The IRS will CERTAINLY come after cryptocurrency traders in the US who do not claim their profits and losses in Bitcoin and Altcoin investments. Assume they are already tracking you, even if you are trading using Etherdelta or some offline decentralized exchange (something other than a Bittrex, Binance, Kraken, KuCoin, Huabi.Pro exchange).
It is too easy to trip up and trade on an exchange that you registered using your real ID, or that you trade on your computer without a VPN running (exposing your real IP address), or that you trade using your cell phone which is linked to your phone number, social security number, or Google account.
[JUST SO THERE IS NO CONFUSION, I AM NOT AN EXPERT ON CRYPTO, NOR SHOULD I BE A RESOURCE. THIS STUFF IS FOREIGN TO ME, BUT I AM JUST OFFERING SOME PRACTICAL SUGGESTIONS WHICH I THINK COULD BE HELPFUL (and which I wish more people would talk about instead of silly "lambos" and "to the moon").]
Here is my best non-lawyer advice on how to document your trades.
A) Don't rely on cryptocurrency exchanges to keep records for you or to document your trades. They are all new and are all figuring out how much they themselves want to be held to government regulation and tracking. Coinbase was just sued and now reports to the IRS on their more active customers. Assume that is you.
Also, just because an exchange keeps a history of your transactions today does not mean they will change their minds and put a 30-day retention on your transactions without telling you.
B) Thus, because you are your own banker, make for yourself an Excel spreadsheet. Thinking back to stock market exchange reports, you can use the following headers:
DATE
WHAT YOU DID (BUY/SELL/TRANSFER)
ON WHAT EXCHANGE
HOW MANY
AT WHAT PRICE
COST OF THE TRANSACTION (HOW MANY x AT WHAT PRICE)
WHAT WAS THE COST OF THE TRANSACTION
WHAT IS/WAS YOUR BASIS
WHAT IS THE PROFIT OR LOSS
For example, on 2/11/2018 I bought 0.5 Ethereum (ETH) coins on Binfinex for $400. Ethereum was trading at $800 at the time, and thus $800 is my basis [for if I sell it later on]. Since I did not sell it, I did not make a profit.
I am sure this can be improved upon (and I'll think more about it), but the point is to document what you did. Most cryptocurrency trades are done in pairs, e.g., BTC/ETH, so I haven't thought that deeply on how to record these in a spreadsheet. I assume if you are using Bitcoin (BTC) to buy Ethereum (ETC), your spreadsheet would reflect a SELL with Bitcoin, and a BUY of Ethereum.
C) Use software-based solutions IN CONJUNCTION with your spreadsheet. For example, CoinTracking (https://www.cointracking.com), Bitcoin Tax (https://www.bitcoin.tax), or up and coming software tracking platforms such as FinTab.io (https://fintab.io/). I assume the PAID software solutions will be more useful to you when doing your taxes.
D) Hire an accountant who knows how to track short term and long term capital gains on your trades (I'll explain these definitions below).
SHORT TERM CAPITAL GAINS are taxed on coins or tokens you hold for LESS THAN A YEAR, and the tax paid when you file your income taxes is based on your income tax bracket (because short term capital gains are considered regular income).
LONG TERM CAPITAL GAINS are taxed on coins or tokens you hold for MORE THAN A YEAR, and the tax paid when you file your income taxes is less -- likely 15% (which is most likely less than your income).
For more information on capital gains, you can see Motley Fool's article here: https://www.fool.com/taxes/2017/12/22/your-guide-to-capital-gains-taxes-in-2018.aspx
E) The LAW on crytocurrency trading: Firstly, I am an attorney but I am NOT knowledgeable on tax law, so do not rely on me. I am also not an active trader, but I have been interested in the topic so I read books and listen to podcasts on the topic.
What I understand is that when you SELL a coin or a token, this is the same as buying or selling a STOCK. For this reason, you incur short term or long term capital gains on the sale, and you must pay taxes on any profits you make from the transaction.
If you sold at a loss, you can deduct that loss against your profits (or up to a certain amount against your income). I have heard numbers like $3,000, but I am not looking into it.
When you BUY a coin or a token, BE SURE TO RECORD THE PRICE OF 1) THE COIN OR TOKEN YOU BOUGHT, AND 2) THE COIN OR TOKEN YOU SOLD. The price of the coin or token you bought is called your "basis." This is the price which you will use when you later sell that same coin or token to determine your profit or loss from the sale of that coin or token.
Lastly, when you TRANSFER or MOVE a coin or token from a wallet to an exchange (or vice versa), this is NOT considered a sale. Rather, you are moving something you own from one location to another, just as you would transfer a gold bar from your safe deposit box at your bank into your gun safe in your home. (FYI, I don't have gold, nor do I have a safe. This is for ILLUSTRATION purposes).
F) The IRS requires that you file a yearly report when you have more than $10,000 in a location outside of the US. I can't remember what this is called, but many exchanges are outside of the US, and if you are lucky or smart enough to have invested enough and yet you are dumb enough to be holding your crypto on an exchange (which can be hacked), you probably need to file this yearly report. If anyone remembers what this is called, let me know.
IN SUMMARY: I am a lawyer but I am NOT knowledgeable on the topic of crypto taxes. What I have shared is simply what I have heard or gleaned from doing Google searches and listening to podcasts. Thus, ASSUME THAT I CAN BE MISTAKEN on anything I have written, and I have no plans to update this article. This is simply what I believe I know as of writing this article on 2/11/2018.
Also, please don't ask me questions about taxation because I simply do not know the answers nor am I willing to give legal advice on the topic.
My point in writing this was simply to share the message that the IRS is probably going to "git gud" at tracking your crypto transactions, and so either be aware of the limitations of your so-called privacy, or take very good notes of each and every trade so that you can allow your accountant to properly report your losses, or hopefully, your lambo sized crypto-retirement level profits.
DISCLAIMER: Anything written here on Steemit is my own personal opinion and is not to be taken as legal advice. We have a law firm (https://www.cashmanlawfirm.com) and you can e-mail us at [email protected] if you have any questions about what I have written here.
