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I’m not a crypto person, but I have always been curious - how does the tax situation actually work if you don’t want to commit tax evasion? I know that on US ta

I’m not a crypto person, but I have always been curious - how does the tax situation actually work if you don’t want to commit tax evasion? I know that on US tax returns you need to tick a box if you’ve transacted in crypto, and you have to pay tax on the realized gains/losses. How do you actually go about doing that accounting practically given the volatility and the number of transactions? Are there special pieces of software that handle those calculations? Do they differ between jurisdictions (other countries particularly)? I know the real cynical answer is that most people just don’t report correctly, but I’m curious how you’d do it if you wanted to be legit.

roenxi 3y ago
You'd value the assets at the time of the transaction using reasonable and publicly known exchange rates to fiat. Same process as bartering in any asset.
Roark66 3y ago
In Poland there is no checkbox on a tax forms to say "you've dealt with crypto", but every transaction over 10K EUR is reported to the gov, and when I was a UK tax resident with a Polish bank account my Polish bank asked for my UK tax info to send the details of any such transactions to HMRC in the UK. I suspect it's an EU wide thing. I'm not sure why these 48 countries single out crypto assets like this. You can evade taxes by buying gold, heck, there were schemes that bought tons of steel, mobile phones, anything of value. To me it all seems like just pandering to "crypto=bad" crowd.
- ljf 3y ago
  All this really is is forcing any company that buys and sells crypto in this locations to do KYC/due diligence and share details with the relevant authorities. Unless you are buying privately, you've had to do the same with any serious amount of gold trading too.
- rtkwe 3y ago
  Crypto being digital and weightless makes it much easier to hide and move around vs several tonnes of steel or mobile phones.
- dist-epoch 3y ago
  > but every transaction over 10K EUR is reported to the gov Those reports are not to find tax evasion. They are to detect large scale money laundering and to build aggregate money flow statistics (X billions entered/left country in the last year).
- robinzfc 3y ago
  > In Poland there is no checkbox on a tax forms Yes, there is, in 2022 it was in PIT 38, sec. E. You need to report purchases even when you have not sold anything as this entitles you to subtract cost when you sell later.
  - Roark66 3y ago
    False, in Poland you report income on crypto when you sell and you realise gains. The parent is saying in the US you have to tick a box on a tax form just because you bought some crypto. PIT38 is about reporting income from capital gains, it has nothing crypto specific. Certainly there is no section where you're reporting crypto purchases regardless if you made any income or not. Section E specifically is a summary section where you put totals of tax to pay. There is nothing about crypto in it. Also you only get PIT 38 made up for you if you've made income from(reported directly by the broker): - stocks - short selling - derrivatives - dividend If you didn't and you're not reporting any income from financial instruments you do not report any crypto purchases your pit38 will have all zeroes. Perhaps you confused it with the fact you have to report any shares in ownership of any limited companies, cooperative or other "for profits" you procured without paying for them except when they were exchanged for other shares. This means you have to report shares if your were given them as payment etc. In general it has nothing to do with crypto, but lets say there is an ICO that gives you voting/share of ownership rights like we had with the DAO. And you're a developer, you do some work for the DAO and you're paid with tokens, but you don't sell them. You still have to report this, but that is a very specific situation.
fdkjhasdf 3y ago
It's not difficult at all. This is 2023, we have spreadsheets, lol. You just generate a list of all transactions and losses/gains. Active traders have been doing this one way or another for a century now with stocks and derivatives. If cryptocurrency was actually used for purchasing goods/services it would be more tricky.
- 23B1 3y ago
  Single transactions are easy to do. Extremely hard when your trading volume is substantial.
  - xur17 3y ago
    Very true. I have a spreadsheet that tracks every trade I ever made, including fees. I export that into a csv, and feed it into another piece of software that produces a list of capital gains and losses each year. Some of the challenges: * Figuring out how to classify certain trades (wrapped versions of tokens, bridging assets between chains, staking, etc) * Making sure I have all trades tracked in the spreadsheet (there is automated software for this, but there are a number of ambiguous situations it doesn't hand well, hence needing to manually track it) * Spot checking wallets to make sure trades weren't missed
  - PeterisP 3y ago
    How is that different? The transaction data export from most crypto-exchanges takes up the same amount of clicks no matter if you have 5 or 5000 transactions, as do the adding of whatever formulas you might need in excel to manage your business - which is obviously the case if your trading volume is substantial; if you were doing a substantial trading volume in, say, collectible card game cards, you'd also have to have a custom accounting process for tracking the goods you're reselling and how they appreciate, and you'd obviously have to record every transaction just as if you're trading in physical goods.
    - siftrics 3y ago
      You can do extremely complicated things on chain that require manual human analysis to figure out how to report it. You can do this thousands of times per year. It adds up to a huge amount of work.
koolba 3y ago
> I know the real cynical answer is that most people just don’t report correctly, but I’m curious how you’d do it if you wanted to be legit. If you want to follow the letter of the law, you need to consider each and every transaction in calculating your cost basis, converting to USD at each step. The latter is particularly problematic as it’s possible to transact in something that does not have a clear USD price. So the usual approach is that people just make up numbers, hopefully using some consistent methodology, and pray/hope/beg that if they get audited it’ll be enough to appease the IRS. Not having any standard way of getting the details is another problem. If each and every transaction is not recorded at the time of execution, good luck trying to get that detail back again.
- jon-wood 3y ago
  > Not having any standard way of getting the details is another problem. If each and every transaction is not recorded at the time of execution, good luck trying to get that detail back again. If only there were some sort of publicly available record showing transactions performed. (Yeah, I know, they don't include the USD value)
  - koolba 3y ago
    > If only there were some sort of publicly available record showing transactions performed. (Yeah, I know, they don't include the USD value) I don’t even mean the USD value. I mean the raw transaction itself. In theory it’s persisted forever. In practice, the data is neither readily available nor searchable in the ways you’d actually need to properly account for transactions. On the flip side, if you can’t get the data there’s no chance the IRS would ever be able to figure it out right?
  - petertodd 3y ago
    > If only there were some sort of publicly available record showing transactions performed. These days the majority of Bitcoin transactions by number probably happen on Layer 2 technologies, mainly Lighting, that do not record transactions directly in the Bitcoin blockchain. There is no publicly available record of Lightning transactions. It's quite difficult to even estimate how many are being done.
jcranmer 3y ago
> How do you actually go about doing that accounting practically given the volatility and the number of transactions? It's basically the same as with stocks. Work out the equivalent USD value for every trade, and subtract the cost basis to figure out how much capital gains/loss you have on that trade. If valuation is hard (you're trading 5 shitcoins for 1 altcoins), figure out a method you can justify with a straight face and taxman will generally be happy (this, incidentally, is why auditing rich people is difficult).
- josu 3y ago
  >It's basically the same as with stocks. In many countries, since crypto is not regulated, you can't write off the losses, but you still have to pay taxes on the gains.
  - voxic11 3y ago
    What countries don't regulate crypto these days? Certainly the US and EU does.
    - josu 3y ago
      There is no tax harmonization in Europe; therefore, each country regulates taxes differently. While most countries offer some form of guidance, explicit regulation is not universal.
- Detrytus 3y ago
  In my country it’s even simpler: no one cares about you converting one shitcoin to another, they want fiat currency values of how much crypto you bought and sold, and total crypto assets you own. They calculate taxes based on that (I’m bit fuzzy on the details)
  - simonebrunozzi 3y ago
    It would be useful to mention what's your country.
zby 3y ago
I wrote my own program to parse the logs I get from exchanges and compute the taxes.
- latchkey 3y ago
  And if there is a "bug" in your software that accidentally under calculates how much taxes you owe, no big deal, right? My point being, this is why it is better to hand these sorts of things off to a third party for auditing. Otherwise, you might end up in a nice pickle with the IRS after having checked that box saying you were trading crypto.
  - zby 3y ago
    I tried - but they wanted me to give them the data in Excel. Once I did the parsing, summing it up was trivial (and it would not fit in Excel anyway). That was quite a few years ago.
Erwin 3y ago
https://koinly.io/ https://koinly.io/ is a popular recommendation here in Denmark. Denmark may have the worst possible taxation for crypto: every time you sell, use or convert your crypto, that's an event where you have to calculate your gains or losses. Gains are taxed like personal income (so up to 53% tax), but losses can only be deducted at 26% they do not offset the gains directly. A school teacher speculating in crypto ended up losing his investment and owing $400,000 in tax.
- siftrics 3y ago
  That's so evil. How do you put up with that? Why don't Danes change their obviously evil tax code regarding deducting losses?
kkielhofner 3y ago
There are a plethora of solutions where (across multiple chains) you can give it wallet addresses and it looks on chain to figure out transactions and the taxable currency (fiat/USD/whatever) at the times the transactions were executed. These have been around since at least 2017. I'm pretty sure major exchanges generate the tax form/supplemental schedule/whatever for you in the case of trades on their internal order books (they never really touch chain). Unless you're doing some very edge case or going out of your way (evasion) there's not much good reason to struggle with some kind of reasonable tax compliance with all of this. > I know the real cynical answer is that most people just don’t report correctly, but I’m curious how you’d do it if you wanted to be legit. Not surprisingly when I used to be involved in crypto even discussing an attempt at paying taxes was met with "LOL you idiot bootlicker" types of responses from the crypto community. The only reason they're not in jail or getting hit with heavy penalties from the IRS, etc is because they're too small for anyone to care and audits and budgets for IRS enforcement have been slashed: https://www.cnbc.com/2023/04/01/heres-why-irs-tax-audits-have-declined-over-the-past-decade.html https://www.cnbc.com/2023/04/01/heres-why-irs-tax-audits-hav...
rchaud 3y ago
Doesn't the exchange provide a list of transactions and P&L? You could just submit those numbers.

roenxi 3y ago

You'd value the assets at the time of the transaction using reasonable and publicly known exchange rates to fiat. Same process as bartering in any asset.

Roark66 3y ago

In Poland there is no checkbox on a tax forms to say "you've dealt with crypto", but every transaction over 10K EUR is reported to the gov, and when I was a UK tax resident with a Polish bank account my Polish bank asked for my UK tax info to send the details of any such transactions to HMRC in the UK. I suspect it's an EU wide thing. I'm not sure why these 48 countries single out crypto assets like this. You can evade taxes by buying gold, heck, there were schemes that bought tons of steel, mobile phones, anything of value. To me it all seems like just pandering to "crypto=bad" crowd.

ljf 3y ago
All this really is is forcing any company that buys and sells crypto in this locations to do KYC/due diligence and share details with the relevant authorities. Unless you are buying privately, you've had to do the same with any serious amount of gold trading too.
rtkwe 3y ago
Crypto being digital and weightless makes it much easier to hide and move around vs several tonnes of steel or mobile phones.
dist-epoch 3y ago
> but every transaction over 10K EUR is reported to the gov Those reports are not to find tax evasion. They are to detect large scale money laundering and to build aggregate money flow statistics (X billions entered/left country in the last year).
robinzfc 3y ago
> In Poland there is no checkbox on a tax forms Yes, there is, in 2022 it was in PIT 38, sec. E. You need to report purchases even when you have not sold anything as this entitles you to subtract cost when you sell later.
- Roark66 3y ago
  False, in Poland you report income on crypto when you sell and you realise gains. The parent is saying in the US you have to tick a box on a tax form just because you bought some crypto. PIT38 is about reporting income from capital gains, it has nothing crypto specific. Certainly there is no section where you're reporting crypto purchases regardless if you made any income or not. Section E specifically is a summary section where you put totals of tax to pay. There is nothing about crypto in it. Also you only get PIT 38 made up for you if you've made income from(reported directly by the broker): - stocks - short selling - derrivatives - dividend If you didn't and you're not reporting any income from financial instruments you do not report any crypto purchases your pit38 will have all zeroes. Perhaps you confused it with the fact you have to report any shares in ownership of any limited companies, cooperative or other "for profits" you procured without paying for them except when they were exchanged for other shares. This means you have to report shares if your were given them as payment etc. In general it has nothing to do with crypto, but lets say there is an ICO that gives you voting/share of ownership rights like we had with the DAO. And you're a developer, you do some work for the DAO and you're paid with tokens, but you don't sell them. You still have to report this, but that is a very specific situation.

fdkjhasdf 3y ago

It's not difficult at all. This is 2023, we have spreadsheets, lol. You just generate a list of all transactions and losses/gains. Active traders have been doing this one way or another for a century now with stocks and derivatives. If cryptocurrency was actually used for purchasing goods/services it would be more tricky.

23B1 3y ago
Single transactions are easy to do. Extremely hard when your trading volume is substantial.
- xur17 3y ago
  Very true. I have a spreadsheet that tracks every trade I ever made, including fees. I export that into a csv, and feed it into another piece of software that produces a list of capital gains and losses each year. Some of the challenges: * Figuring out how to classify certain trades (wrapped versions of tokens, bridging assets between chains, staking, etc) * Making sure I have all trades tracked in the spreadsheet (there is automated software for this, but there are a number of ambiguous situations it doesn't hand well, hence needing to manually track it) * Spot checking wallets to make sure trades weren't missed
- PeterisP 3y ago
  How is that different? The transaction data export from most crypto-exchanges takes up the same amount of clicks no matter if you have 5 or 5000 transactions, as do the adding of whatever formulas you might need in excel to manage your business - which is obviously the case if your trading volume is substantial; if you were doing a substantial trading volume in, say, collectible card game cards, you'd also have to have a custom accounting process for tracking the goods you're reselling and how they appreciate, and you'd obviously have to record every transaction just as if you're trading in physical goods.
  - siftrics 3y ago
    You can do extremely complicated things on chain that require manual human analysis to figure out how to report it. You can do this thousands of times per year. It adds up to a huge amount of work.

koolba 3y ago

> I know the real cynical answer is that most people just don’t report correctly, but I’m curious how you’d do it if you wanted to be legit. If you want to follow the letter of the law, you need to consider each and every transaction in calculating your cost basis, converting to USD at each step. The latter is particularly problematic as it’s possible to transact in something that does not have a clear USD price. So the usual approach is that people just make up numbers, hopefully using some consistent methodology, and pray/hope/beg that if they get audited it’ll be enough to appease the IRS. Not having any standard way of getting the details is another problem. If each and every transaction is not recorded at the time of execution, good luck trying to get that detail back again.

jon-wood 3y ago
> Not having any standard way of getting the details is another problem. If each and every transaction is not recorded at the time of execution, good luck trying to get that detail back again. If only there were some sort of publicly available record showing transactions performed. (Yeah, I know, they don't include the USD value)
- koolba 3y ago
  > If only there were some sort of publicly available record showing transactions performed. (Yeah, I know, they don't include the USD value) I don’t even mean the USD value. I mean the raw transaction itself. In theory it’s persisted forever. In practice, the data is neither readily available nor searchable in the ways you’d actually need to properly account for transactions. On the flip side, if you can’t get the data there’s no chance the IRS would ever be able to figure it out right?
- petertodd 3y ago
  > If only there were some sort of publicly available record showing transactions performed. These days the majority of Bitcoin transactions by number probably happen on Layer 2 technologies, mainly Lighting, that do not record transactions directly in the Bitcoin blockchain. There is no publicly available record of Lightning transactions. It's quite difficult to even estimate how many are being done.

jcranmer 3y ago

> How do you actually go about doing that accounting practically given the volatility and the number of transactions? It's basically the same as with stocks. Work out the equivalent USD value for every trade, and subtract the cost basis to figure out how much capital gains/loss you have on that trade. If valuation is hard (you're trading 5 shitcoins for 1 altcoins), figure out a method you can justify with a straight face and taxman will generally be happy (this, incidentally, is why auditing rich people is difficult).

josu 3y ago
>It's basically the same as with stocks. In many countries, since crypto is not regulated, you can't write off the losses, but you still have to pay taxes on the gains.
- voxic11 3y ago
  What countries don't regulate crypto these days? Certainly the US and EU does.
  - josu 3y ago
    There is no tax harmonization in Europe; therefore, each country regulates taxes differently. While most countries offer some form of guidance, explicit regulation is not universal.
Detrytus 3y ago
In my country it’s even simpler: no one cares about you converting one shitcoin to another, they want fiat currency values of how much crypto you bought and sold, and total crypto assets you own. They calculate taxes based on that (I’m bit fuzzy on the details)
- simonebrunozzi 3y ago
  It would be useful to mention what's your country.

zby 3y ago

I wrote my own program to parse the logs I get from exchanges and compute the taxes.

latchkey 3y ago
And if there is a "bug" in your software that accidentally under calculates how much taxes you owe, no big deal, right? My point being, this is why it is better to hand these sorts of things off to a third party for auditing. Otherwise, you might end up in a nice pickle with the IRS after having checked that box saying you were trading crypto.
- zby 3y ago
  I tried - but they wanted me to give them the data in Excel. Once I did the parsing, summing it up was trivial (and it would not fit in Excel anyway). That was quite a few years ago.

Erwin 3y ago

https://koinly.io/ https://koinly.io/ is a popular recommendation here in Denmark. Denmark may have the worst possible taxation for crypto: every time you sell, use or convert your crypto, that's an event where you have to calculate your gains or losses. Gains are taxed like personal income (so up to 53% tax), but losses can only be deducted at 26% they do not offset the gains directly. A school teacher speculating in crypto ended up losing his investment and owing $400,000 in tax.

siftrics 3y ago
That's so evil. How do you put up with that? Why don't Danes change their obviously evil tax code regarding deducting losses?

kkielhofner 3y ago

There are a plethora of solutions where (across multiple chains) you can give it wallet addresses and it looks on chain to figure out transactions and the taxable currency (fiat/USD/whatever) at the times the transactions were executed. These have been around since at least 2017. I'm pretty sure major exchanges generate the tax form/supplemental schedule/whatever for you in the case of trades on their internal order books (they never really touch chain). Unless you're doing some very edge case or going out of your way (evasion) there's not much good reason to struggle with some kind of reasonable tax compliance with all of this. > I know the real cynical answer is that most people just don’t report correctly, but I’m curious how you’d do it if you wanted to be legit. Not surprisingly when I used to be involved in crypto even discussing an attempt at paying taxes was met with "LOL you idiot bootlicker" types of responses from the crypto community. The only reason they're not in jail or getting hit with heavy penalties from the IRS, etc is because they're too small for anyone to care and audits and budgets for IRS enforcement have been slashed: https://www.cnbc.com/2023/04/01/heres-why-irs-tax-audits-have-declined-over-the-past-decade.html https://www.cnbc.com/2023/04/01/heres-why-irs-tax-audits-hav...

rchaud 3y ago

Doesn't the exchange provide a list of transactions and P&L? You could just submit those numbers.