Uncle Sam Ate My Cryptokitties: Cryptocurrency Tax Implications for 2017 and Beyond
We are four months out from Tax Day 2018 in the United States. Plenty of time to log a few thousand day trades, right? Maybe you’re thinking of using the supposed anonymity of the blockchain to shield yourself from the prying eyes of Uncle Sam. Stop fooling yourself, your cryptocurrency taxes will be coming due. The new GOP tax bill eliminates a like kind exception which means that trading bitcoin for ether or any cryptocurrency to another cryptocurrency or token will result in a taxable event. This provision goes into effect January 1st, 2018.
Further, as reported by CSNews December 14, 2017—The Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 under consideration by the US Senate “would require any person possessing more than $10 000 in cryptocurrency to declare their holding when passing a US customs checkpoint.” Penalties include 10 years in prison and $1,000,000 in fines.
Bitcoin and the IRS
The IRS has issued a 6-page guidance document, Notice 2014-21, detailing the rules of reporting cryptocurrency transactions. It answers 16 FAQ’s, including:
“Q-1: How is virtual currency treated for federal tax purposes?
A-1: For federal tax purposes, virtual currency is treated as property. General tax
principles applicable to property transactions apply to transactions using virtual
According to Fortune Magazine, August 22, 2017 The IRS has been tracking bitcoin reporting since 2015, when a scant 802 individuals reported their bitcoin earnings. They are currently using the software Chainalysis, which can follow transactions through the blockchain to identify and catch bad actors. In a recent decision in a court case between Coinbase and the IRS, a decision was made that Coinbase would only hand over information on accounts with funds greater than $20,000.
There are a few options for those seeking full compliance with tax regulations.
Option for Tax Reporting 1:
This service is apparently free at the time of the writing of this article. According to the bitcointalk forums, the author of the website writes, “If you like the site, I would appreciate a little support in form of a donation.” This full-featured service boasts that, “CoinTracking analyze all your trades and generates in real time tons of useful information such as the profit / loss of your trades, the value of your coins, balances, realized and unrealized gains, reports for tax declaration, and much more.“ It uses your choice of FIFO, LIFO, HIFO and LOFO accounting practices to account for your transactions. The service CoinTracking covers the following exchanges:
A screenshot of their tax reporting feature is below:
Libra raised $7.8 million to “provides institutional-grade blockchain and cryptocurrency ecosystem connectivity, standardization, and delivery of data in a scalable, secure, and fully auditable solution.” However, its launch date is sometime in 2018.
Option 3: Hire a CPA
Hiring a Certified Public Accountant may be the best way to go, given that if you get audited they will be able to support you through the process. But the trade-off is that they will be more expensive. Finding someone specialized in the niche is key.
For example, at https://www.tyracpa.com/category/virtual-currency/ the CPA states that one of his specialties is assisting with taxes in this domain.
Other Tracking Options: Build your own. #NotWorthIt
It is possible to build your own FIFO accounting spreadsheet based on Youtube tutorials and a bit of a time commitment, but the learning curve is steep—if you don’t know what a VLOOKUP or a SUMIF is, you better pack your bags and head for the Cayman Islands.
Another option is the Satoshi Trackamoto Google spreadsheet developed by Reddit user katatoniq, with a ton of features, but a bit of a learning curve to setup. Here is one of the summary charts it is capable of producing:
If you do use Satoshi Trackamoto, make sure to save a private copy to your Google Drive.
In summary, the tax man is coming and it is best to prepare yourself. We are entering uncharted territory where the law has not yet caught up with the technology. That’s no excuse not to comply, however. This article reviewed some of the limited options available to assist with reporting requirements. An exception for limiting taxes to transactions greater than $600.00 was NOT included in the latest US tax reform bill, meaning that the Congressional Blockchain Committee failed to provide tax relief to US traders. If you have additional resources to assist traders, please post them in the comments section.