Calculating Crypto Gains & Losses for Reporting

(image from Bing, licensed free to share and use)

I’ve spent considerable time scouring the internet for solutions to how to calculate year end gains and losses. I’ve read everything from fiat in to fiat out, to reporting of every trade, to reporting nothing, to one blogger’s opinion that it’s all so complicated that the IRS will be happy if we just do something in good faith effort.

Coinbase is currently under IRS investigation because last year, despite having enormous numbers of users, less than 900 users reported their transactions to the IRS. With this year’s enormous gains in Bitcoin and other currencies’ market values, users on the platform can no longer expect to be able to stay under the radar. As we speak, Coinbase is under request to hand over user names and account information to the IRS.

https://www.cnbc.com/2018/01/17/irs-steps-up-tax-enforcement-for-cryptocurrencies.html

Here is a 2014 memo for cryptocurrency published by the IRS:

https://www.irs.gov/newsroom/irs-virtual-currency-guidance

But even for the good faith user, attempting to report accurately could be a nightmare. After speaking with a tax preparer and comparing her recommendations with information found on tax prep sites like H & R Block, I’ve now learned that my original way of viewing all of this was backwards. I entered the market believing that gains were calculated on whatever I received back to my bank account when I cashed out. So when I pulled up the Cost Basis For Taxes report on Coinbase, I was disheartened to see that I owe taxes on money that has never gone back into my bank. (To view this report, go to Coinbase, Tools, Reports, +New Report, Cost Base For Taxes, 2017).

The Coinbase calculations include sells of cryptocurrency into the USD wallet, which was never withdrawn to my bank, but held momentarily and then returned into cryptocurrency and moved into the exchanges. Unfortunately, at the end of 2017, cryptocurrency was at its all-time high, and for those who have moved currencies around, that’s what we owe taxes on, even if we never tangibly received the money.

According to my tax preparer, the reason we owe taxes before cashing out, unlike when daytrading stocks, is because in the stock market brokers take care of this service all along the way. I’m interested in hearing thoughts on this. But regardless of whether this is the reason, this sentiment is reported widely.

But Coinbase isn’t the problem for me. Attempting to report gains and losses on individual trades in the exchanges becomes problematic. I’ve found no such “Cost Basis for Taxes” report in Bittrex and have instead read their statement that they’re not responsible for it. Trying to decipher our own records may be impossible because the transaction histories are not in USD, and there’s no conversion rate that we can apply today that holds true for previous days of market value. There have been times when I was unable to determine the exact USD price I was buying or selling for, even on the day I was trading. (I am interested in readers’ comments about how to generate the appropriate reports in the exchanges.)

I have found good news.

In all my searching the internet, I ran across a cryptocurrency calculation program that is said to interface with the exchanges and provide a report that meets reporting requirements for tax filing. At first, I was skeptical and wanted to be sure it wasn’t a scam trying to get into my accounts. But then I read a helpful article in Forbes that was published in October.

The article grabbed me with its first line, “Don’t look to your coin exchange for much help with tax reporting.” Now I feel better ;)

https://www.forbes.com/sites/greatspeculations/2017/10/31/smart-tax-accounting-moves-for-cryptocurrency-traders/#2a7a07a61c17

The article recommends two calculation programs and states, “They [exchanges] don’t keep cost-basis information and are unable to give the users online tax reports. A coin is not a ‘covered security’ for Form 1099-B issuance, so coin investors and the IRS don’t receive a 1099-B. Coin investors are responsible for generating their accounting and tax reports. With uncertainty on tax treatment due to lack of sufficient IRS guidance, many coin traders wind up under-reporting taxable income on coin transactions. In most cases, it may be inadvertent, but sometimes, it’s willful. Using accounting software shows an attempt to be compliant.”

The two programs Forbes recommended are Bitcoin.Tax, which is “free up to 100 transactions, and it charges $19.95 per year when users exceed 100 entries” and CoinTracking.Info which is “free to use for up to 200 transactions, and it charges $325 ‘for lifetime use,’ when users exceed 200 entries.”

The two programs can be found here:

Bitcoin.Tax https://bitcoin.tax/

CoinTracking.Info https://cointracking.info/

Maybe after we come out on the other side of the “regulation dip” we’re currently in, by next year we’ll receive 1099s.

I would love to hear comments and suggestions.