So I woke up this morning a little nauseous, caused by nerves. I'd been trading pennies the last few years, nothing really worth reporting to Uncle Sam. To put it into perspective the accountant said I started the year with $35 USD in bitcoin and $150 in various altcoins. I added one paycheck to this at the beginning of 2017 and traded my way well into the mid five figure range. By today's standards I'm still small time but really happy with what I accomplished in my first year of serious trading. I'd like to be a little more specific on end of year cap gain totals, but I think its a bit tacky, and not wise from a security standpoint.
At first I thought I was only going to be claiming funds I transferred to USD. This wasn't a serious issue for me till around December when the bitcoin price hit about $20,000. For the first time it sunk in that The Dood had a serious tax obligation to his country. Knowing tax time was right around the corner I decided to start researching crypto taxes immediately.
One of the first things I learned was that a loophole for "like kind exchanges" that many traders had been using, was no longer going to be possible. Apparently Presidents Trumps new tax bill made it very clear this wasn't going to stand any longer. Based on this information, I had to come up with a way to track every single trade I made over the course of 2017 and there were a lot of them. Over 10,000 to be a little more precise.
I talked to our family accountant who had no clue how to handle crypto taxes and said she would rather not mess with it. I then called a few local accountants who seemed equally confused. A couple of them offered there services but I wanted someone that knew what they were doing. Finally I found a guy a city over, about an hour and a half drive away, who specialized in crypto taxes. I called him and we talked for awhile, he explained my obligation, a couple different online tracking software to use, the best way to handle it, and offered his services. I wasn't comfortable having an account that I had to drive over an hour to talk to though. It was a matter of luck that I ran into an old friend, and was talking about my accountant dilemma. To my surprise he too had just begun trading bitcoin and said, "I know a guy, he's done bitcoin taxes for a couple friends, give him a call and see what he says."
I gave the guy a call, he seemed knowledgeable, and I set up today's appointment with him.
So the first accountant I talked to told me about bitcoin.tax & cointracking.info I looked into both them as a solution to track my profits and losses. I ended up using Cointracking. You basically plug in the exchange API key and the tracking software downloads all your data and figures out your profits and losses. Soooo....
This was a nightmare in itself. At the height of the altcoin rush many exchanges were not only limiting new customer registrations, but also limiting access to their API's to help limit server load. Luckily I was able to get my data into the Cointracking account about a week before this happened.For the most part cointracking figured out all my profits and losses, I had to manually enter a bunch of deposits and withdrawals from a few different exchanges. All in all this took me a couple attempts before I got everything right. The good news is, once I figured out the software it produced a bunch of different reports that my accountant understood, and was able to use for my filing. As we were playing with the reports on his office computer I was explaining the situation to him, and he looked at me and said, "If you didn't have these reports, this would of been an accounting nightmare, and not cheap."
So I guess the $300 dollars I paid for Cointracking was worth it. By the end of it all he was able to figure out my profits and losses. He used the cap gain report, not the tax report the website originally suggested. He figured out my tax obligation, and was able to do this for not much more than a standard return. He added my W2, cap gains, gave me my total. All I'll say on that is that I owe several thousand for federal, and a couple thousand for state :( Luckily I socked some away for just such an occasion.
Not tax advice, but you may want to figure on 15% to 20% of your cap gains and put them in an account for tax time. A friend of mine that's really into investing suggested that I did that in the middle of the year and I'm really glad I listened to him. I'd of been really pissed if I didn't have that money, and I've owed the IRS in the past. Trust me you don't want to owe these people money. Frankly, I'd rather owe the mafia money than these guys. It's a major pain in the ass, and when you miss payments the interest and penalties are outrageous. Just like the local shylock.
So I guess to summarize all this. I used Cointracking and I'm really glad I did. It worked out well, but wasn't without problems. As far as I understand as a US citizen the tax obligation is the USD value of BTC at purchase, the USD value of the altcoin purchased in btc, then the price of btc on the sale of the alt in US value. Yeah, it's more than a bit confusing, not to mention a bit complicated. The IRS really needs to come up with an easier way for people to do this. They can't understand why people aren't filing crypto taxes, well if they made it easier, and clearer, more people probably would. Just saying.....
I also consulted with the accountant on affiliate program earnings, steemit earnings, crypto gifts and giveaways. He took this into his accounting. Each of these could be and may be a future blog post that I don't want to delve into today. Overall, I'm glad I hired an accountant to handle this, I feel good about getting this over and out of the way. It sucks paying out this money, and I feel a bit taken advantage of. I don't mind paying my "fair share" but question the number of taxable events in crypto trading. In some instances it seems as though we are taxed multiple times on many unavoidable transactions. I would strongly suggest having an account handle this for you. They know what to look for and in some cases may even be able to find you some savings.
Nothing in this article is meant as tax or financial advice, this is just a personal blog entry documenting my experience, and posted for the readers entertainment. Thanks for reading, good luck with your crypto taxes, and happy trading everyone!
If you're looking for a way to track your trades, this worked out pretty well for me. I was promoting the referral program for awhile but stopped after they were having the API issues with some of the exchanges. Another thing I didn't like is the fact that it's proprietary software, that resides on their servers. If the company ever closed, you run the risk of losing your data. I asked my accountant for alternative suggestions, and he pretty much said that he'd stick with what I did and suggested just downloading monthly reports as backups. If anything happens to the site or I'm no longer able to access my data, we handle that when it becomes a problem. For now he said it was perfect for what we needed. Here's my referral link if you're interested in trying it out. They do offer a free service, that allows you to track your trades without access to the reports. The pay version unlocks the reporting abilities.