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Crypto and the IRS: Why It Doesn’t Have To Be So Taxing

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With cryptocurrency prices and trading volumes soaring, more and more Americans lament having to figure out how to report their earnings to the taxman. Inaccurate reporting on a tax return could land one in hot water and create lots of hassles.

With the Coinbase/IRS saga continue to garner a lot of attention, it is clear that the U.S. Department of Treasury is paying closer attention to how digital currency earnings are accounted for, especially given the meteoric rise in prices and investment returns. With tax season in full swing, it is evident that the vast majority of tax accountant are unaware of what to do regarding this key element of the return.

Perry Woodin, CEO of Node40, an Albany, New York-based blockchain infrastructure service provider for the Dash network says that for any digital currency user, the hardest part about tax compliance is calculating gains and losses. “There is no way to simply look at your transactions and come up with an accurate gain or loss. What is needed is software that can evaluate every transaction and determine the cost basis of each input.”

Intrigued by the problematic scenarios that could ensue from this issue, Woodin and his staff set out to create a blockchain-centric solution to address it. Known as Node40 Balance, this new tool will allow U.S. taxpayers with the ability to report every single transaction and digital currency gain during the calendar year, with cost-basis calculations accurately pulled directly from the blockchain. This data can then be migrated over to IRS Form 8949 for seamless filing.

Node40 Balance is now available for Dash users, with Bitcoin features set to be released shortly. International users can use Node40 Balance to get their gains, losses, and income. There are plans to add report generation features for additional tax jurisdictions as the software evolves.

Two years in the making, Node40 Balance, has been under comprehensive beta testing using real-world use cases. The product has been highly anticipated by Dash traders, miners, accountants, lawyers and tax professionals.

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The need for the Node40 Balance tool is critical for two simple reasons. First, government direction for tax reporting digital currency has been sparse at best, given that the IRS policy for digital currency users was last updated in 2014. Despite the fact that that digital currency is taxed as property, most people are unsure as to how to properly calculate gains, losses, and income from incredibly small fractions of a currency with different valuations and different days held.

A second reason is that current means of tax reporting are categorically flawed; people currently self-report without taking minute-by-minute price fluctuations into consideration, or use existing software that favors aesthetics over accuracy. As a result, says Woodin, “the burden of calculating tax liability falls completely on the user.” 

“The practical reason is that we needed a way to generate tax forms and worksheets for our own tax filing. So we pushed hard to get Node40 Balance released in time for Dash users to file their 2016 tax liability. What is unique about Dash is the masternode owners are generating ordinary income. And masternode owners needed a way to find out what their tax liability is.”

Absent of this tool, Woodin says that working through these tax complexities can be a nightmare. “It all comes down to the fact that digital currency is treated as property and thus each transaction triggers a taxable event. Every single transaction is made up of one or more inputs. Each input can have a gain or a loss. The reason this is so complex is that each input can have a different valuation based on when a user received the asset.”

He says to imagine paying for goods and services with gold chunks that you acquired over time. Each piece of gold will have a different valuation based upon how much it weighs (i.e. how much you have), and the price at which you acquired it. If you paid for an item with multiple gold pieces and needed change back, you would have to chip off a bit from one of the chunks. The question then is what is the value of the gold you received as change?

“In digital currency, the same problem exists. The beauty of digital currency is you can view the transaction details on the blockchain and come up with precise values for every bit of digital currency you possess.”

Woodin says that as his company continues to enhance the interface, they will be working on making the API accessible to businesses seeking a blockchain accounting solution. “We can easily imagine the Node40 Balance accounting algorithms being used by Point of Sale (POS) systems as they work to incorporate digital currency.”

Concludes Woodin:

“In business and life, every penny counts. If you are not accurately calculating your gains, losses, and income, you could end up leaving money on the table. We want this to become an indispensable tool for every digital currency user across America.”