TAXES AND TRADING - How do you traders establish cost basis and pay the taxman?
Under current law and depending on where you live... (presuming many of you are in the US) you're ultimately going to have to pay taxes on your crypto gains once you cash out to fiat or even if you buy a single cup of coffee with your crypto… That is unless of course you want to risk taking an extended holiday at club fed... Sound unbelievable? That's what I thought until I started looking into basic crypto TAX issues…
Ideally when you cash out of your crypto holdings you'd want to pay a lower rate on your capital gains so you'd hold your coins for at least a year and a day to be taxed at the lower long term capital gain rate... Then once you have your cash and need to pay the taxman for that year, you have to establish your cost basis on your tax forms (how much you bought each coin for versus how much you sold them for) Now say you buy a bunch of bitcoin on coinbase at different prices over a period of years... and assuming you do not trade them and immediately create a short term capital gain TAXABLE EVENT (don't even get me started… more on that later) YOU HOLD YOUR COINS...
Now years later, bitcoin is at 100,000 dollars and you're ready to exit back into fiat through coinbase or something else. How do you establish your cost basis to the feds if you transfer a random portion of your 100 bitcoin stack from your secure wallet to your coinbase wallet and withdraw to your bank account? It is in your best interest to claim that the coins you are cashing out now are the more expensive one which you bought later in your 100 btc stack building so you have a smaller capital gain/cost basis and thus a smaller tax liability… Remember… You bought 100 coins originally at different times and different prices and sent all of them to a single wallet where they can't be distinguished from one another... Now it's years later and you want to get out with a couple million dollars and keep as much of it as possible after taxes… How are you going to account for the cost basis of all these different coins that have been put into the same wallet? Does each BTC itself (not wallet) have a unique ID and history that can be tracked? Now add to the fact that under current IRS regulation, if you TRADE any of these coins… BITCOIN ETHER LITECOIN RIPPLE… YOU NAME IT… You immediately reset the clock on the long term capital gain rate with each trade/shapeshift and have effectively created a TAXABLE EVENT, that according to uncle sam… you need to pay for in FIAT in the tax year you did it or ultimately face back taxes, interest, penalties and even jail whether you actually cash out any of your stack to fiat (incurring more taxes) or just continue HOLDING…
Read for yourself…
It's insane.
Now make matters worse… What if you wanted to cash out what are now 100 bitcoins through coinbase that have been traded back and forth and shapeshifted into countless other cryptos which have obviously been held for less than a year due to your constant trading and stack building… Can you risk claiming that those 100 BTC are the same 100 BTC you originally bought years ago and as such… claim that they should be taxed at a long term cap gain rate(which is not the truth)? Does each coin have a history that could get you in trouble if you go that route? Can you get away with it?
Now what happens when you've been trading crypto for years and can't account for your countless trades into and out of different currencies which you have NOT paid short term capital gains tax on going back years even though your digital money has only ever been in digital wallets and exchanges and you haven't spent your crypto on goods or services nor withdrawn a single unit of fiat to your bank account… How many of you are in this boat? How are you going to exit into fiat and keep your money if this applies to you?
For those of you constantly trading in and out and between different cryptos over a period of years… HOW ARE YOU DEALING WITH THIS SHORT TERM CAP GAIN TAX LIABILITY ISSUE WITH EVERY TRADE YOU MAKE EVEN THOUGH YOU ARE NOT REALIZING REAL FIAT GAINS IN A BANK ACCOUNT? Sometimes we all get so caught up in memes and price talk that we neglect to come up with a sound exit strategy… This is serious stuff that we all need to consider… We've yet to see a substantial number of people successfully cash out of crypto and ride off into the sunset with millions… It all may be a fantasy ultimately thanks to uncle sam and his current regulation… so… WHAT ARE YOUR THOUGHTS VISA VIE SHORT TERM CAP GAIN TRADING/TAXES/EXIT STRATEGY?
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