Keeping a record of BTC transactions to optimise CGT liability.

[Jet Cash]

This thought occurred to me when reading a thread in the beginners forum.
Everybody seems to assume that a Bitcoin is a Bitcoin is a Bitcoin, but that isn't strictly true. Every Bitcoin transaction has an acquisition value, and, assuming that you use a wallet that allows you to select transactions to move to another user. If you dollar cost average, then you may be losing some tax advantages. For example, if you show a loss on some coins, then you may want to save those to offset against gains in the future. Alternatively, you may want to dispose of some early, and highly profitable coins, to take advantage of your tax allowances. Does anyone know if the revenue departments will allow you to discriminate?

There is another possibility as well.  Suppose you move coins into a different wallet, does that count as a disposal? If it doesn't, then how much will you have to vary the wallet ownership for it to become a disposal? Perhaps you could exchange it for (say) Eth in one tax year, and exchange it back in the next year.

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[NotATether]

There is another possibility as well.  Suppose you move coins into a different wallet, does that count as a disposal? If it doesn't, then how much will you have to vary the wallet ownership for it to become a disposal? Perhaps you could exchange it for (say) Eth in one tax year, and exchange it back in the next year.

It shouldn't count as tax, because US taxes only apply starting from when you buy bitcoins with dollars (and not any other currency) and are calculated at the moment you withdraw to dollars (again, not any in other fiat currency, USD only).

In particular, if you're earning bitcoins from somewhere like a sig campaign or a job, you don't pay tax on that when you cash out because there is no applicable Capital Gains.

[Husires]

I do not know what the tax background will be based on in the discussion, I think you are in the United Kingdom, and I do not know if they have the same tax details related to the United States which is mentioned here (Frequently Asked Questions on Virtual Currency Transactions and Notice 2014-21, 2014-16 I.R.B. 938)

I will try to answer your questions in general.

Bitcoin and related investments (altcoins, tokens. NFT) are often classified as a capital asset, so moving your coins within your wallet is not subject to taxes because you have not exchanged them for other currencies like when paying using cash.

Any exchange of Bitcoin with other currencies is a taxable transaction. If you make gains, you pay tax, otherwise you will not need that.

You do not need many tax details for your wallet records, but you will need to download a record of your files on any CEXs/DEXs, as all buying and selling within them are subject to taxes.

Some try to hide it by using platforms that do not require KYC and a one-time payment of taxes when converting bitcoins to cash.

[Welsh]

There is another possibility as well.  Suppose you move coins into a different wallet, does that count as a disposal? If it doesn't, then how much will you have to vary the wallet ownership for it to become a disposal? Perhaps you could exchange it for (say) Eth in one tax year, and exchange it back in the next year.

If it's a wallet that you own, no that's not a disposal. I'm not sure what you're asking exactly, but if you still own that Bitcoin, you have to declare it to the tax man if it needs to be declared. I don't know where you are, and what exactly you're talking about here, but income tax is usually required to be declared. Whatever you do with that money from there on wards is considered yours until you send it to someone else. If you send it to a different wallet that you own, then that's just moving your funds around instead of a disposed of.

Honestly, to prevent going wrong I'd just advise to talk to an accountant. I've had an accountant for years just for Bitcoin now. Usually, just give them the transactions of the wallet, and then any subsequent withdrawals. If you've purchased Bitcoin from an exchange, give them that. If you sell at a loss later, that'll be considered a loss, and won't be taxed. 

[DaveF]

As others have pointed out it is going to depend on country to country along with several other factors.

Using the US as an example if I mine coins and sell them since they are considered property according to most accountants I have to declare them at $0 cost of acquisition. BUT I can then deduct the cost of mining them. Same thing different box on the form.

But I know in some places you just put in the profit and call it a day.

As always consult a tax professional and then consult another one to be sure.

-Dave

[Jet Cash]

OK, I obviously haven't explained things very well.
Let say I bought one Bitcoin for £100, and a few years later, I bought another for £10,100. I then decide to sell one coin at a price of £20,100. The taxable gain on the first coin is £20,000, but on the second coin it is £10,000. With dollar price averaging, the gain is £5,000 (approx.). If my tax free allowance is £5,000 then by relating the sale to specific coins, the taxable liability is £0, £5,000 or £15,000. If I had purchased an additional coin for £30,100, then I could have an allowable loss of £10,000.
So what is the purpose of all this? Well I am a long term HODLer. I'm starting to believe that this long term inactivity may not be the best approach. By selectively selling and repurchasing after a required interval, I could take advantage of unused tax allowances, or favourable tax conditions.

It becomes even more interesting if I sell half a Bitcoin.

Figures will vary dependent on market conditions, residency, and tax legislation.

[tbct_mt2]

In particular, if you're earning bitcoins from somewhere like a sig campaign or a job, you don't pay tax on that when you cash out because there is no applicable Capital Gains.

A signature campaign or a job is one of income sources so why in the US, they don't count such income sources to total income and consider it as one element for personal tax records?

I think tax is applied for many things, from income, total income each year and not only for gain or loss from investment.

Maybe governments just can not trace all income resources of many people who work in different areas, in the forum exclusively and receive their part time job salary in cryptocurrency especially if salary is paid by privacy coins like Monero or by Bitcoin through tumblers, mixers.

[Jet Cash]

Nobody seems to be addressing the fundamental point that I hoped to make. This is that you may be able to optimise your tax liabilities by selected the input for a partial disposal from a suitable wallet.

[DeathAngel]

Most good exchanges give a detailed list of all your transactions so it’s not too difficult to keep records of all your purchases & sells. Obviously you can keep your own spreadsheet but it’s not hard.

It's important to keep records going back several years. I had to dig out 2015 buy records when I sold a bunch in 2021. You can’t get caught slipping these days, IRS are on our asses, especially after COVID. They are trying to get back every cent they can.

[DaveF]

Nobody seems to be addressing the fundamental point that I hoped to make. This is that you may be able to optimise your tax liabilities by selected the input for a partial disposal from a suitable wallet.

If that works where YOU are. As we all wind up saying a lot here it depends on where you are living and what the local laws are.
Some countries force you to use a LIFO method for doing things, others are FIFO and so on.
Here in the US it's a 'thing' so I can pick. One of the South American countries that a coworker is from just changed from that method to FIFO. So if he sells any at home in 2023 he is going to get hit hard.

-Dave

[Jet Cash]

Exchanges are only relevant when you withdraw or deposit coins. Balances in their ledgers are not Bitcoin, and cannot be tied to specific transactions. Similarly, if you deposit fiat, and trade in Bitcoin on the exchange, and then withdraw fiat, it is not really a Bitcoin transaction imho.

FIFO should only apply if you don't specify transaction IDs when you "spend" your Bitcoin. If you specify the transaction ID, then surely the acquisition cost of those coins is the relevant figure, and not an average cost of your wallet contents.

I own two Volvo cars, if I sell one, the the purchase cost of that car is the relevant figure, and not the average cost of purchasing the two cars.

[stompix]

FIFO should only apply if you don't specify transaction IDs when you "spend" your Bitcoin. If you specify the transaction ID, then surely the acquisition cost of those coins is the relevant figure, and not an average cost of your wallet contents.

FIFO and LIFO apply depending on where you live if the law says this you can come with whatever timestamps you want for the said coins the IRS will not give a damn, you can change your accounting method in some, and in some, they decide for you!

You bought coins at 1k and at 4k and at 10k and you decide to sell a coin they will not care you have chosen to send the coins you have acquired second to the exchange and thus calculate that based on the second price. Depending on the method they are using they will either use 1k or 10k, but most likely it will be 1k.

Besides, the UK is completely different than most as they use Share Pooling so that won't help anyone in the US for example!

Nobody seems to be addressing the fundamental point that I hoped to make. This is that you may be able to optimise your tax liabilities by selected the input for a partial disposal from a suitable wallet.

That's because it doesn't work like that!

I own two Volvo cars, if I sell one, the the purchase cost of that car is the relevant figure, and not the average cost of purchasing the two cars.

Apple and Oranges, you don't sell one half of a Volvo (unless for scrap or part) and for sure you haven't bought 0.2 of Volvo then 0.5, and then 0.3. Compare bitcoin with stocks, not with cars!

[Jet Cash]

Are they really different? You can sell a single car, or a yard full of cars, but I accept the restriction as a result of division. Maybe I should have said Satoshi instead of Bitcoin. Every Bitcoin transaction is recorded permanently ( I don't include transactions inside an exchange), and it has an acquisition and disposal value. Surely, if that is submitted to the blockchain, then the profit or loss should be calculated on that. If the inputs are not specified, then LIFO or FIFO may well be the best options.

I wonder if anyone has put this situation to a revenue department. Bitcoin is unlike any of the other assets that they have had to consider. I suspect if you submitted a return based on transaction IDs, then they would accept it, rather than go down another rabbit hole.

[stompix]

Are they really different? You can sell a single car, or a yard full of cars, but I accept the restriction as a result of division. Maybe I should have said Satoshi instead of Bitcoin. Every Bitcoin transaction is recorded permanently ( I don't include transactions inside an exchange), and it has an acquisition and disposal value.

Let's go with Satoshis.
You have bought once 1000 sats and once 1000 satoshis. You move them both to the same address you have different outputs but the same balance. Then you decide to spend 500 satoshis, from which batch have you spent those satoshis?  When you have two packed cars in a garage you for sure know which one you have sold, right?
Do you really think the IRS will waste time trying to figure out this kind of thing?

I wonder if anyone has put this situation to a revenue department. Bitcoin is unlike any of the other assets that they have had to consider. I suspect if you submitted a return based on transaction IDs, then they would accept it, rather than go down another rabbit hole.

Nobody in the IRS is going to care about the transactions ID, what they are going to care about is the proof you have paid x for them, the statement from the bank or the exchange or whatever means you have used to purchase those coins.
Especially since in the UK it's clear they use share pooling I advise you to speak with a tax expert before you go out and do something you might regret based on what you think it's right.