The ugly truth about money is everybody wants a piece of your money, especially the tax authorities.
While it was much easier for the tax authorities to tax monies that were indexed through your social security number, tax ID and/or an employers W4, Now with a potential option of crypto currency supplementing and eventually replacing? Conventional fiat currency the 3rd party intermediaries of your income flow, specifically:
- Your employer which controls how you will be paid and deducts from your pay for appropriate expenses to cover your future income tax liability, social security deductions, etc.
- Your bank that houses what you are paid, and although you bank holdings are FDIC insured, it is only insured until it is not. Meaning if your bank ever lost more than the insured amount or if the account is ever seized or zeroed out because of complicated legal sanctions, a tax levy or creditors or any other tax authority. You are out that capital until legal matters have been settled.
The tax authorities cannot stand to allow that level of control to its citizens over their own money and resources. They will stop at nothing to prevent easy assimilation of dealing with crypto currency, from out right banning, to creating FUD media to convince the majority of citizens that crypto currency is a big hoax and not to be trusted like the fiat greenback is.
Or ultimately to concede, but make 100% of the onus of accurate and non fraudulent data to be able to tax gains or just purchases of crypto currency with no gains a “taxable event”, which has to be accurately reported and properly formatted for the tax authority. The tax authority may even enact a compulsory requirement to surrender your private eWallet keys to the tax authority...You know, for safe keeping and to keep you honest and submissive to them.
But this is data, you say, not dollars, Caesar can tax his coins to his hearts content, but keep their hands off your HODL stack. But like with any one sided relationship what is yours is theirs and what is theirs is theirs.
So what is a tax payer to do? How can cryptocurrency holders comply with the IRS without fear of literally being taken for everything you have?
- Find your cryptocurrency data. There are now more than 170 crypto exchanges worldwide, with new ones opening more than one a week and that doesn’t even include conventional face to face exchanges, over-the-counter venues and forthcoming decentralized exchanges.
- Isolate your cryptocurrency data from everybody else's. Many data elements are not exactly the same, even though they have the same name, so it’s hard to know what’s the right data element, specifically what your data element is in the blockchain ledger. Does “output amount” mean exactly the same thing across all venues and exchanges?
- Extract your cryptocurrency data. Certain cryptocurrency exchanges may limit your ability to extract historical data (*cough* Bittrex *cough*) or they may apply limits once you’ve hit certain transaction volumes.
- Transport your cryptocurrency data. If you try to programmatically scrape and pull out data from APIs, problems may arise when the data highways are constantly under maintenance or shut down.
- Format your cryptocurrency data. Now that the taxpayer has a bunch of data files, they quickly discover that none of them look the same. Or are unreadable if not formatted in the correct .pdf file or word .doc file. Getting them into the same format can require some serious spreadsheet-jockeying skills.
- Check your cryptocurrency data. Hmmm… something doesn’t look right. Is the taxpayer missing transactions? Time to call an 800 number for help. Oh wait, there aren’t any.
- Correct your cryptocurrency data. This is challenging as most taxpayers are not tax professionals or legal experts. What to correct and why? How do I know I even have the correct information to start with?
- Aggregate your cryptocurrency data. Now the taxpayer needs to consolidate it all into one file… time to power up Google Sheets again.
- Process your cryptocurrency data. Time to do the matching: This gain goes with this loss. Wait, should the taxpayer choose the “first in, first out” method for the cost basis, “last in, first out” or average cost? How to manage partial lots?
- Reconcile your cryptocurrency data. How can the taxpayer be sure that the processed data is complete and accurately associated with the trades collected from all of their trading venues?
- Store your cryptocurrency data. Where should the taxpayer store the data that’s safe and secure, as the IRS might want to take a look at this sometime over the next 6 or 7 years.
- Export your cryptocurrency data. Now the taxpayer needs to take all that processed, accurate, and complete data and convert it into the proper format and export into a form that they can send to the tax authority. Along with a check (Sorry, no crypto payments in the U.S. right now – though I hear Arizona’s working on it.)
Not allot of tax software has these mechanisms to sort out all the cryptocurrency data the tax authorities want, further how are special cases worked.
- What if a eWallet is controlled by specialized software not owned by a taxpayer? How do you tax a bot?
- Would it be possible to deny or hide ownership of a cold eWallet, but still have control of said eWallet?
- How many eWallet proxies would it take to distance a taxpayer to such a degree that it would be virtually impractical for any tax authority audit a reliable connection to any eWallet?
- What if the taxpayer just didn't admit to owning any cryptocurrency?
- Does a off shore exchange, require all your tax information social security number and taxID and if not how can any tax authority determine who owns what account? Or claimed they traded currency as a service for other less tech savvy clients?
The waters get very murky about this.
This is a strange game the tax man makes us play, it seems the only winning move is not to play their game in the first place.