I realize some of this has been discussed already. Ignore if it is of no use to you. Also, I do not mean to join the debate over the inequities of the U.S. tax system or how unwisely taxes are spent. This is only to write down my research on how it affects my crypto dealings. Perhaps someone who doesn't want to read the whole thread and the scattered comments in other threads might find it useful.
So I approached the subject of taxing my crypto profits with some naivete. It seemed fairly simple in concept: If I put $10K into the cash/crypto portal (Coinbase) and took $20K out, I would pay tax on the $10K profit. All the maneuverings in between were irrelevant. Not so.
Then I came to understand that it was more granular than that. If I topped certain thresholds, $20K and (not "or") 200 payment transactions, Coinbase/GDAX would report every crypto-to-cash sale to the IRS. Now, in the second half of the year I cashed out my fiat investment (broke even as far as taxation, to my mind), left the profit in crypto and did a lot of trading of crypto to cash and back again in GDAX to build BTC position. But no way I converted to cash 200 times, so I was in the clear. Again, not so.
There had been some ambiguity and different interpretations on whether trading crypto for crypto was an immediately taxable event or "in-kind" trading. Well, my party of choice, under direction of the bankers the president appointed to run his administration, passed a tax bill that among other things removed that crypto ambiguity. Crypto was now stated to be "real property" and every crypto-to-crypto trade was clearly stated to be a taxable event. If I trade Bitcoin for Ether for Litecoin for Bitcoin for Ether for USD etc., each one of those swaps is a taxable event. And profit or loss on each trade is determined by USD value at the time of each trade.
Ack! This explained the impossibly huge dollar amount of payments reported by Coinbase on my form 1099-K. Every granular intra-crypto trade in GDAX was added up. Each was considered a "payment." No differentiation between crypto-to-crypto and crypto-to-cash.
Of course, all those payments don't reflect any cost-basis. The profit or loss on each is up to me to figure out, using Coinbase's transaction history. What a nightmare, but at least there are records to refer to. Oh, for my naive idea that I would simply pay tax on cash taken out exceeding cash put in.
Some specific thoughts I would appreciate comments on:
- The tax law that was passed is not retroactive. It does not govern 2017 taxes. Perhaps the ambiquity regarding intra-crypto trades remains for that tax year? Still, Coinbase added them all up on the 1099 and sent the total to IRS.
- Bittrex, where I also traded, even though it is US-based did not notify me of a form 1099 like Coinbase did. If they sent one to IRS, they would have had to provide one to me, too.
- Form 1099-K is called an "information" form. My accountant (whom I have not yet buried under actual transaction records) told me the IRS does not use it the same way as a W-2 to verify income. Since there is no cost-basis reflected, the 1099 is essentially useless (on its own) as a means of determining capital gains.
- However (my thought) it does tell the IRS that I was very active on Coinbase, and thus not reporting crypto gains or losses at all would be dangerous and invite additional scrutiny you may not want. Better to report and discourage them with a pile of paperwork.
- Trading on foreign exchanges like Binance is beyond the reach of IRS scrutiny. So at least the crypto-crypto trades aren't all added up. But unless I plan to die with my crypto assets in Hong Kong, it has to be taxed eventually.
- The only way to (legally) avoid taxes on crypto is to buy and never sell. Which to me means to donate my money to the crypto market, but that's another conversation.