Bitcoin Tax Recordkeeping – Stephan Livera Podcast: Part Two

Learn about Bitcoin tax recordkeeping with tax experts Clinton Donnelly and Dennis Wohlfarth on Stephan Livera’s podcast, episode 183.

Bitcoin tax recordkeeping

Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax recordkeeping, and strategies to employ to minimize tax. In the full podcast, we chat about:

  • Current Bitcoin tax treatment
  • Capital gains Bitcoin tax treatment
  • Bitcoin tax recordkeeping
  • Bitcoin tax strategies locally
  • Bitcoin tax strategies for those willing to go overseas
  • International crypto competition

In part one, we talked about Bitcoin tax treatment and Austrian economics on Stephan Livera Podcast, episode 183, and our guests were from the company Accointing and Donnelly Tax Law

We talked about Bitcoin and tax strategy.

Today, our podcast show notes are about Bitcoin tax recordkeeping with our two crypto tax experts. 

In part one, we left off curious about how people typically deal with having multiple wallets or multiple exchange accounts.

Bitcoin Tax Recordkeeping: Dealing With Multiple Wallets Or Exchange Accounts

Bitcoin tax recordkeeping

What’s the typical way that you and your customers usually deal with multiple wallets or multiple exchange accounts?

Dennis Wohlfarth:
At Accointing, we allow our customers to directly connect their exchanges with either an API or a direct connection if the exchange offers that. For Bitcoin and auto blockchains, we import all the historical data through an xPub and yPub, or standard Bitcoin addresses. 

You can then combine all that into one portfolio, and we keep track of the entire money flow in your system. 

That means if you send something from your first exchange to your Bitcoin wallet, Accointing handles that connection through the transaction ID, and we create a so-called “internal transaction.” These internal transactions are not a taxable event. They even create a fee because of the transfer fee that you can use later as a cost that you spend to transfer those Bitcoin.

Tracking Your Money Flow

Use the internal transaction through Accointing to transfer the cost basis from the first wallet to your second wallet, and it is always kept with that Bitcoin. This internal transaction is excellent because you can go back and dive into your money flow, and you have everything completely tracked.

It’s nice to have for tax purposes and to prove to your bank where you got the funds. If you trade with higher amounts, banks want to know where you got that investment from because it could be some money laundering activity. If you can track the entire history, it makes it more accessible.

Bitcoin Tax Recordkeeping: Self-Spending Is Not Taxed

Bitcoin tax recordkeeping

Stephan Livera:
I see. Yeah. That’s one way to aggregate across all of your wallets and all of your exchanges into one thing. 

The other part is when you sell. That’s a capital gains event, typically, and you want to have the record to say this wasn’t a sale, this wasn’t me spending. It was me, self-spending. And so that’s not treated as a capital gain, etc., and therefore not taxed.

Bitcoin Tax Recordkeeping: Taxable Events

Bitcoin tax recordkeeping

Dennis Wohlfarth:
Exactly. Or you even use it when you send a gift or did some other activity with it so you can prove where. 

For example, in Germany, we are currently suing the government, and are in court because we don’t agree with the government on the tax regulations. 

We don’t agree that payment should be a taxable event. We believe that people who report their taxes in Germany are being truthful. These truthful people report some gains and, in theory, have to pay taxes, but it’s unfair. The government can’t prove that other people don’t report taxes or are guilty of tax fraud. They don’t have a way to go into the blockchain point or different exchanges because they are all over the world.

Therefore, they cannot prove that you traded, but they want forthright people to pay taxes, which is not legal in Germany. That’s why we’re currently suing the government there and fighting the tax regulation. To make it clear to them that they can do that for everyone, which is highly unlikely, or they’re not allowed to file taxes on crypto investments or crypto trading. 

That’s one part that we try to do for the German community. Clinton knows more about the US part. Some inspiring things are happening in the future. I mean, a few exciting discussions are starting where they are trying not to treat payments as a taxable event, which would be nice. Considering everything happening in the market regarding Lightning and Defi coming in, I don’t know how they want to do it.

Bitcoin Tax Recordkeeping: Taxation From A Capital Gains Point Of View

Stephan Livera:
Let’s talk a bit about that. This idea of payments and the taxation that occurs on them, theoretically from the capital gains tax point of view. 

So I guess what you’re getting here is for example’s sake, let’s say you buy $100 worth of Bitcoin, and then it’s $200 worth of Bitcoin. If you spent a portion of that, the point you’re getting out there is theoretically a capital gain on which the government wants their pound of flesh.

What are some different ways those situations are treated from a taxation law perspective?

You can find out more about how different situations are treated from a tax law perspective in our upcoming post along with Bitcoin tax strategies locally and overseas.

Stay tuned for Part Three of the Bitcoin Tax Strategies Podcast with our host Stephan Livera. 

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