Bitcoin and cryptocurrency accountant Daniel Winters explains that Coinbase treats outgoing transfers of bitcoin as a “sale,” subjecting it to tax as a commodity if it was sent when the price is higher than at which it was bought.
Also read: BITLENDING CLUB SHUTS DOWN DUE TO ‘REGULATORY PRESSURE’
IRS Presses Bitcoin Exchange
Earlier this week, Bitcoin users raised concerns when the Internal Revenue Service (IRS) requested Coinbase to hand over user information between 2013-2015, calling the move a “dangerous precedent.” Then a California district court upheld this request to pry into the transaction records of the San Francisco based exchange.
This, of course, also raised many questions. Since Bitcoin is treated as a commodity in the United States, how does Coinbase determine if their customers actually sold their coins? Are customers individually responsible for managing their own spreadsheets? Does Coinbase track their users transactions?
Paying Tax to Move Your Bits
Bitcoin accountant Daniel Winters went to reddit to explain how Coinbase treats bitcoins that move from its customers’ accounts.
“I’ve reviewed Coinbase reports for 2 years now for the tax returns I prepare for clients. The methodology Coinbase uses for their gain/loss report actually makes sense,” Winters writes in his post.
This is because when bitcoins leave a Coinbase account, the company can no longer track what happens to these coins, he adds.
Winters explains that this is the only course of action the company can take while staying compliant with US regulations. He continues:
So, their report treats this as a sale. What else could they do? If you have a Coinbase account and transferred BTC in and out of Coinbase to other wallets or exchanges, you need a third party tool.
Third-party tax services are recommended by Winters to accurately calculate your capital gains and losses. However, this process will still be cumbersome as you will have to obtain a record of all your transactions involving any addresses that you used.
“You will probably also need to create your own CSV files where you make manual entries to correct for transfers and events which didn’t occur on an exchange,” he adds. “Such as Bitcoin purchased for cash on LocalBitCoins or from friends.”
Getting Help
Of course, this can get very difficult for even an advanced Bitcoin user to manage. At the same time, users who would like to avoid a call from the IRS, should probably heed Winters’ advice. In fact, regulations differ depending on your location so getting help from tax professionals is probably a good idea. These include services such as:
- Bitcoin.tax (Winters recommends)
- Bitcointaxsolutions.com
- Kryptofolio-tax.com
Given the current uptrend in the Bitcoin price, the world’s first cryptocurrency also known as “digital gold” is becoming increasingly attractive for all types of investors. But users must be aware of their responsibility when using tax-compliant third-party services to buy their bitcoin, especially in the US.
Non-US residence, can check Bitcoin’s legal status in their country here.
“It is complicated,” adds Winters. “Well, the idea behind Bitcoin is that we can all be our own bank, and be responsible for storing our own wealth in the form of Bitcoins. Unfortunately, that also means tracking our transactions for tax purposes.”
Will these developments prevent you from using Coinbase? Do you know other service to help with Bitcoin taxes? Share below!
Images courtesy of twitter, optimataxrelief.com
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