Chandan Lodha is co-founder of CoinTracker, a manager of portfolios and taxes for cryptocurrency. It can be reached on Twitter Here.
The following article is an exclusive contribution to CoinDesk Crypto and taxes 2018 series.
As a hobbyist investor, my first foray into cryptocurrency was with Coinbase.
I was buying a few coins here and there, and everything was simple enough to handle in a spreadsheet. I would record the date, the time and the amount bought and sold for each transaction. This worked well enough for the first 10 transactions.
Soon, however, like many others in space, I found myself at the back of the rabbit crypt lair.
I had exchange accounts on GDAX, Poloniex, Binance and a lot of others. I was buying the coins of privacy on decentralized exchanges. I had read about large-scale exchange hacks that burned many people in the past, so I created cold storage hardware portfolios and ended up with over 15 different portfolios for different types of altcoins.
Anyway, I was a hobbyist; I was new in space and fiddling with small amounts of these coins, learning, curious to see how this decentralized digital economy worked and how all the underlying technologies worked.
He was charming, but also confused to death.
By the time I moved a single coin from Coinbase, the exchange no longer had an accurate reporting of my holdings and transactions, so it was tax report It was wrong
My spreadsheet became unmanageable, as I started integrating Google Apps scripts to look up the exchange prices of the different trading accounts I had, in addition to the rebate cost bases for portfolio transfers.
The spreadsheet became more and more complicated, until one day it took two minutes to load.
This was the breaking point: there had to be a better way to run this hacky spreadsheet.
Normally, for a collateral project I would not have imported, but this was real money on the line and I had no idea how much fiat money (US dollars) I had invested. How would I calculate my capital gains on Crypto if I did not know how much money I invested in the first place? It is becoming financially irresponsible for me not to have a better understanding of it.
I turned to my friend sitting next to me and asked him how he was solving the same problem for himself. He turned to me his laptop: a complicated sheet of almost identical calculation (in all honesty, his was better than mine).
There was no way that mainstream users would jump through these circles. We immediately started looking for what other crypto-enthusiasts were using to solve the tracking problem.
To our disappointment, there were no good tools. The most popular tool was a "mobile app" that functioned as a stock app: it showed you the coin prices every day and, if you wanted it, it allowed you to manually add these coins into a wallet, one to the time.
This was even worse than the spreadsheet we already had and was not customized for our particular portfolios, not to mention the calculation of our cost base, capital gains or the provision of tax information.
Then and there, my friend and I decided to stop doing what we were doing and producing our spreadsheets (OK, his spreadsheet) in a simple website. It was the first incarnation of what has now become CoinTracker.
The moral of the story: make sure you keep good records of your transactions, or use the exchanges that provide these records for you.
If you use more bags and wallets, exchange more coins or use a safe or cold deposit for your coins (which everyone should do), there are several tools that can help you monitor the entire portfolio, the return on the investment, the amount of fiat invested, and perhaps the most important, the cost basis and capital gains.
In the future, the IRS will ideally help to clarify the tax rules applicable to cryptocurrency, particularly with regard to gray areas such as type exchange (retroactively), which accounting methods are acceptable for capital gains (eg FIFO , HIFO, etc.) and coins with compressed air.
Until then I hope to see exchanges and intermediaries that make it easy to report a priority so that their users are not left to ruminate to understand their fiscal situation.
In the meantime, I advise you to inform yourself on how to protect your coins and to know how cryptocurrencies are regulated in your jurisdiction. If you have not already set your taxes for the cryptocurrency of 2017, send a free file fiscal extension (but be sure to pay the estimated fees to avoid late payment).
Although the cryptocurrency is still a nascent space with many uncertainties and some headaches – like the ones I have described above – I am very confident about the future of the industry. Rarely does such revolutionary technology come in and there are many excellent materials out there to learn more.
Image of the headache via Shutterstock.