Monday, March 26, 2018

Node40: An OK Start To Crypto Tax Accounting

I found a fledgling service this morning called Node40, which aims to be a crypto tax tool service that can help you see long and short term capital gains at a glance.

Right now it's still so new that it's in beta, and as such currently comes with the attractive price of "free," so I decided to try it out.

At present it can link to a Coinbase account to gather data, or accept a transaction history file from Gemini. That was good news for me as those are the only two exchanges I've ever used (thanks to the idiots that run my state). It took me about five minutes to get all of my data imported.

Right off the bat I spotted a problem that I knew would be there: the system immediately told me I had lots of gains in accounts that I know I do not.

Basically, the system assumes that any transfer out of a wallet is a sale of an asset, then declaring a gain or a loss on it. In my Coinbase account, which I only ever used to purchase Bitcoin, it showed that I had gains and losses on transactions that were really just me moving my Bitcoin from my wallet account into Coinbase's cold storage. Then later in the year, it showed further gains on those same coins when I moved them out of cold storage, back into my wallet, and then off to a paper wallet, which I did prior to the Bitcoin Cash fork last August.

In all of that there's not actually a single taxable event that occurred. These assumptions the Node40 system makes can be fixed manually easily enough (though that is a bit tedious, especially if there's a lot of transactions). All you have to do is click on the transaction in the "manager ledger" screen and wipe out the gain or loss figures, then include an explanation if you like.

The real problem this demonstrates is going to be with the IRS.

With the 2017 tax year filing deadline approaching, articles are popping up all over the place that basically read, "the IRS is going to get you!" They think that because very few people have ever reported gains or losses on cryptos that it's this vast pool of untaxed gains just waiting for them to extort a slice from, so they're on the hunt for anyone not reporting their activities. To that end, they've successfully sued Coinbase to get transaction data, currently limited to a certain segment of users of that platform.

But what did the IRS really get? Basically, the exact same thing I got when I fed my data into Node40: the wrong answers.

The IRS will not be able to tell an account-to-account transfer apart from a sale, just like Node40 can't. Of course the "guilty until proven innocent" model the IRS uses against citizens will then mean the crypto owner will have to use further records to prove what was what, which is easy enough to do if you really were only moving assets between your own wallets without realizing a gain or a loss. But their assumption from the get-go will be that you're hiding something, and they'll then treat you like a criminal (maybe this will propel them to the top spot of most hated Federal agencies, which they're already not far from being).

Chances are then that this whole crypto taxation thing is just going to be a train wreck for years to come. The IRS will charge into the affair like a bull in a china shop, screw up massively, lawsuits will start flying in Federal courts, and in the end it will probably cost U.S. taxpayers more than the agency will legitimately collect in capital gains taxes. It would be wise of the IRS and lawmakers to slow walk the enforcement side of things until they really understand the technology involved here and come up with effective tools and techniques for identifying the truly taxable events that go on. This is government we're talking about here though, a combination of force that can be applied largely without consequence, fueled by other people's money, so they'll just screw it all up and leave the mess for someone else to clean up.

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