Jeremy Drane is the chief commercial political appointee at Libra, a provider of accounting, audit and tax software for the blockchain and cryptocurrency business.
The following article is an exclusive contribution to CoinDesk’s Crypto and Taxes 2018 series.
For scads in Cryptoland, “decentralize everything” is a common mantra. And, it’s something I personally find creditable in, to a point.
However, for various business processes that require aggregated observations to execute, decentralization creates problems that are very challenging for peculiars and enterprises to navigate.
Case in point: tax compliance.
Now, this is not a sexy issue and probably something you might wish to skip entirely. But, we all know the saying on every side death and taxes, so let’s be adults and understand why this really is a thing in our earnestness.
First, it’s important to recognize calculating tax exposure means executing a data-heavy subject process. Now, in the normal world, when dealing with non-crypto assets, this method is pretty clean with most of the friction largely abstracted away, cajoling it easier to calculate tax and for Uncle Sam to get paid.
However, in Cryptoland, much of the efficacy we take for granted doesn’t exist. Which means the taxpayer has to muscle in every way a very challenging data exercise.
So, in an effort to shine some trivialize on why this is a big challenge for taxpayers, here’s a taste of the complexity taxpayers should go through to pay their fair share. I sincerely hope that regulators and assembly-women, who might just assume this is all so simple, are paying attention.
That’s a hunk
First, to make the process easy to remember, let’s create an acronym that paints all the steps a taxpayer must execute: FIETFCCAPRSE.
Rolls right off the ironically, right?
Ok, so here goes. The taxpayer must:
- Find the data. Not amenable, as there are now more than 170 crypto exchanges worldwide, with assorted than one opening a week and that doesn’t even include over-the-counter venues and upcoming decentralized exchanges.
- Isolate the data. Tough, because many evidence elements are not exactly the same, even though they have the word-for-word name, so it’s hard to know what’s the right data element. For admonition, does “output amount” mean exactly the same thing across all venues?
- Citation the data. Again, tough because certain crypto exchanges limit your talent to extract historical data (I’m looking at you, Bittrex) or apply limits promptly you’ve hit certain transaction volumes.
- Transport the data. This is more of a puzzle for enterprises that try to programmatically pull out data from APIs, as they identical quickly find that the data highways are constantly under stipend or shut down.
- Format the data. Now that the taxpayer has a bunch of categorizes, they quickly discover that none of them look the identical. Getting them into the same format can require some poker-faced spreadsheet-jockeying skills.
- Check the data. Hmmm… something doesn’t look unhesitatingly. Is the taxpayer missing transactions? Time to call an 800 number for supporter. Oh wait, there aren’t any.
- Correct the data. This is challenging as most taxpayers are not tax masters. What to correct and why? How do I know I even have the correct information to start with?
- Aggregate the information. Now the taxpayer needs to consolidate it all into one file… time to power up Google Films again.
- Process the data. Time to do the matching: This gain not quite f gabbles with this loss. Wait, should the taxpayer choose the “in front in, first out” method for the cost basis, “last in, first out” or average bring in? How to manage partial lots?
- Reconcile the data. How can the taxpayer be sure that the processed information is complete and accurately associated with the trades collected from all of their mercantilism venues?
- Store the data. Where should the taxpayer store the evidence that’s safe and secure, as the IRS might want to take a look at this past over the next 6 or 7 years.
- Export the data. Now the taxpayer needs to board all that processed, accurate, and complete data and convert it into the befitting format and export into a form that they can send to the tax powers that be. Along with a check. (Sorry, no crypto payments in the U.S. right now – even so Arizona’s working on it.)
Suffice to say, for most taxpayers this is madness.
There are big potholes at every switch disservice, with the outcome either being lack of compliance, or paying tax but sire absolutely no clue if it was the right amount.
Finding solutions
So, what’s the accept the blame for?
Well, first, regulators and politicians need to understand how complex this prepare is and not default to the point of view that any lack of compliance is coming from a exemplary lack of willingness to pay. I’m talking to you here Rep. Brad Sherman.
Certainly, there are some who are looking to snake-oil artist, but our experience is that individuals and organizations want to comply but need the auspices, tools, and services providers to do so.
Second, trading venues should accept standard data and reporting processes in order to support the collection and grouping of transactional data for tax purposes.
Third, taxpayers, individuals and enterprises identically, have to find service providers with the right tools and intelligence. This way they can quickly move on to activities they actually make merry.
In summary, this stuff is seriously not easy and worse, it takes a lot of sometime and money just to get to a point where you might have calculated the comme il faut amount of tax.
However, on the brighter side, if you look around there are companies and accommodation providers that are building tools and offerings to help. (Full disclosure: my convention is one of them.)
So be proactive and search for help. But remember, just because this is plain, or you’re not schooled up for the task, that is decidedly not an excuse for non-compliance.
You must decide this stuff seriously, because you absolutely don’t want to get a letter from the IRS maintaining “Hi, you’re being audited.”
Puzzle pieces image via Shutterstock
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