Crypto and Taxes #illumedati


Hey everyone, it’s Finance Fridays again. This is kind of a short, niche post on “Crypto and Taxes”.

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Crypto and Taxes

Yes.

Just like anything else, you need to pay taxes on your cryptocurrency gains. Obviously, where you are in the world treats taxes differently. However, for the purposes of this post, I am specifically talking about United States Taxes.

Oh man, I have to pay taxes?

Yes.

The IRS has, for some reason, defined cryptocurrencies as “property”. I don’t really know why to be honest. I will imagine things will be redefined later, but for now, they are defined as property.

If you’re interested, you can read more about it here:

IRS Notice 2014-21

It’s all very convoluted, but the long and short of it for most people is that anytime you exchange a cryptocurrency for another one, you pay capital gains tax on it. This may be short term or long term capital gains depending on when you bought and sold the entity.

For example, if you buy Bitcoin with dollars, then exchange it for Ethereum. That process (to the IRS) is considered as:

  1. Buy Bitcoin for dollars
  2. Sell Bitcoin for [some dollar value]
  3. Buy Ethereum with [some dollar value]

[some dollar value] is considered “fair market value”

Hmm… what about altcoins?

This can become an enormous headache for anyone who bought altcoins. The reason for this is the process is something like this:

  1. Buy Bitcoin (or Ethereum) for dollars from some major fiat gateway
  2. Transfer the Bitcoin or Ethereum to other major exchange
  3. Exchange Bitcoin or Ethereum for altcoin of your choice

This isn’t a huge deal if you only bought once or twice. However, if you bought a few times over the course of a few months, this can be convoluted. Then if you were exchanging altcoins for other altcoins, you can imagine that the transaction history can get very long, in the thousands or tens of thousands even.

Luckily, for me, I don’t have much crypto, so it wasn’t too bad for me. I also don’t plan to sell until 2025 anyways nor do I plan to buy any more. So this will be the only tax year which was a little difficult.

However, if you have a ton of transactions, consider looking into things like:

CoinTracking.info

Sites like these let you upload your exported data from exchanges. Don’t worry, the exported data from exchanges is simply a transaction log of buying/selling. It then uses price data from the exchange of the average price of that coin to calculate everything. It then calculates your losses and gains on each transaction for you to input into your taxes.

It’s free for 200 transactions, which hopefully is enough for most of you. Of course, if you have more than that, then you need to start paying.

My friend has used this service and he says it was worthwhile. But he also has tens of thousands of transaction, so yea, that makes sense. He also intends to keep trading crypto, so I think he bought their lifetime plan.

There is another service which I see around called:

Cryptotrader.tax

I have no experience with this company. However, their website is pretty slick and has a lot of informational articles. That said, it seems to be mostly geared at “regular” people since it costs $39 per yearly report.

What about the Bitcoins I mined?

Technically, Bitcoins you mined are considered “work” and any dollars you received (from selling those Bitcoin) are therefore taxed as income as well.

However, you can deduct the business expenses associated with “mining” such as electricity and computers, etc.

What about when I buy things with Crypto?

I’ve never done this before, but apparently it’s very convoluted:

You need to know the basis price of the Bitcoin used to buy the item, and then subtract it from the item.

So you would need to know you bought 1 Bitcoin for $200 or whatever originally years ago, then you spent that 1 Bitcoin to buy a a HoloLens (~$3500) today, you would subtract $200 from the item.

So, in the eyes of the IRS, you “made” $3300 and used it to buy the HoloLens. Now you need to pay capital gains tax on it, short term or long term, based on when you bought the original cost basis Bitcoin.

Of course, this becomes even more ridiculous when you account for the fact that it is impossible to tell which Bitcoin you’re using when you’ve bought Bitcoin multiple times. However, the onus lies on you to differentiate and keep track of which Bitcoin you spent, every time you spend them and cost basis them.

In other words, it’s just not worth it to buy things with cryptocurrency yet. The tax headache is ridiculous, at least in America.

What are you doing?

I’m paying my taxes like a good citizen should.

Unfortunately, on paper I actually made a little money in crypto in 2018. This had to do with buying Ethereum and then exchanging it for Cardano a week later. In that short time, Ethereum went up a fair amount, and so I will need to pay short term capital gains taxes on that.

Of course, in reality, I’m actually down when it comes to cryptocurrency, as you would expect. Cardano and Ripple are both down >90% from their all time highs. Just to be fair, Ethereum is also down 90% from its all time high and Bitcoin is down 80% from its all time high.

The 4 pillars of crypto investing (gambling) sort of worked.

However, the current prices don’t really matter to me. I bought when I thought it was reasonable and because I believed in what they were trying to do. Regardless of price, I wasn’t planning to sell until at least 2025 or when cryptocurrency can be spent natively without penalty whichever came first.

All that said, I have all the paperwork ready for my CPA who I will being going to see on Saturday. I’m not sure he’s ever worked with cryptocurrency before, but I’ll give him all the information so he can do my taxes correctly and I can pay the IRS the gains I made on paper.

As usual, please remember that I only have a very tiny amount of cryptocurrency and mainly do it for fun with what I consider to be play money. I truly believe that cryptocurrency will what changes the world in my lifetime, just like the internet before it. This is the biggest gamble that will probably happen in our lifetimes. Maybe there is an Amazon in there somewhere, but remember to only invest what you can afford to lose.

How should cryptocurrency be categorized?

Well, I’m not the IRS and I’m not a CPA.

However, it makes sense to me that cryptocurrency should be categorized in a similar fashion to foreign exchange. I mean, the end game is that these currencies will have their own ecosystem, although they won’t technically have their own sovereign nation backing them.

TL;DR

Crypto and Taxes. Pay your taxes. I am.

If you don’t pay your taxes now you will likely have big problems later.

The tax man always comes. Nothing is certain but Death and Taxes.

Finance Fridays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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