Hello, My friend has BTC in a non-US wallet. He wants to transfer to US wallet so that he can use the money. He called Coinbase and was told he would have to pay taxes on the whole thing because the cost basis cannot be established. Is there a way to do this, legally preferred, but open to suggestions Thanks
Hold it for over a year, maybe your friend has already done this, that would lower the tax obligation. (I'm not a tax advisor so only an opinion, consult a tax professional would be best advice) When you say non-US wallet ,you probably mean non-US exchange, they should have the history of when he bought bitcoin and can print the history showing his cost-basis (or lookup the date and price on Coinmarketcap)? If self-hosted wallet, then it's not necessarily non-US, it's more blockchain location based, or Internet based, no geographical location
Ouch, definitely I'm not qualified. I'm in the process of selling bitcoins, started today, in fact, as yesterday was a US holiday., my cost basis is less than $150/btc so already talked to my tax accountant, purchased in 2013 For mined coins, I think they are treated like dividends or airdrops, so tax reporting is different. I mined some bitcoins, too, but forgot to ask my tax accountant about those, since I'm only selling the ones I bought. This is a good thread/reminder. Thanks! I think he can deduct mining costs (i.e. electricity, equipment cost depreciation, etc) but again, I'm not a tax professional.
The title of your post suggests that maybe you don't understand the issues here. In the US, for tax purposes, it is better to have a higher cost basis. You don't want to reduce your cost basis. You want it to be as high as possible, within the parameters of the law. When Coinbase says he will have to pay tax on the whole thing because the cost basis cannot be established, what they mean is that they will have to treat the cost basis as zero in their accounting system. If he then sells or spends the bitcoin, at the end of the year, they have to issue a US tax form showing that he sold that amount of bitcoin, and they will report the cost basis as zero on the form that they send to him and to the IRS. Their accountants have told them that is how it has to be reported. This occasionally happens with stock. Before everything went electronic, it was actually fairly common that someone would inherit stock from a deceased family member, and they would get paper stock certificates that were stored in a safe somewhere. They would then deposit those certificates with a broker to sell them. The broker would have no way of knowing what the cost basis was. If your friend has his own records to prove what his cost was for the bitcoin, then he can report that cost himself when he files his tax return for the year in which he sells or uses the bitcoin. He should not have any issues in the year that he performs the transfer to a US account. The issues will come up in the year that he sells or spends it. But if he has records to determine his cost basis, he can use that basis on his tax return. He should hire a qualified tax pro who understands US tax regs for crypto. If he mined the bitcoin, that does make it difficult to determine the basis. Whatever number he uses for basis on his tax return in the year that he sells or uses it, he needs to be able to back it up with solid documents, because the IRS loves to audit bitcoin transactions. I am a tax advisor in the US. BMK
Crypto mining is tricky. You have two parts: 1. At the time the coins are mined, that creates a taxable event at the current price of the token. This establishes your cost basis. 2. When you sell the token, you have capital gains, which is the difference between the price during part 1 and the sale price. So, let's say you mine 1 BTC at $10k, which creates $10k of income which often is offset by mining equipment, electricity costs, etc. Now, let's say you hold the 1 BTC for a few months and sell it for $15k. Then you have $5k of short-term capital gains (or long-term if you hold it for more than one year). It is a tremendous amount of recordkeeping if you're doing pooled mining where you receive fractions of tokens all the time. Now to confound your problem, you are doing this from overseas, so you have local and US rules to contend with. The big issue is whether or not he's a US citizen. If he's a US citizen, he should have been paying US tax on this all along in addition to the local taxes and it will be a bloodbath: taxed at ordinary income rates unless he can provide documentation for the origin of the coins and potentially re-file previous years to account for it. If he is not a US citizen, I would liquidate the funds overseas, then transfer the money through the traditional banking system where its provenance can be established. I'm not an accountant, but this was my understanding when I inquired about it a few years ago.
Cost basis is established on the "date acquired"... normally the day you bought something or the day you inherited. For a stock or property, there is a recording of the transaction somewhere. With BTC cost basis would also be the price you paid. If you didn't "pay" for it but rather mined, you should still have some sort of transaction record.... that is, you received it on one day and you can check the price on that day. However... you may have ordinary income tax due on the value at the time of receipt.... as though you "earned it" and was "paid" the value of the coin. (Not 100% sure on this point.) Any "costs of production" like electricity or computer hardware should be deductible (unless specifically excluded) or amortized as applicable. For those who bought when BTC was really cheap, nearly all of the value today will be capital gain.
You don't want to "decrease" your cost basis. That means you'll pay more tax. If possible you want to INCREASE your cost basis.... as the tax due is calculated upon the difference between cost basis and sale price. If you can't produce a record of your cost basis (usually, purchase price), then you must calculate taxes based upon "zero cost basis".... that is, the entire sales price is the "gain, subject to tax". Bottom Line... keep records. (Not a problem with stocks. Brokerage statements have that. Might be a problem with real estate.... purchase and sales date are documented, but any "capital improvements" you make to property can be added to the cost basis.... that is, if you keep records and can document. Definitely a potential problem with BTC*.) *If you bought your BTC years ago for "pennies", then effectively the entire amount at sale will be subject to capital gains tax.... as your "cost basis" will be "pennies". If you bought at $20,000, you need to have record of that.... or you'll get hosed on the taxes. If you have more specific issues, ask BMK. FWIW...