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Comment by shanebrunette | Hacker News Reader

Founder of cryptotaxcalculator.io here. First of all I agree the proposed rules aren’t particularly well thought out. The thing is, the 1099 forms that the IRS gets from existing brokers don’t make any sense because as soon as you move funds between exchanges the broker can no longer accurately track the cost basis. Pre-crypto you generally wouldn’t have this problem. From a tax compliance perspective it is an absolute nightmare, and I am sure this is just an ill thought out attempt at trying to make their lives easier. Probably not the best way to go about it though. There is a lot to solve in this space.

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One of the underlying problems is that the capital gains tax code itself is designed for a world from a pre-financialized, pre-electronic world from the 1950s. The idea that someone might trade in and out of positions within milliseconds, possibly using complex derivatives or sophisticated leveraged is completely absent from the code. There's nothing in the code that addresses even how to treat trades that are done in the same day. Wash sale rules are literally non-determinable for high frequency traders. There's no guidance whatsoever on when and how derivatives are rolled against the a position in the underlying.

I run a HFT operation, and just computing my US tax returns required thousands of lines of code of custom software. And then to actually file it, I print off a PDF, thousands of pages long of each and every individual trade. Not a CSV, not a data file, literally a printout. As if some IRS accountant is going to manually go through millions of rows line by line with an adding machine.

Ha, I always wondered what HFT tax returns looked like.

Of course, the IRS cannot and will not check every transaction. But I do wonder if they actually verify some subset of the reported transactions, or would this only happen in an audit?

Luckily, never had to go through an audit yet. But spot checking a subset of transactions isn’t actually workable. Because of the wash sale rule, the adjusted basis on any single transaction is path dependent on both the previous and future trades in that symbol.

This is also true of stocks transferred between brokerages -- it's supposed to be transfered with. If it's not, there's a correction line on the 1099 with a space for accurate cost basis info, and you'd provide the original purchase receipt as an attachment. There might be issues in the space, but cost basis on a transferred equity isn't one of them.

Yes, this is correct. The technical term for this is an "in-kind" transfer, and while it might occasionally allow for things to slip through the cracks, it certainly hasn't stopped capital gain reporting requirements from being both feasible and largely effective.

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