Let's say I buy a crypto on an exchange and transfer it to my wallet. I can spend it from that wallet, or transfer it back to an exchange and trade, or send it to another wallet multiple times etc. How does Bitcoin.tax know how to classify that specific crypto as short or long, and how does it determine it's specific identification method.
Posted May 10, 2021, 6:07 PM UTC
You input an API key. It looks at all of your buys and sells on the exchanges that you use.
Then it gives you multiple options for taxation. FIFO, LIFO etc. I believe it’s based off the exchange data, not actual BTC address tracking software.
I’ve used it for three years, and have been pretty impressed. But I am no CPA.
I’m not sure if this helps but I’ll reiterate what Sal said in that the route that your crypto takes is irrelevant. Only buys, sells and a few other transactions like fees and maybe income are counted.
Let’s say:
Transaction 1: Buy 1 BTC on 2019-01-01 for $3000 ($3000 per BTC) in Coinbase
Transaction 2: withdrawal to your ledger, fee of 0.001 on 2020-01-01 (FMV is $4000 per BTC)
Transaction 3: Buy 0.1 BTC in 2021-01-01 for $4000 ($40000 per BTC) in Coinbase
Transaction 4: transfer 0.1 BTC from your ledger to binance, fee of 0.001BTC (fmv of $50000 per BTC) on 2021-04-01
Transaction 5: sell 0.1 BTC in binance for $5500 on 2021-05-01 (55000 per BTC)
Now depending on what you select, FIFO, LIFO, etc. The tax software will identify your short and/or long term capital gains.
FIFO Your capital gains are: 5500-300=5200 taxed as long term capital gains given that it’s using the BTC bought in 2019
LIFO Your gains are: 5500-4000=1500 taxed as short term capital gains given that this calc is using the BTC bought in 2021
Expenses for 2021 are 500 (transaction 4) in both cases
As you can see it doesn’t matter where you bought the crypto or where they are or the route
I started using bitcoin tax in 2018, and I noticed all the data from previous years rolls over to the next. So, I assume if you’ve entered in all that past data it’ll default to FIFO, or whatever you set it to
I appreciate the reply but that's not what I'm asking. It's kind of hard to explain.
How does it track a specific input through multiple different addresses. It can track the first transfer from an exchange to a wallet address, but if I transfer it to another wallet I don't think it can keep track of it anymore.
I don't know if this explains it any better.
Our system doesn't require transfer data. Deposits and withdrawals and other transfer data shouldn't be imported. The original acquisition information for those coins, and any taxable dispositions of those coins, are all that matters. As long as you import that data, everything will be properly tracked.
For example:
You buy 1 BTC on Coinbase.
You transfer it to Binance.
You sell 1 BTC on Binance.
We don't need to know you transferred from Coinbase to Binance. All we need to know is how much it cost you and when it was acquired on Coinbase (which we will know when you import your Coinbase data) and what you disposed of it for, and when (which we will know when you import your Binance data).
Hopefully this clears things up!
What if i transfer it to ledger, or trust wallet, then to electrum, then back to an exchange for trade/sale. Does it track these scenario's, or will it for example, default to short term fifo if it can't track this scenario.
Sometimes my inputs travel to multiple addresses before use.
Like Sal said, transfers are irrelevant. Only cares about buys/sells. Bitcoin.tax doesn't actively trace your transactions. It only calculates what you put in, or import.
Could I ask you what the 'Tax Rate' drop down button in bitcoin.tax is for? Why are there options for the tax rate?
Your tax rate is based on your income bracket. We list tax rates so you can see an estimation of the taxes you may owe. It doesn't have an effect on the calculation itself.
Does the program recognize (i.e. have historical price data on) each and every shitcoin?
Sometimes a new coin pops up and it takes a bit of time for us to fully integrate pricing for that coin, but for the most part yes, we have historical pricing for most crypto. You can see our current coin pricing here: https://bitcoin.tax/prices