The short answer is yes, tracking cost basis for crypto is different than fiat currencies, but that won’t necessarily be the case forever. There are considerations related to how the assets came to be and their current nature.
Let’s discuss each of those and then I’ll get into what this means for reporting. These are going to be largely focused on the regulator environment in the United States, as that’s where we’re based. No matter what, these are important considerations regardless of your jurisdiction.
Whether you call it an Initial Coin Offering (ICO), Security Token Offering (STO), Initial Exchange Offering (IEO), or some other term, there was some reason for the creation of the coins and certain expectations that the purchasers of those coins had. No matter how much pixie dust you sprinkle on it, regulators will ultimately get to the core of what happened.
There’s a lot of focus on how to sell coins or tokens without giving up equity. It makes sense that if you can raise a bunch of money and not have to give up any ownership for it, that’s a pretty good deal for you. But if you don’t give up ownership, you’re on the hook for providing some sort of utility to the purchasers. So even if you thread the needle and are able to create a utility token that’s used for payments and is regulated like cash, you’ll still have a liability on your books for the network and an asset for which you’ll need to track your cost basis.
The best example of the distinction between this and the preceding section, are comments made by William Hinman, SEC Director of Corporation Finance, last year. He said that “putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.” This implies that Ether may have initially been a security, but it doesn’t appear to be a security now.
Earlier this year, SEC Chair Jay Clayton also commented on how Bitcoin is being used. “No one is creating it for their own … control of bitcoin, it’s designed to be a payment system replacement for sovereign currencies,” he said. “We’ve determined that that doesn’t have the attributes of a security … as far as I’m concerned, that’s designed to be akin to the dollar, the yen, the euro … and it operates that way. People who purchase it are expecting it to operate that way.”
As the market evolves, we expect to see many more examples of a change in the nature of crypto assets. This would then lead to a change in their regulation. The idea that previously illiquid assets can now move around more freely will give rise to some new regulatory complexities.
You may have read Clayton’s quote and determined you can track Bitcoin like you do US dollars and be fine. Well, you’d be wrong in the United States (and most other countries). While the SEC has indicated things seem to be moving in that direction, that’s far from definitive guidance.
And the SEC isn’t the IRS. Some might be able to circumvent detailed reporting requirements for investor disclosures. But you may still need to track your cost basis in separate cost layers for tax purposes. If you received some type of value that you didn’t have previously and aren’t aware of an explicit exemption, generally you owe taxes to the IRS.
So take the time to make sure your records are in order. Tax evasion was how they got Al Capone after all, and he didn’t have to worry about immutable ledgers.