Coinbase "Cost Basis for Taxes" usage

[rocks]

I use Coinbase for all of my BTC purchases, and starting this year made a few (small number) of sales, and so obviously need to figure out how to report the sales. Overall I am well familiar with capital gains taxes. I understand people here can not offer "legal advise", but figure many people here are also dealing with this issue so it would be nice to have a discussion.

The IRS plans to use the FIFO method, and it seems the Coinbase "Cost Basis for Taxes" uses this FIFO method for calculating coin basis for both sales and transfers to your own wallet.

In my scenario I typically purchase coins, then transfer all of them to my own wallet at xxx address, then purchase more coins and transfer those to my own wallet at yyy address, and so on. Sometimes I've left coins on coinbase and then sold them a little bit later, and sometimes I transferred coins from a specific address back to coinbase and sold them.

1) I'd assume it is safest to use the coinbase calculated basis for both sales and transfers to external wallets.
-> This means that when I transfer coins to xxx wallet address, the basis of those coins is now what coinbase determined them to be.

2) The tricky part comes when I transferred coins back to coinbase to sell.
- For example, in the above example lets say I had coins at xxx address at basis xBasis, and coins at yyy address at basis yBasis. Using the FIFO a sale should match to your latest buy, i.e. the yyy address coins. But in my case I transferred coins from xxx address to coinbase, so it seems the "correct" thing to do is use xBasis.

Basically by transferred coins out of Coinbase to specific addresses, I can control and verify to the IRS which coins I later transferred back and sold.

What do you guys think, is this right?

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[farlack]

The IRS cares that you give them money. The don't care where it came from. Taxes should not be stressful as people make it seem.

FIFO just follow the method, the IRS doesn't need to know your balance, if you bought 10 sold 9 made $200 in profit, just tell them that. You're not going to get an audit unless you make $25,000 a year and somehow bought a new house, new boat, and new car with cash, unless you pay the taxes on that income and send in your FIFO information with bitcoin.

[Nagle]

More to the point, since Bitcoin has been going down, you probably have a tax loss when you sell, and can deduct it from other capital gains. So you want that record keeping.

[ArtsNentertainment]

as a non tax professional, I read that it costs on average 80k to audit someone. Even if thats not correct it is expensive. Do the best you can and when you end up making enough where an audit would make sense, get an accountant.

[charliemaggot]

The IRS plans to use the FIFO method, and it seems the Coinbase "Cost Basis for Taxes" uses this FIFO method for calculating coin basis for both sales and transfers to your own wallet.

The IRS doesn't exactly "plan" to use FIFO. FIFO is the preferred method of the IRS. However, there is debate as to what methodology you could use (LIFO, HCFO, CCFO, average, etc ) since Bitcoins are property and therefore essentially have no particular rules.

In my scenario I typically purchase coins, then transfer all of them to my own wallet at xxx address, then purchase more coins and transfer those to my own wallet at yyy address, and so on. Sometimes I've left coins on coinbase and then sold them a little bit later, and sometimes I transferred coins from a specific address back to coinbase and sold them.

1) I'd assume it is safest to use the coinbase calculated basis for both sales and transfers to external wallets.
-> This means that when I transfer coins to xxx wallet address, the basis of those coins is now what coinbase determined them to be.

2) The tricky part comes when I transferred coins back to coinbase to sell.
- For example, in the above example lets say I had coins at xxx address at basis xBasis, and coins at yyy address at basis yBasis. Using the FIFO a sale should match to your latest buy, i.e. the yyy address coins. But in my case I transferred coins from xxx address to coinbase, so it seems the "correct" thing to do is use xBasis.

Basically by transferred coins out of Coinbase to specific addresses, I can control and verify to the IRS which coins I later transferred back and sold.

It doesn't matter where the coin sits, its cost basis doesn't change. If you bought 1 BTC on Coinbase for $500 on date x and transfer it to a wallet, it still has a cost-basis worth $500 from x. Transfer it back to Coinbase, still nothing changes.

What matters is if you start mixing coins of different cost basis. Say you bought another 1 BTC for $400 and transferred it to the same wallet. Then you spend one. Which coin did you spend, the $400 or $500? Technically, the software could have spend either or a mix of the two, but that is almost impossible to track. So your only realistic option is to balance it on paper. If you use FIFO, then it was the $500. If you use LIFO, it was the $400.

End result, if you use Coinbase for all your buying/selling/spending and want to use FIFO, their tool will work everything out for your.

But if you spent using another wallet, on your phone for example, bought/received elsewhere or traded/mined alt-coins, you need a more sophisticated tool. Look at https://bitcointaxes.info that is designed to work out Bitcoin and alt-coin capital gains.

[51percemt]

The IRS plans to use the FIFO method, and it seems the Coinbase "Cost Basis for Taxes" uses this FIFO method for calculating coin basis for both sales and transfers to your own wallet.

The IRS doesn't exactly "plan" to use FIFO. FIFO is the preferred method of the IRS. However, there is debate as to what methodology you could use (LIFO, HCFO, CCFO, average, etc ) since Bitcoins are property and therefore essentially have no particular rules.

A taxpayer is able to choose specific "lots" they wish to sell when they are selling a stock. The taxpayer must advise the broker as to which lot they wish to sell at the time (or prior to) of the sale. I am not sure if this is something that coinbase offers as of now.

[stup2plending]

I'm a finance guy but not a tax accountant and a blogger on Peer lending as an investment including lending BTC.

You are fine with using FIFO. Regardless of your 87 wallets you transfer things between, including back to Coinbase, you only have a taxable event when you sell the coin. It's a capital gain or loss and short term or long term depending on how long you held it before you sold it.

CB has good records of your purchases so you can match purchase prices and sale prices to determine that gain or loss.  Your  #2 is not tricky at all. If you haven't sold it yet, it's not taxable and the IRS doesnt care. When you sell it is.

Now if you traded your BTC for LTC as an example, then you had a sale when you sold your BTC and a new purchase price (cost basis) for your now purchased LTC, which is taxable in the same way as described above upon its sale as a capital gain or loss.

I hope this helps.  I track all of my purchases on a simple Excel spreadsheet.