'm just concerned if this is a taxable event.

Only cashing out is taxable.

https://www.bitcoin.tax/ (Coinbase allows a similar service I think)

Good website, thanks.

From https://bitcoin.tax/faq

I didn't move any money out of the exchange, I just bought back in. What about then?

Yes. A tax event occurred and you gained money, even though it isn't in your bank account. For tax purposes it is treated no differently.

I bought some things with Bitcoins directly, do I owe taxes?

Probably, but depends on your country. If it's considered as a tax event, then you are essentially exchanging Bitcoins for goods or services. You may have gained in doing so, and therefore it has to be reported. Say you bought 1 BTC for $10. Now say that Bitcoin is worth $100 and you buy a $100 gift card. You got a $100 gift card for only $10. That $90 is gains and taxable.

 

[Travel Museums]

So selling BTC at a profit to your coinbase wallet is taxable?

 

[The Beast1]

So selling BTC at a profit to your coinbase wallet is taxable?

Yes, it always was a taxable event. Just like buying a gold coin and selling it later for profit. Previously it was up to you to report the event, but with the stratospheric rise in interest in bitcoin the government now wants its fingers in the whole mess.

 

[Isaac Jordan]

So selling BTC at a profit to your coinbase wallet is taxable?

Correct. It doesn't matter where the cash is, all that matters is that value was transferred from a crypto asset to a fiat base.

That's why I'm considering taking the slightly riskier route of selling my crypto assets to something like USDT. It's pegged to the dollar, but not an actual dollar; it's still a cryptocurrency and thus would fall under the 1031 rules for like-kind exchanges.

I'm still researching additional possibilities, so if anyone can find a better solution I'm sure everyone here would be eager to hear about it.

 

[...]

With the S.1241 being introduced into the Senate -- which essentially outlaws cryptocurrencies -- would you ironically get in trouble for doing the right thing, which is to report your gains from trading cryptos?

Always report your gains, the IRS won't prosecute you for it being illegal nor report you to the feds (FinCEN, DHS, HSI).

I know a couple of strippers and drug dealers that report their dirty money to the IRS and pay taxes. So far (10+ years) they haven't been arrested for their activities.

As one of them said "Fuck the DEA, FBI, and ICE. They can go to hell. But I do not want to fuck with the IRS...they will shut my (legit) business, bank accounts, and credit cards down....and bring the other agencies with them".

I also know a couple that got arrested and never paid their taxes. Guess what happened? The feds added charges for money laundering and tax evasion, IRS froze all their accounts.....and they had to pay fines/interest/etc.

 

[CleanSlate]

I found this article on Forbes:

https://www.forbes.com/sites/lauras...ow-about-trading-tipping-mining-and-more/amp/

The most relevant parts to this thread here:

6. Trading

Like the buying and selling of a stock, when you trade for Bitcoin, there’s no immediate taxable event, but you have to record the fair market value and the date. The taxable event occurs upon disposition — either when you sell it or pay with it.

Because this is a new industry, if you are trading, you should check with your exchange to find out if it issues a 1099-B report at the end of the year, which will identify your gains and losses. Among some of the major digital currency exchanges — ItBit, Coinbase and Gemini — itBit releases 1099-Bs to its users, Coinbase sends out “a specialized Cost Basis for Taxes report” plus has a partner integration with LibraTax, and Gemini’s CEO and cofounder Tyler Winklevoss said by email, “we will deliver to our customers the appropriate information prior to April 15, 2016 so our customers can comply with applicable federal tax law.”

And how to account for your trades (LIFO = last-in-first-out, FIFO = first-in-first-out):

Deciding Which Bitcoin Is Being Disposed Of

The difficulty of all these rules is that, in any particular disposal scenario, you may not know which particular Bitcoin you are spending, tipping, gifting, donating, etc. “Think of [Bitcoin] as liquid. If you poured two Bitcoin into the same wallet/glass, it’s just mixed liquid and there’s no way to really separate those two glasses you mixed together,” Benson says.

For that reason, it’s more practical to use one of the two common accounting methods: last in, first out (LIFO), or first in, first out (FIFO). In LIFO, you always assume disposal of your newest asset or coin. In FIFO, you always assume disposal of your oldest.

Individuals can change their accounting method from year to year.

So if the price of Bitcoin or your digital currency has risen over the year, LIFO is ideal. That will help minimize your gains and the taxes you will pay on them. If the price is falling however, then go with FIFO, because you can maximize your losses and claim a deduction, which will reduce your taxable income.

Businesses, however, can’t switch from year to year. They usually have to choose an accounting method and stick to it.

Another option is to use what’s called “specific share identification.” If your records are in good enough order, every single time you dispose of an asset, you can select the highest cost one to either maximize a loss (and your tax deduction), or realize a smaller gain (and minimize your tax). Benson’s software offers an option called Libra Optimize, which, instead of using LIFO or FIFO, will mathematically reduce your tax obligation using this methodology.

In bitcoin.tax, you can select FIFO, LIFO, Average Cost, and a few other methods to see which gives you less tax liability. But it sounds like the IRS will only accept either LIFO or FIFO. I'll ask my accountant, and encourage U.S. guys to do the same... especially if a lot of money is at stake and with the IRS subpoena on Coinbase/GDAX.

 

[CleanSlate]

^ my accountant says first-in-first-out. If cost basis is unknown, make a reasonable estimate.

 

[jamaicabound]

To avoid taxes, couldn't someone just buy as many things online as possible with BTC to avoid transferring the BTC to USD?

Or sell to friends or on Craigslist strictly cash transactions

 

[JayJuanGee]

To avoid taxes, couldn't someone just buy as many things online as possible with BTC to avoid transferring the BTC to USD?

Or sell to friends or on Craigslist strictly cash transactions

For direct transactions, there is also bitcoin meetups, and those will vary from city to city, or creating a local bitcoin's account, which will also vary from city to city.

I have been actively using local bitcoin's for nearly 2 years, and I am a bit strict about following the terms of my advert - in part, because I am trying to get customers who are compliant, and I feel that is more likely to weed out scammers.

I also have a policy/practice that I mostly follow with my local bitcoins's connections, and that is to conduct the very first transaction through local bitcoins, and thereafter, if I am comfortable with the person, to conduct subsequent transactions directly.

I understand that markets can be different depending on where you are at; however, it seems that a overwhelming number of my local bitcoins' connections want to deal directly, rather than through local bitcoins' - even on the first transaction and even though the person who places the advert has to pay the 1% fee. Since I place the advert, I have to pay the 1% fee, but I think that in my area there are so many of the Bitcoin sellers on local bitcoins that only use the local bitcoin service to connect with buyers and they actually convert to direct transactions in order to avoid the 1% fee. I don't have any problem with folks avoiding the 1% fee - and I am kind of the same way, except that I think that it is worth the 1% fee on the first transaction, just to attempt some kinds of screening of possible scammers.

Probably about 30% of my local bitcoin transactions resulted in subsequent direct transactions, and maybe about 10% became repeat and regular customers of mine to perform direct transactions on a fairly regular basis. Certainly, results are going to vary, but sometimes when you have a few regular people, it is not always easy to service everyone because they tend to communicate in spurts - rather than a method that would be more spread out and preferred.

 

[Plus Oultre]

With the S.1241 being introduced into the Senate -- which essentially outlaws cryptocurrencies -- would you ironically get in trouble for doing the right thing, which is to report your gains from trading cryptos?

Always report your gains, the IRS won't prosecute you for it being illegal nor report you to the feds (FinCEN, DHS, HSI).

I know a couple of strippers and drug dealers that report their dirty money to the IRS and pay taxes. So far (10+ years) they haven't been arrested for their activities.

As one of them said "Fuck the DEA, FBI, and ICE. They can go to hell. But I do not want to fuck with the IRS...they will shut my (legit) business, bank accounts, and credit cards down....and bring the other agencies with them".

I also know a couple that got arrested and never paid their taxes. Guess what happened? The feds added charges for money laundering and tax evasion, IRS froze all their accounts.....and they had to pay fines/interest/etc.

Good Advise .... always report your income

Bad Advise ... report your criminal activity to a branch of government because they will not prosecute you .... bad advise because they will share this information with another branch of government which will prosecute you. I dare anyone to list your occupation as "drug dealer" in your tax return ... dumbest thing ever

Have you heard of Audits? well truth be told 100% of tax returns go through an audit ...... Tax returns go through the computer system which looks for common red flags (this is the initial audit), and one of things it looks for is for illegal activities listed in the occupation .... or you think governments like competition?!

Dealing with illegal drugs is an illegal activity so that person will raise a red flag.

Also, being a stripper is not illegal so they are expected to report their income and actually the strip club issues them 1099 ...

 

[Plus Oultre]

RE: Mi data sheet on tax implications for cryptocurrency trading in the United States

I wouldn't hurry in treating two different cryptocurrencies as like-kind for the purpose of a 1031 exchange ..... section 1031 is very restrictive in this sense ....
First of all you have to qualify the property as being held for business or investment purposes. So if you are constantly exchanging the IRS will take the position that you are not holding for those purposes but rather you are trading. But even if you buy and hold for investment purposes you only cleared hurdle one. The next step will be to qualify the two cryptocurrencies as like-kind; which, in my opinion, will not be a very strong position.

Also, as an examples let's illustrate the way the IRS treats the exchange of different property:
1) metals, you can exchange gold that is valued for its metal content for other gold that is valued for its metal content. You can not exchange gold valued for its metal content for silver valued for its metal content.
2) livestock, you can exchange two livestock held for investment or breeding of the same sex .. but you can't exchange livestock of different sex.

See the pattern? in the examples above you can see the intent of section 1031 which is to replace business property or personal property held for investment for the like. They have the same nature and specific purpose. Even though I didn't find any ruling, memos, opinions directly related to the exchange of different crytocurrencies, I am confident the IRS will not allow their like kind exchange. I am sure we will see it soon play out with a real example because someone is going to try it. But unless you have the resources to challenge they IRS when they disallow your exchange, I wouldn't try it. My opinion.

 

[CleanSlate]

^ that would complicate things, for sure.

But the best we can do right now is download our transaction histories off the exchanges, put it through a tax cruncher like bitcoin.tax, and just report whatever it spits out.

That way we can say "hey, at least I tried."

 

[jamaicabound]

Good data sheet. The only thing I would mention or question is about trading from crypto to crypto and whether the IRS will consider that a like kind exchange. I think that's still kind of up in the air from what I've heard and read.