The IRS collects data on Coinbase account holders
wsj.com
wsj.com
I know, I know. Intuit and H&R Block refuse to allow that to happen, but if we could stop prioritizing entrenched industries, that'd be really nice.
You, me and most everyone else reasonable. In some countries, taxes are as simple as the tax agency sending you a bill or a check. But, America's love of excess capitalism means our tax code is needlessly complicated and pretty much insists on as many third party businesses to be involved as possible - every company you work for, plus anyone holding your securities, plus Intuit or some other tax preparer, and so forth.
The most sensible requirement, since we're not going to get sensible tax reform ever, would be just making legal exchanges operating in the US have to send out a 1099 variant (maybe 1099-MISC could cover it? Or they could create a new one) so people aren't left scratching their heads all the time. But we'll see if that ever happens...
I don't think it's fair calling this capitalism. Capitalism is the idea the the production of goods is controlled by private entities, whereas what you are talking about is a government over complicating/regulating an industry at the behest of a company. In a capitalist society, regulation is not a thing, whereas in the corporatist society I believe we live in, regulation harms the citizens through capture and reduction in effeciency.
If the state didn't give a bill, you couldn't figure out what to pay.
Unlike stocks which seem to be entirely traded on exchanges, bitcoin could have been obtained through mining (unlikely, but possible) or a true person-to-person trade/barter. In order to calculate capital gains, one needs to know the cost-basis (i.e. the price you paid to acquire the asset). If bitcoins are deposited into your Coinbase BTC account, there's no way for Coinbase to know what you paid for them, hence difficult/impossible for them to calculate the capital gains.
You could have bought stock directly from the company, in an IPO or secondary offering (where it does not go through an exchange), from an individual or broker not intermediated by an exchange, etc.
You can keep stock certificates in a safe deposit box, and then later transfer them into your brokerage account, they have no idea what you paid for them.
This is a solved problem, cryptocurrency is not special. If they have the cost basis they can tell you, if not, they can leave it blank.
>>This is a solved problem, cryptocurrency is not special. If they have the cost basis they can tell you, if not, they can leave it blank.
We're in agreement - this is a solved problem that the retail investor or their accountant needs to calculate manually via aggregation of the entire lifecycle of the asset(s) to properly account for capital gains (or losses).
You should probably call the IRS tipline and say "I think [Schwab] isn't filing their 1099-Bs, you know the thing which reports cost bases and short-term/long-term capital gains for retail investors, and accordingly they're on the hook for billions of dollars of penalties, but to keep the math easy just write me a check for a billion dollars rather than what the law actually says you owe me for this hot tip."
Or, in the alternative, you could look again.
I checked again, and you're right. Interactive Brokers is the only platform I still infrequently use but it does have a list of pre-filled tax forms available for download. Worksheet 8949 is also pre-filled, but this is probably where one would need to submit a revised version if previous cost-basis amounts need to be adjusted as in the specific edge cases we're talking about above.
Coinbase seems to have sent 1099-K documents to eligible customers which isn't as detailed as 1099-Bs since I believe the Ks only report gross transaction volumes over $20K[1].
[1] https://www.irs.gov/businesses/understanding-your-1099-k
https://www.irs.gov/businesses/small-businesses-self-employe...
I cannot account for the discrepancy, but I use Charles Schwab, and it absolutely DOES calculate and display capital gains. In cases where I have moved a security into the account (rather than purchasing it directly within the account) I have had to provide original cost basis information for them in order for the calculations to be correct.
BUT from what I understand, people leave a lot of coins on exchanges and never transfer them back to personal wallets. Coinbase can track that.
See "Basis of Assets" https://www.irs.gov/pub/irs-pdf/p551.pdf and "Investment Income and Expenses" https://www.irs.gov/pub/irs-pdf/p550.pdf
None of that covers cryptocurrency directly yet, but looking at how more traditional investments are treated can inspire you to try to do your taxes in the spirit of the rules to avoid likely problems.
"How much do you THINK you owe?"
"...Hmm, if I have everything correct, I think I owe this much"
"WRONG! Time for consequences!"
One of the biggest frustrations of modern life is knowing how efficient and easy things could be if these systems were designed better...and then realizing that nothing will be done about it because entrenched interests hold all the power in American government.
- Comic book guy
What's funny is that they will. After the fact. I got a notice last year from the IRS about some back taxes I owed because I forgot to include some stock I sold in my taxes for that year.
They were right. I had overlooked it. But their figure for what I owed was a little higher than what I calculated it to be. I sent back a revised tax return with a check and an explanation for how I arrived at my number and the matter was closed.
So just to reaffirm: the obstacle is more political than technical.
How about instead of big-brother style "hand all your metadata over to the state", that instead the state releases an open-source program you can run that collects & analyzes all your metadata and then produces the bill?
But I also agree that you shouldn't have to calculate it. I'm in favor of return free filing.
And in my experience at least, their customer service people are courteous and genuinely helpful. It's nothing at all like the standard substandard DMV experience.
Another cool thing is they have an absolutely fantastic record for providing real opportunities (not just busywork) to disabled persons.
The current tax system places responsibility on you, the investor, to tabulate all of your gains and losses, but it also gives you the freedom to invest in complex and unusual transactions like coins in the first place. Don't be so quick to assume you could give up the one without giving up the other, were it not for those pesky TurboTax lobbyists.
For the 99% of us who aren't small business owners, the IRS already has all our information: my W-2's, 1099's, etc. are already sent there by my employer/bank/broker. Making me do my tax returns anyway is literally useless, just busywork for its own sake.
> The current tax system places responsibility on you, the investor, to tabulate all of your gains and losses, but it also gives you the freedom to invest in complex and unusual transactions like coins in the first place.
As people have explained countless times, letting the IRS compute your returns for you in no way precludes the ability for you to do it yourself, if you desire. That is how it works in every other country - most people just accept the government's return, the people who have complex financials file their own. Stop making the rest of us do pointless work just because of your paranoia.
And your second paragraph makes no sense whatsoever.
That said, pretending the IRS doesn't already know what taxes to collect from you is definitely naive.
If my choices were to pay the tax man directly or pay a third party to calculate my tax for me because it's too complicated to do myself in part because of that third entities lobbying, then I am always going to choose to cut out the middle man
Also I agree the the IRS can figure out the taxes you'd need to pay if they ever cared to look at you, but I was responding to the parent comment implying that they shouldn't get more information so that they could go outside the regulations
The current system is like having to write your own credit card statement, mail it in to the CC company, and getting penalized if you get it wrong.
They just send you another bill, plus interest.
I think you'd need to get a lawyer for them to even look at your work.
I replied to the bill with the relevant paperwork and a 1 page letter explaining what happened, and the IRS agreed I did not actually owe them anything. No lawyer required.
If I buy $10k of Intel, it grows to $15k and I sell it to buy $15k of Google, I owe tax on the $5k gain.
Now, perhaps one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. The IRS generally doesn’t like someone to be able to trade assets without recognizing a gain, otherwise it breaks down the fundamental framework upon which the entire tax system is based. The law provides a few provisions for tax free trades, but they are specifically prescribed by the tax law, such as a 1031 exchange between real estate holdings.
If you’ve heavily traded between cryptos over the past year with massively appreciating values, I would be worried that the IRS would claim you should have recognized a tax gain with every trade. For some, the ramifications for such a perspective could be huge.
I think the bigger issue for US taxpayers is that the IRS doesn’t allow individuals to carryback losses. From what I’ve read, corporations in the US and individual taxpayers in Canada can carry back losses for up to 3 years. The way the crypto market exploded up until late Dec, and then has crashed hard since then could leave some traders with a big tax liability from 2017 that they could end up having to work off for years. The good news is that they might be able to carry 2018’s losses forward to offset future capital gains, but that could be cold comfort to the kids that lost it all on leverage when the bubble popped.
IANAA IANAL, seek professional advice.
I still wouldn’t hold my breath.
They explicitly do consider crypto-to-crypto transactions as a taxable event now, as of the recent tax bill. You are required to pay taxes on it.
I mean where does it end? If I tell you I'll pay you 10000 dollars for the pocket lint in your pocket, did you just make a gain of 10k? Do you now owe the IRS 10k? If you haven't actually made any legal tender, how can you be taxed on a trade at all? The value of something is completely relative, speculative, and ever-changing.
The IRS has all sorts of rules involving barters, meaning trading one asset for another without USD being involved in the transaction at all. [1]
Say you buy a car for $10k, let it sit in your garage for 30 years and it now becomes a classic vintage worth $30k. If you go and trade that car for a new motorcycle worth $30k, the IRS requires you to record your $20k gain on the car when you make the trade for the motorcycle.
Where does it end? When you’ve paid the IRS the tax you owe, as per the law.
Regarding the pocket lint, if you tell me you’ll pay $10k for mine, I have no gain. When the sale happens, I recognize the $10k gain and pay the tax. This seems to be a pretty typical transaction for pocket lint or a truckload of butter.
At the end of the day, whether you traded BTC for DOGE or for IKEA couches, you were able to buy more of the second thing after you traded your BTC. You sold it. You realized your 50% gain.
Its farcicle to argue that by trading BTC for DOGE you're not realizing your gain. You're no longer tied to BTC, and your purchasing power increased at the time of the trade. Your wealth converted to USD went up. You sold your asset. You owe taxes.
> If I tell you I'll pay you 10000 dollars for the pocket lint in your pocket, did you just make a gain of 10k?
Yes. this is exactly how it works. you made a $10k profit. Its not a capital gain, but you made a profit and owe taxes. You dont owe them 10k, but you owe them part of it. If you then go and invest that 10k on physical capital in order to make more lint, then you can deduct that again as a business expense because you've essentially lost 10k on an investment (assuming 100% depreciation).
> The value of something is completely relative, speculative, and ever-changing.
This is why the thing that matters is when you realize your gain by selling the asset. It doesn't matter what you sold it for, you either realized a gain or a loss and that has tax implications.
Do you realize a $10/gain, and owe money on that? If yes, let's say you return the toaster, and your Bitcoin is refunded. Do you still pay taxes?
Moreover, if you bought the toaster, and sold it for $20 in BTC, you would have profited $10 and would need to pay taxes on it.
Key point here is that you also recognize every loss. Which means in effect you are only paying tax on the amount your wealth increased over the tax period.
It could still be huge, but only proportional to huge overall gains.
Not sure about the trading fees for frequent traders. That's definitely a CPA question.
I believe they factor into calculating the gain/loss. E.g., if you buy 100 units for $99 plus a $1 fee, then your cost basis is ($99 + $1)/(100 units) = $1.00/unit. If you later sell them all for $111 with a $1 fee, then your capital gain is ($111 - $1) - ($100) = $10.
You owe taxes to the feds and state of about 500,000, which you don't have anymore. That is of course carried forward as a loss for the next year, but that only results in reducing taxable income at a potentially lower bracket.
For someone who knows nothing about tax law, if I draw the $15k back from Google to USD, would I pay taxes on the full 15k?
This gains growth tax thing seems to make sense, if there is no taxes when converting it to USD. Eg, if I take 10k and make an additional 10k converting from BTC->ETH and pay taxes on that new 10k, that's reasonable to me if I only pay taxes once on those gains. If however, I withdraw the 20k ETH to USD, and pay taxes on the 20k, then effectively I've paid double taxes on the gained $10k.
Is there a way to handle that in tax law? Or are trades among stocks/etc supposed to be double taxed like that?
https://www.irs.gov/taxtopics/tc429
Are cybercurrencies not considered securities in that same sense? Has anyone seen tax advice about how the day trader rules apply?
This is called a "like-kind trade" which is IMO muddy for cryptocoins [1].
EDIT: oh yes, I see now that you cite 1031, oops.
[1] https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth...
The link you cited above covers this on page 4.
Keep in mind also that like-kind exchanges, if you're going to use them this year and for prior year reporting, require you to claim them explicitly on your taxes [1].
[1] https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills...
[1] https://www.irs.gov/businesses/understanding-your-1099-k
Ignoring the arguments about what Coinbases is _legally_ required to hand over, it seems like Coinbase withholding this information from the IRS really only favors criminals. If you're a law abiding citizen you're already giving all this information to the IRS yourself. Every Coin-fiat transaction is taxed and must be reported. So there's not much difference for you. It's only if you aren't following the laws that this has an impact on you. So I find myself in _favor_ of the IRS snooping around in Coinbase's business. More compliance means less average taxes.
That said, there are nuances. What information exactly gets provided to the IRS is important. Exchange/transaction events? Sure. Money in/out? Ehhh, maybe not. Bitcoin address data? Definitely not.
(To be perfectly clear, this is _not_ an instance of "if you have nothing to hide". This is an instance where we're _already_ giving this data to the government, and that's _necessary_ because of our tax laws. There is no equivalence to other privacy cases.)
I'm founding www.ZenLedger.io to help crypto investors and CPA's to comply with IRS law, aggregate ledgers across exchanges and wallets, and make everything easier. We also undo things like Coinbase falsely classifying all coin movement off their exchange as a taxable sale when they know it's most likely a non-taxable transfer. So, we help you pay less taxes. Check us out please. We have a great team of developers and business/finance professionals working hard to get it all done for you.
It will be more interesting when the IRS starts trying to get your electric consumption data (assuming people aren't using solar panels, and/or live in a jurisdiction whose electric companies don't have to hand over such information about their customers to another governmental body) because more people are mining (inflationary) cryptocurrencies and trading that for other "assets" without going through 3rd parties like Coinbase (i.e. needing to upload any forms of government ID).
I wonder if this is the kind of stuff the G20 finance ministers will talk about at their upcoming meeting[0], though I kind of doubt it.
[0] https://asia.nikkei.com/Politics-Economy/International-Relat...
> store the history of all Bitcoin transactions
Bitcoin conveniently does this for them
> and try to identify all wallet owners
That’s the headline here
> check if profits were reported and if taxes were paid
Which is the IRS’ job
Ever heard of the 4th Amendment?
I guess they thought it was a reasonable request to get the data of the 25,000 US citizens who made significant profit with bitcoin in those years, when only a few hundred reported such earnings in total.
I also read somewhere that the IRS is only coming after people who made $20,000 or more. (Note: I couldn't read this article due to the paywall)
Should I be concerned that they'll try to get their $10 from me and then pile on a bunch of penalties?
Just pay the damn tax. If you’re thinking “will the IRS care,” avoid the hassle and pay it. Forgetting $32 of gains is one thing. Wilfully determining the IRS won’t come after you is another.
No, despite their reputation, the IRS is pretty reasonable about stuff like this, at least in my experience. They're relentless if they think you owe a ton or were malicious, but they don't intentionally trump up penalties on the every day person.
It makes more sense to go after the targets they can get the most money from. They won't bother you with your $10, it is a waste of their time compared to the thousands they can recover on larger scale, well established fraud.
They weren't jerks about it but they do seem to have a weird attention to detail for certain matters.
With 150 million tax payers, if they had a $10 cut off everyone underpaid, that’s a potential loss of $1.5 billion, over half of the annual national parks budget. Not so weird.
Even if the chance of the IRS coming back to me is small, I'd much rather pay the $10 now than deal with them later.
However, my concern is less from that and more from the $30. Will they care?
https://www.hrblock.com/tax-center/irs/tax-responsibilities/...
They do have a limited budget for enforcement and they prioritize accordingly.
Does this right generate taxable income?"
Huh.
For Bitcoin Cash, if you declare that, what value do you use? Futures price before the fork? Price immediately after? Which exchange? And the price fluctuated wildly, so they all seem arbitrary.
The alternative is to claim a cost-basis of $0 when you actually realize those gains, which makes a hell of a lot more sense to me, but the IRS might disagree. Who knows?
And what about Bitcoin Gold or the dozens of super-shady forks? Technically they have value, but it's value I don't think I'll realize because they're so shady. You have to go through the trouble of clearing your wallet of 'real' Bitcoin, and then import it to whatever 'totally not going to hack you' wallet software you need to use to claim it. Even if you don't lose your 'real' Bitcoin, all the other shady forks could be stolen. It's clearly not 'real' in the way that traditional securities are.
Also what if I haven't imported my private key into the forked coin's wallet? Do I have to report the income right away or only until after I've gained control of the coins?
I will definitely pay my cap gains on the small amount of coin I sold (BTC->USD within coinbase). But I have no idea about first in first out, when is it a wash if I buy more?
I don't even want to think about trying to calculate cap gains on purchases made with BTC since the price is almost always different even if I buy BTC on coinbase and use it to buy server time 60 minutes later..
So if you mined and then traded $100k in Bitcoin for Ethereum and then the Ethereum was stolen, you would use form 4684 to claim the loss against your taxable income.
But I haven't heard of anyone doing this yet and I can imagine it would get some scrutiny from the IRS, seeing as it would be hard to prove a loss or theft.
You only pay capital gains taxes on them in the years where you sell.
Keep in mind that in the IRS's eyes, any exchange (like BTC -> LTC) counts as a sale, and so does buying goods with crypto (like buying a video game with BTC).
The current governance system will have to adapt or die. It's not much different than any other disrupted industry, except this one is armed.
They're doing a whole KYC thing.
Because it seems to me like they are very much capable of enforcement, as exemplified by the article.
Rich people in the US don’t avoid taxes by stymying investigations they give 5% of their income to Republican candidates and PACs, and have the law changed for them.
I really don't see the big deal here. People who were thinking that crypto was going to magically be exempt from taxes were delusional. The only open question is if the IRS may change crypto->crypto trades to like kind. As of today with the current guidance though, no - crypto is property similar to a stock.
Well since I wouldn't have committed tax fraud (and potentially other felonies) by not reporting capital gains, I wouldn't be the slightest bit worried, no.
They do not send you a threatening letter. They do not throw you in prison. They send you a bill; more formally, a CP3219A. (The IRS says it is not a bill, it is a proposal. In practice, it's a bill you can argue with.)
You can see the not-so-hair-raising copy here: https://www.taxaudit.com/irs-letters/irs-letter-cp3219a-samp...
If you ever get one, you will simply call up your accountant and follow their advice. It's less annoying than owning a bank money...
... providing you didn't commit tax fraud.
Here's an example of tax fraud, taken directly from a case where the IRS did, indeed, refer to prosecution: Joe Smith owns a small business. Joe Smith, Inc. paid a Japanese technology company $600k for "technology services", per his tax return.
Joe Smith received a $600k wire from Japan, which he did not declare as income.
Can you guess the nature of the "technology service"? Yep, it was "Mt. Gox, please technologically service me by buying Bitcoin and then wiring the money back to me. Hah hah hah we are so clever hah hah hah."
That said, I’m always vaguely terrified each year when I deduct the low five figures I’ve spent on bare meral server hardware. Being audited remains in my top ten fears, even though I don’t try to evade taxes. I always wonder if someone at the IRS is going to see my return and say, “He paid this much for ‘Computer Hardware’? That seems fishy.”
Consider the set of all companies in the economy which spent $15k last year on "computer hardware." How many IRS hours would be required to read all their returns, given that they are sitting in a pile. How many would, on examination, show a deficiency? How much would those deficiencies be worth, on average? What's your ballpark estimate for how long it takes a government employee to put through a single routine non-trivial work order?
Suppose the IRS sits down with a randomly selected small business for a site visit audit. Suppose they budget 2 hours onsite and 8 hours offsite for the audit. How many of those minutes do you think they will spend on that line item, specifically? Does it allow them to do more than ask "I see your return shows $15k on computer hardware. What was the hardware? Can you show me your records?"
https://www.treasury.gov/tigta/auditreports/2015reports/2015...
It doesn't (and can't) divine "Did the expense on this business return factually happen? Was it for the operation of the business? Is it standard and ordinary?"
Anyone that can afford accounting services from the Big 4 (PwC, Deloitte, EY, KPMG) is getting this golden glove treatment. I am sure that there are numerous mid market firms with significant amounts of ex big4 staff that are also helping their clients just as much. Small CPA shops will be hit or miss with mostly misses. My results were 20% experience, 20% skill, 50% training by my Big 4 employer, and 10% fear of my employer escalating the situation if they didn't get a sign off from me (I'm not the one that would get sent to represent the client in tax court).
The vast majority of the IRS's work is based on incompetency and fear. Nearly all of the charges they tried to leverage against my clients were false and due to paperwork errors (more often on the client's side than the IRS but not always...not even close to always) that were easy to resolve with minimal penalties and interest.
To be clear, they didn't get to throw the middle finger at the IRS and pay nothing, they paid what they owed which was practically never even in the same ballpark as the bill the IRS came at them with. The people who can't hire a professional Tax CPA to sort it out for them get fucked not because they are the only ones paying what they owe but because they are the only ones paying way fucking more than they owe. That's a whole other ethical problem that should be addressed with the IRS.
I did this by myself without a CPA but I knew what I was doing. The IRS was pretty understanding the whole way and quickly understood my situation. They never tried to threaten me or anything like that. It didn’t help that their mail to china kept getting lost, however.