TBI's Crypto Tax Guide: Extend, Panic, File

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Messari’s Unqualified Opinion #7

TL;DR:

The extended US tax filing deadline is two weeks from today. I expect some selling pressure from the late retail filers, especially in the long-tail of crypto assets. Why? 1) The IRS and the big crypto companies have made it damn near impossible to report on anything other than plain vanilla trading records. 2) Many may have been hoping for a rebound in prices before settling up with Uncle Sam, a pretty bad strategy in hindsight for those who took that path. For the stragglers, never fear: I wrap up with some software solutions I’d recommend checking out that may aide your filing process.

TBI’s Crypto Tax Guide

I spent a bunch of time this beautiful sunny Sunday trying to figure out my crypto tax liability in the good ole US of A. No dice, yet, but I feel like I made progress.

I know you’ve probably got burning questions (as does my wife) as to why I’m doing this in early October vs. April. Let me explain.

Q1: Why didn’t you just hire someone? 

A1: First, because I’ve done my own taxes almost every year to date, and have found I’m better at proactive tax planning than deferring to a paid-by-the-hour consultant. Second, because I like getting angry about the process itself. I don’t mind paying taxes, I mind having to pay to pay my taxes - in time, money, and anxiety over potentially one day enduring the soul suck of an audit. It reminds me that the work we’re doing in crypto is important - viva la revolucion. Third, I wrote the crypto tax 101 post that still tops the SEO charts for “bitcoin tax guide” so am a crypto tax thought leader.

That said, this is the last year I put up with this crap.     

Q2: Ok, but why didn’t you file back in April? 

A2: I overpaid in April, and waited to file until now mostly because I thought the major crypto exchanges and wallets would have their shit together and it would be easier to aggregate transactions and accurately track cost basis across services. And I thought reliable third party services would emerge to optimize filings between April and now. Using FIFO vs. LIFO vs. Specific identification are boring eye-glazing-over tax accounting distinctions that could lead to a 50-100% (or higher) difference in tax liabilities. There might be some progress on third-party software solutions (more below), but account records from the major wallets and exchanges might as well be in different languages.

I may be an outlier, but here’s what I need to complete my return: 

  1. Full historical transaction exports from Bitgo, Bittrex, Blockchain, Circle, Coinbase, Ledger, MetaMask, Poloniex, ShapeShift PRISM (RIP, fam), Xapo. Needs to include withdrawals and deposits and mark by trading pair - netting out commissions.

  2. Match up transactions (to determine which are mere wallet transfers - non-taxable), sort by date, annotate transactions (investment? trade? transaction?)

  3. Determine historical cost basis for about 2500 historical transactions. BTC that stayed on an exchange as a crypto “reserve” shouldn’t affect the cost basis of the stuff in cold storage.

  4. Ponder whether accurate crypto reporting is cruel and unusual punishment under the Eighth Amendment.

  5. Bitcoin Cash!?!E?KFAGDVAJSDF:ds

  6. Finish reconciliation and file the return with a shrug emoji and best estimate for my actual liability. Assume we’re all getting audited, and wait for my favorite people to come in and ruin my life in a year or two for as long as the audit lasts.

  7. Think about all the tax cheats that are going to get away with not paying anything, while I struggle to get this done right - with an accounting degree. 

Q3: You bitch a lot, TBI (well, the IRS ruined my Sunday, so deal with it). What does this actually mean for me?

A3: First, I don’t think the Q1 tax selling pressure is fully baked into today’s prices. I’d bet there were many, many people with 2017 gains that waited to sell their crypto to cover tax obligations after they had fallen so precipitously in Q1…many who likely filed extensions while optimistically waiting for a rebound in prices to settle up in October. That’s not how it’s supposed to work, but a lot of people were between a rock and hard place this spring. 

Bruce Fenton outlined it best:

If there’s even a little truth to this, we could still have high hundreds of millions of dollars, if not low billions of dollars worth of retail selling pressure in the next couple of weeks -- some of which could hit illiquid positions especially hard. 

I don’t have a chart for this (no false precision here). But something you should keep in mind and maybe measure by looking at 2017 (real) trading volumes by currency pair - lots of USD-crypto action in a given asset could mean a lot of unpaid taxable gains. 

And yes, they should have paid estimated obligations in April, but I could see many people filing extensions, clinging to hope they would get back above water by October with a price rebound, and now scrambling trying to figure out what they’re going to do to cover. It could get ugly for some speculators who got caught up in the fever.

Second, these billion dollar private crypto companies have to step up and fix this mess, like, yesterday. It’s borderline negligent from a consumer protection standpoint. You should push your favorite wallet and exchange to get together with their unicorn counterparts and come up with a common reporting standard.

Out of the companies I listed above, Poloniex and Bittrex are without a doubt the worst in terms of actually getting clean transaction history downloads because they make you download separate files for trades vs. deposits and withdrawals. (I’ll cut Circle a little slack because of the recency of the acquisition.) Even the good companies, though, all deliver different file formats that make manually doing this reconciliation work impossible. Few include the would-be-useful-thank-you-very-much reference exchange rate at the time of a given transaction - you gotta go look that up manually per transaction. 

Good on the Picks & Shovels guys for at least starting the conversation on this issue with a GitHub commit called Harmony. Unfortunately, no one else has actually contributed to it, nor does it seem to be top of mind for any of the exchanges. 

We need less kowtowing to the SEC for the ability to trade more cryptos of (questionable value and) mass destruction, and more focus on tax reporting standardization. Giving away customer records to the IRS witch hunt doesn’t count. You can’t sell out your customers on the one hand, and not give them the tools they need to do good faith tax reporting on the other.  

Third, if you are struggling like I am, and don’t have a $1mm+ return to justify enormous spend on a tax lawyer, it’s probably time to look for a third party software that at least gives you some defensible position when the IRS does comes knocking. The thing you need to look for is their exchange coverage - almost none have complete exchange and wallet coverage - and robustness of the software.

Here are the few that I’m exploring this week:

LibraTax: The OG in crypto tax prep filing. I used them historically, but haven’t heard many people talk about them more recently. Going to give them another shot for this return, but I’m not sure they’ve sufficiently improved their exchange coverage. 

CoinTracker: Decent exchange coverage. YCombinator-backed, and they share a couple Messari investors (Initialized and Kindred). So I like that as a data point. 

ProfitStance: Still in beta, but I’ve heard good things. 

TokenTax
: Claim to work with every exchange, but it's a small team with few proof points. They claim to be rated the “best platform for filing crypto taxes”, but don’t actually have a link to the source article that “rates” them. (I like to know who I’m giving my read data to given my inevitable future kidnapping and Hollywood drama ransom and rescue. The dude who plays Thor will obviously play the protagonist.)  

To conclude: stay safe out there friends.

Pay your taxes, but not too much.

Demand better standardized tools from the companies that have gotten filthy rich from your patronage. 

And always remember, HODLing isn’t taxable.

-TBI 

P.S. Smash those share and subscribe buttons, and spread the love. Tweet at me or Messari for feedback, comments, or (more?) questions.


News & Analyses


Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

🔄 [Analysis] Satoshi as the base unit – Melik Manukyan

The path forward with bitcoin UX is to adopt the “satoshi” (0.00000001 BTC) as the currency’s base unit. The smallest unit per the Bitcoin base-layer protocol consensus rules can help us begin ‘thinking’ in terms of Satoshis and nothing else, which should help design future applications and think of the next billion crypto users. Humans are not well adapted to think nor work in terms of decimals, but neither are computers for that matter (precision or rounding errors). In digital information and computer systems, the base units are always the smallest unit. Using that common reference point, we can use the SI system to scale up or down from there. (Messari | Source)

👔 WSJ research claims $88.6 million of crypto is laundered through exchanges

The Wall Street Journal claimed $88.6 million related to criminal activity was laundered through crypto exchanges over a two year period. The report showed that funds from illicit activities like ransomware and fraudulent fundraising were sent through 46 different crypto exchanges. The Journal focused on U.S.-based ShapeShift which it claimed was responsible for laundering $9 million over the two year period. ShapeShift CEO Erik Voorhees pushed back on the report, noting this represented less than 0.2% of the exchange's volume over the period, an order of magnitude lower than what he claims is laundered via the banking system. (Messari | Source)


🔄 ICONOMI to redeem tokens, offer equity in company

It’s happening! (ronpaul.gif) Citing unclear legal frameworks, asset management focused crypto project ICONOMI ($ICN) announced that they would be converting the company into a Liechtenstein based holding company called ICONOMI AG. Current token holders will be given the option to convert their current tokens into equity in the new company or redeem them for Ethereum ($ETH) at a rate of 0.0019 ETH per ICN. Those that decide to convert to equity will be issued new security tokens under the ticker eICN starting in the first quarter of 2019. (Messari | Source)


Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 🚀 StellarX launches decentralized exchange based on the Stellar protocol. The exchange offers zero-fee trading and the ability to deposit fiat currencies with a bank account. Going forward StellarX plans to offer digitized versions of other assets including bonds, stocks, real estate, and commodities. (Messari | Source)

Startup Signals (ICOs, Cryptos, and Startups)

  • 📄 Michael Arrington's XRP Capital subpoenaed by SEC, plans to stop U.S. investments. Arrington said his firm will pivot to Asia-based investing and that the cost to deal with the request will not be "insignificant." (Messari | Source)

  • 💰 Serial entrepreneur Marwan Forzley has raised $25 million from Goldman SachsGVKleiner PerkinsSilicon Valley BankTrend Forward Capital, and Pantera Capital to cut intermediary banks out of the payment process altogether. Instead of relying on a series of correspondents to move money between different jurisdictions around the world, Marwan’s latest venture, Veem, uses Bitcoin to directly connect its clients’ bank accounts with suppliers and customers. (Messari | Source) [TBI note: Kudos, Marwan. Fast and steady growth.]

The Powers That Be (Legal/Reg/Policy)

  • 🇮🇳 The Reserve Bank of India (RBI) has denied the "formal creation" of a unit to research AI and blockchain technology, according to a report. The clarification after an investigation by Coin Crunch India comes weeks after the central bank was rumored to have set up the supposed unit to "research and possibly draft rules" for the emerging technologies. (Messari | Source)

  • ⛓ The Commodity Futures Trading Commission (CFTC) filed charges against two defendants for allegedly going to a number of lengths in attempts to steal bitcoin. The regulator announced late Friday that it was charging two individuals using the names Morgan Hunt and Kim Hecroft for "fraudulent solicitation, impersonation of a CFTC investigator and forging CFTC documents" as part of an elaborate scheme to convince cryptocurrency investors to pay a fake tax in bitcoin to the defendants. (Messari | Source)

"Celebrities" (Crypto Influencers)

Did I miss something?

Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).


Community Updates


Podcast Recap

🎧 ICYMI, we also host & produce our own podcasts on Spotify, iTunes, and Google Play.

In our latest episode, we had on Eric Meltzer to talk about the latest bitcoin bug, and also give you the most interesting statistics about Bitmain's latest disclosure documents for its IPO application on the Hong Kong Stock Exchange.

Listen on Apple Podcasts here, Spotify here, Soundcloud here, and Google play here. Happy learning!


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