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US Tax Law - Need Help Calculating


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I need some help with tracking my taxable events for my cryptocurrency trading and think that many others struggle with how to record taxes with the new tax laws that went into affect January 1, 2018. It is pretty straight forward if you buy a crypto with USD and then sell the same crypto for USD.

Where I am having trouble is if I buy a crypto with USD then trade that crypto for another crypto. For example, if I buy ETH on GDAX with USD I record that as a line item in my excel file then calculating the cost basis is easy. Now I send that ETH to Binance and Trade it for XRP. According to the new tax laws my ETH to XRP trade is now a taxable event. In the past, people could use IRC 1031 which allowed for deferred taxes on like kind exchanges of property. Cryptocurrency has been identified by the US government as intagible property for several years now. As far as I understand it, the government has changed IRC 1031 starting in 2018 to replace the word "property" to "real property" making crypto currency no longer eligible under this rule. This means all crypto to crypto exchanges are now a taxable event.

I need advice on how to calculate the USD value of a like kind exchange. I want a way to get this exact and have definitive proof that my numbers are accurate if I was to be audited.

Lets keep it simple with a hypothetical: I buy 1 ETH for 10 dollars (cost basis) on January 1, 2018 at 5pm and then trade that ETH 1 week later on January 8, 2018 for 5 XRP. Now I have to find out how much my ETH was worth after holding it for 1 week when I "cashed out" for XRP which means I have to figure out how much XRP was worth in USD at the exact second of my trade. So if my XRP was worth $4 each at the time of that trade that means my ETH appreciated from my cost basis of $10 to $20 (because I traded the 1 ETH for 5 XRP which are worth $4 each). In addition, my new cost basis for the XRP would be $20, so I guess I would have 2 line items for that one trade (A sell line item for ETH and a buy line item for XRP).

Basically, I would have a taxable gain of $10 for my ETH and a cost basis established for my XRP of $20.

So how do I capture the Fair Market USD Value of XRP at the time of my trade of ETH to XRP???? There is almost no way to be exact with the amount of fluctuation in price per second.

Advice?

 

Any advice on tracking this is appreciated.

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Maybe look into this: https://bitcoin.tax/
Their features show "Choose like-kind treatment between coins"
I haven't used it myself but I think you import .csv data which you can export on exchange sites and this does all the math for you?  Anyone have experience with this service?

If you insist on doing it manually, I think the important words in the IRS Virtual Currency Guidance of 2014 are:

"the fair market value of the virtual currency is determined by converting the
virtual currency into U.S. dollars (or into another real currency which in turn can be
converted into U.S. dollars) at the exchange rate, in a reasonable manner that is
consistently applied
."

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

 

That said, personally, I'm not sure I even want to claim these as like-kind trades. 

Edited by eoma
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8 minutes ago, eoma said:

That said, personally, I'm not sure I even want to claim these as like-kind trades. 

Thanks for the advice, unfortunately you can't legally treat them as like kind trades anymore. New IRS rules went into affect on January 1, 2018 which do not allow cryptocurrency to use the like kind exchange rule. All trades are now taxable events. I might check out the tool you linked for tracking taxes.

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1 minute ago, CryptoMaster1000 said:

New IRS rules went into affect on January 1, 2018 

so wouldn't this affect everything you do after jan 1 2018?

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1 minute ago, CryptoMaster1000 said:

Thanks for the advice, unfortunately you can't legally treat them as like kind trades anymore. New IRS rules went into affect on January 1, 2018 which do not allow cryptocurrency to use the like kind exchange rule. All trades are now taxable events. I might check out the tool you linked for tracking taxes.

I assume you're talking about your 2017 taxes though which don't fall under these new tax rules as I understand it.

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Just now, g___ said:

so wouldn't this affect everything you do after jan 1 2018?

Yes it would, but I want to track as I trade so I have everything I need for 2019 tax season.

1 minute ago, eoma said:

I assume you're talking about your 2017 taxes though which don't fall under these new tax rules as I understand it.

No, I am tracking as I go in 2018 so I am ready for 2019 tax season. I record each trade as I make them so I have a good record for tax purposes. Now that it is 2018 I need to be sure I am tracking my crypto to crypto trades correctly.

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1 minute ago, CryptoMaster1000 said:

Yes it would, but I want to track as I trade so I have everything I need for 2019 tax season.

No, I am tracking as I go in 2018 so I am ready for 2019 tax season. I record each trade as I make them so I have a good record for tax purposes. Now that it is 2018 I need to be sure I am tracking my crypto to crypto trades correctly.

Ah, ok.  Yea it makes sense to keep track as you go so you don't have a big surprise next year.  Maybe a rough accounting and then just use tools to get exacts later on?  Not sure tbh...

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6 minutes ago, TheXRPer said:

What is wrong with my theory of not trading on any exchange that submits a 1099? If the exchange doesn't submit one, how and the hell would the IRS know anything about what you do with your money?

I prefer to use good exchanges that obey the law over a shady exchange. I also don't want to risk an exchange saying they don't submit to IRS and then later that changes. I could get audited and they would want to know about deposits coming from an exchange to my bank account.

I want to trade crypto legit and do not want to be caught up in some tax evasion BS.

For example: Coinbase ordered to report 14,355 users to the IRS - https://www.theverge.com/2017/11/29/16717416/us-coinbase-irs-records

No one knew in advance coinbase would be ordered to do that.

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16 minutes ago, TheXRPer said:

What is wrong with my theory of not trading on any exchange that submits a 1099? If the exchange doesn't submit one, how and the hell would the IRS know anything about what you do with your money?

When you cash out a couple million dollars a few years from now after XRP mooning, you think the IRS isn't going to have a few questions if they have no trading history for you? 

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22 minutes ago, g___ said:

so wouldn't this affect everything you do after jan 1 2018?

At best it was a grey area before, even though many CPAs even in 2017 said you cannot do it. So there is a pretty decent chance that if you file a 1031 like kind exchange form and list crypto on it that you may get audited by IRS in later years and be assessed penalties and fees. If you want to play it safe then just pay tax on your trades. If not then best of luck

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3 minutes ago, eoma said:

When you cash out a couple million dollars a few years from now after XRP mooning, you think the IRS isn't going to have a few questions if they have no trading history for you? 

This. 

Unless you bought XRP with fiat and only held and never did any other trading

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