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Congress is about to turn Bitcoin taxes into a tremendous clusterfuck

Tomorrow, the House of Representatives is voting on the infrastructure bill. I know you’ve probably read a thousand posts about this already but it seems like there’s one thing that’s been relatively under-discussed: the fact that 1099 reporting is going to turn reporting Bitcoin taxes into a **total clusterfuck** for the average investor.

**What is 1099 reporting?**

1099 reporting has existed within the traditional finance space for a long time. It’s meant to help the IRS understand your non-employment-related income (like the income you get from stock trading). Brokers like Robinhood and eToro are required to send this info to the IRS to help identify people committing tax fraud.

The infrastructure bill would require major crypto exchanges to report the same information.

**What’s the big deal? My stock broker is already sending my 1099 information to the IRS anyway.**

Remember, Bitcoin is *fundamentally* different from stocks.

Bitcoin is meant to be transferable, peer-to-peer, and operate without the need for a third-party. That means that trying to force all of these traditional finance rules onto it is going to lead to disaster.

Here’s an example that might help make this more clear:

Jimmy buys 1 Bitcoin for $30,000 on Kraken.

Jimmy transfers his Bitcoin to Coinbase.

Jimmy sells his Bitcoin for $50,000.

Since Jimmy gained $20,000, he SHOULD incur $20,000 of capital gains.

However, Coinbase has NO IDEA what Jimmy’s cost basis for acquiring his Bitcoin was. Did he acquire it for $1000? $100? $60,000? Since the transaction took place on a different exchange, Coinbase doesn’t know.

Coinbase is also under NO OBLIGATION to provide that information to the IRS… so they’re not going to bother trying to figure it out.

They’ll give the IRS the information they do have: Jimmy sold his Bitcoin for $50,000. If Jimmy can’t prove that he actually bought it for $30,000, **he’s on the hook for the full $50,000.**

And look, most people feel overwhelmed when it comes to navigating their taxes. There’s a good possibility that Jimmy MAY NOT EVEN REALIZE that he’s paying too much in taxes until it’s too late.

Jimmy can go to an accountant. But most accountants aren’t crypto-friendly and may not be able to provide much help.

**“Whatever, we don’t know if the infrastructure bill is going to pass anyway.”**

Unfortunately, it looks 1099-B reporting is coming no matter what. Even the “crypto-friendly” amendment to the infrastructure bill that was being pushed by Senators Wyden, Toomey, and Lummis would have required centralized exchanges to provide 1099-B reporting information to the IRS.

**So what does this mean for you? It’s going to become WAY more important for you to track your Bitcoin transactions.**

Remember, to avoid paying more in taxes than you actually owe, you’ll need to keep a record of all of your Bitcoin transactions.

You can do this via a spreadsheet or use a crypto tax platform. You’ll need to track the amount of Bitcoin you sold, the time the transaction took place, and the price of Bitcoin at the time of the transaction. (I was using a spreadsheet to track my Bitcoin transactions for a while, but it got too complicated so I said fuck it and got started with [CryptoTrader.Tax](https://cryptotrader.tax/))

I hate the fact that this is an issue in the first place. Bitcoin is supposed to be about the little guy standing up to the established financial system. While already-rich whales are going to come out okay, filing taxes is going to be harder than ever for retail investors.

**TL;DR:** Crypto exchanges often have no idea what your cost basis is. Requiring exchanges to send 1099 information to the IRS may cause the average crypto investor to pay WAY more in taxes than they actually owe.



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31 Comments

  1. How about this…

    People should USE Bitcoin as currency and FLOOD the system with 1099s to backlog them past the statue of limitation and then some.

    They don’t have the manpower to process everything.

  2. Bitcoin is my retirement fund. Why the hell would I ever cash out or swap for another asset like a house in such an un-friendly system. Plenty of other crypto friendly countries out there that can have my money instead.

  3. “Jimmy has to prove he bought it 30k” “Everyone will have to track their transactions”

    If only there was some sort of distributed ledger that kept track of all transaction history to help with this 🤔🤔🤔

    Also, stocks experienced this same issue. Moving stovks from Schwab to Merrill Lynch worked the same way. You know how easy it is for Schwab to just provide Merrill with the cost basis info? Super easy. Same for Kraken and Coinbase who will be expected to do so going forward by their clients who DON’T want to have to crawl back through their transaction history to work it out.

    Take a second and breathe…if the gov’t taxes they’ve legitimized it and won’t be banning it. That’s a good thing if you want to see stratospheric prices from institutions taking positions.

  4. I don’t get it what is here so complicated? Show them your bank statement that you put in Kraken 30k and returned 50k, what is it so complicated? I did many small purchases while DCA in 3 different exchanges and lost track how much total have been invested, opened my bank statement sorted by exchange names, added everything up with basic math and got total number invested. Now all I need is to decide when to sell and at that point my profit will be very clear.

  5. Wouldn’t they only be able to tax it when a taxable event occurs? Like when you trade or sell? If I hodl and haven’t sold with no intention to do so anytime in the near figure, what can they tax? I haven’t realized my gains yet?

  6. You are stating this incorrectly.

    My E*TRADE account doesn’t report cost basis because they don’t know if I have Microsoft in other brokerages. They just know I sold it. I have to report the cost basis and the capital gain.

    You guys are over complicating this.

  7. We don’t need Congress to tell us how to do our business, we have stablecoins and tools like Bisq and localmonero for cashing out, no need to play their game and pay anything if they want to be that way, no problem 😉 Just don’t use their system, this is what we have DeFi for

  8. This is half the reason I HODL, cause I don’t even want to bother figuring out the tax headaches. But it sucks because I do want to support small bitcoin vendors by purchasing goods and services with BTC here and there with small amounts. Let’s just make it legal tender in the US already!!

  9. How exactly would you end up in a position where you can’t prove how much you bought btc for? The dates should stored on whatever exchange you used to get the BTC. IF ANYTHING, you can look at the blockchain to prove dates.

  10. > Remember, to avoid paying more in taxes than you actually owe, you’ll need to keep a record of all of your Bitcoin transactions.

    > You can do this via a spreadsheet or use a crypto tax platform. You’ll need to track the amount of Bitcoin you sold, the time the transaction took place, and the price of Bitcoin at the time of the transaction. (I was using a spreadsheet to track my Bitcoin transactions for a while, but it got too complicated so I said fuck it and got started with CryptoTrader.Tax)

    I’ve been doing this already since the beginning.

  11. Here’s the answer – keep your Bitcoin in a private wallet. Period. Store it there, and if you need dollars, sell for a few dollars. Don’t day trade it, and only sell for the dollars when you need dollars. Use Bitcoin to buy the things in your life that you need, directly from your private wallet, to the maximum extent that you can. Then, there’s no 1099 and nothing to report, the IRS can’t see the information in your private wallet, and the government can fuck off and leave you alone.

    That’s what literally everyone should do. Then this evil, corrupt federal reserve system will be consigned to the dustbin of history where it belongs. This is all assuming one thing – that the Bitcoin network’s scalability issue gets some sort of technical solution.

  12. bunch of FUD dude

    we are waiting for these boomers in power to die

    When millenials and younger run the world we won’t have to deal with this bullshit

    buy bitcoin, send it to your Coldcard or Trezor and wait until boomers are dead

    wait

    them

    out

    ​

    ​

    they are dying. They are afraid.

    ​

    we already won

    ​

    stack sats

  13. The rich whales: Ok, I’m never going to sell. I’ll use it as collateral and borrow.

    Spending loan money that will never reach the value of the collateral. They can pay it off 2-3 cycles (8years) later.

  14. I think as far as we the users are concerned, we just need to keep track and submit our P/L account. Since they wanna tax it then also losses would be deductible from the total income.

    It’s on them to prove that we are lying. They will require all exchanges in US & abroad to submit info about US citizens just like they do with banks currently.

    There are already apps that use API across exchanges to calculate for you profits & losses.

    In general most of people enter crypto one way till they make real money. Since profits will be taxed then buying crypto will be an expense. That in itself is an incentive for people to put money in to crypto and they won’t pull out this money until they make it big.

    Eventually it will get too complicated for either the exchanges or the IRS and they will change the way. I expect them to apply some kind of a stamp duty that you pay when you buy crypto and that’s it. I also expect exchanges to either pull out of the US or refuse US clients just like banks outside the USA.

What do you think?

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