Is tracking cost basis for crypto really that different than fiat currencies?
The short answer is yes, but that won’t necessarily be the case forever. There are considerations related to how the assets came to be and the current nature of them.
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 this regulator environment in the United States, as that’s where we’re based, but these are important considerations regardless of your jurisdiction.
How the crypto assets came to be
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 purchases of those coins had. No matter how much pixie dust you sprinkle on it, regulators will ultimately get through 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 of your coin. 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 current nature of them
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 been a security when it was created, 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 leading to a change in how they’re regulated. The idea that previously illiquid assets can now move around more freely will give rise to some new regulatory complexities.
Crypto reporting requirements
You may have read Jay Clayton’s quote above and determined that you can just track Bitcoin like you do US dollars and you’re 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. While you might be able to circumvent detailed reporting requirements for investor disclosures, you may still need to track you 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.