My Cryptocurrency Lessons At Tax Time, Cryptocurrency is Still in the Wild West Phase

Part of my justification of buying cryptocurrency last year was being able to write this blog post.  I am trying to get my little tech blog going and some web dev business too.  I thought it might be helpful to dive in and learn about this emerging blockchain technology.  Dave Ramsey’s advise on financial things has been my guiding principles.  He wasn’t wrong that this is still the wild west and people getting hurt.  Here is what I learned.

What is Cryptocurrency

In case you are wondering what I am talking about here, I’ll do a quick review.  Cryptocurrency is a new virtual currency that isn’t linked to a country.  It is called crypto because it is highly encrypted, making it very secure if handled correctly.  Therein lies the rub, which I will discuss.  The rules and knowledge about it are still very nebulous, making unforeseen consequences highly likely.   Bitcoin was the first to be created using blockchain.  Blockchain is a newer type of coding that codifies transactions or actions by adding the information in a chain.  The chain is not editable which makes it secure.  Anyone can go through the history and see the transactions.  I wrote a related article which explains it more here.

History of Cryptocurrencies

Bitcoin was created in 2009 by a Japanese man under the pseudonym Satoshi Nakamoto.  After the idea proved to be interesting hundreds of new cryptocurrencies started being created, which in my opinion is the biggest Achilles heel of the concept.  There has to be a limited supply of something to be a higher demand.  This being said, not all cryptocurrencies use blockchain.  IOTA uses something called Tangle according to the Wikipedia page for cryptocurrency.   As I went with the flow of emerging new coins I bought into theories that the new ones like, Extrabytes and the qualities which made them more desirable.  I could go way deeper on this topic as there are so many ways each is different but I’ll let you research that on your own.  Just be ready to be overwhelmed, there are thousands of them now. Wikipedia is a pretty good place to read about it as it is updated regularly.

The Lessons I Learned

  • Consider any money you invest already lost

As of this writing buying into this stuff is a total gamble.  Here’s how Mark Cuban said it.

“If you’re a true adventurer and you really want to throw the Hail Mary you might take 10 percent [of your savings] and put it in bitcoin or ethereum.  You’ve got to pretend you’ve already lost your money.”

From CNBC article
  • Create your own documentation of every transaction you make as you make them

I’m using a google sheet to do mine so my accountant and I can quickly remember what transactions I made.  This is important because every single transaction might be taxable whether you win or lose money.  Some of the IRS documents consider cryptocurrency a property, not a currency.  This is weird but I think it is because there is so much disruptive potential to the US dollar.   Here is a template I made that you can use to make your transaction tracking spreadsheet.

  • Cryptocurrency IS taxable

When I was first sold on cryptocurrency in the fall of 2017, everyone was saying that due to its cryptic nature it wasn’t taxable.  People thought that it was somewhat like the dark web with everything being untraceable and at first this was true.   It is the same reason cryptocurrency was used by criminals because it was so hard to trace.  It probably is if you don’t use the major exchanges like CoinBase.com, gdax.com and binance.com and others.  The rate my accountant said I am paying is 15%.  I don’t plan on using those as they make things more complicated as do the assumptions that they won’t be reporting to the IRS in the future.  That is my opinion anyway.

If you think about the way blockchain works as a digital ledger it is actually pretty trackable if the government keeps up with technology.  An article in Money Magazine had this to say about it.

Because the virtual coins are tracked on digital ledgers, every single transaction is marked and stored. And more regulators have begun to crack down on cryptos’ libertarian dreams.

  • Figure out how and where you will buy from and where you will store your cryptocurrency in advance.

When I first learned about buying and selling cryptocurrencies it was via a friend using coinbase.com.  Coinbase is super convenient and wallet connected to its exchange.  It is kind of like a full-service gas station and gdax is the self-service one.  The same company owns both but I found out too late in the game that you can skip the transaction fees of coinbase on the more self-service, gdax.  I moved my money back and forth between the two which showed up as transactions on the profit/loss tool in the coinbase dashboard when my accountant was trying to figure out what to pay on.  This is where it is really important to keep track of every transaction in some kind of spreadsheet to rule them all.  You will also need to know where you are going to put your purchases once you have them.

  • Storing cryptocurrencies

Ideally, you want to put your purchases somewhere more secure than the exchanges.   Gdax and binance and others are pretty secure with their 2 part authentication but still more vulnerable.  There are online options, of which coinbase is one but those are still hackable.  People are recommending some of the thumb drive based storage devices to store your code.  Millions of dollars have been lost by people using cheap thumb drives which break.  Once a device doesn’t work there are zero ways to get your cryptocurrency back.  Here is a list of good options for coin wallets as of 2018.

  • Buy a physical  safe

You might also want to invest in a fireproof safe if you go this route.  We bought one relatively cheaply at Fry’s in Dallas.    The safe is also a good idea because you get a number from coinbase and others which you are supposed to write on a piece of paper so there is no wireless way anyone can find it.  Such a piece of paper would be worth a mint if you do good.

  • Keep It Simple Stupid

Lastly, if I had known how things would go I probably would have just bought the hell out of the first one recommended to me by my buddy Jacob.  He was dead on, Etherium has been one of the more predictable coins just as he said.  Had I just bought it I would have done better, it was the least nerve-racking coins I bought.   You can see my income report which shows I did the best with Litecoin and Etherium here.  I am still trying to figure out how much I lost on Xtrabytes if I sold right now.  I didn’t write down the values when I bought them and with several exchanges have to figure this stuff out in the next 2 days.  Such a pain for the little money I made.

Another way to keep it simple would have been to sell the amount I initially invested once I had made a good return.   When I was up $14,000 on my investments my patient told me to do this and that not doing it was just greedy.  I couldn’t stop thinking about people who said it might go as high as $100K per Bitcoin.  I also justified it by thinking about the Winklevoss brothers saying they will not sell no matter what happens.  Had I sold when I should have though I would be way less stressed out than I am now.

In Summary

In the end, I think I am done buying any crypto as I spent a lot of energy for little returns.  I definitely think it is the wild west as Dave Ramsey put it and there may be unpleasant surprises in store like the way it’s being taxed, see this IRS report.  I know the majority of people are not reporting at least as of what I read in March but after watching Zuckerberg being grilled on why he wasn’t more proactive I know I want to be as proactive as possible in all things rules.  I’ve been trying to think that way anyway ever since taking ethics and learning how neuroethics shows that when we always respect lines in the sand we, we have less trouble losing site of them.

If you need help with advising, either I can help you or I can connect you with a friend who has already learned the ins and outs.  I can also recommend a good accountant who I put through the wringer.  This year I will have a record for anything I do.  Who knows, when Netflix came out no one thought digital media would shut down brick and mortar Blockbusters as fast as it did.  Maybe it’s just going through growing pains.  My accountant said I did pretty well so for now I won’t complain to much.

If you read this far, thank you soooo much!! 🙂 🙂

 

 

 

Leave a Comment