It’s tax season again, and unlike last year at this time—when many Bitcoin investors were sitting on exponential 2017 gains—there may be another reason for cryptocurrency holders to file their taxes: the possibility of a Bitcoin tax refund.
The price of Bitcoin fell nearly 74% in 2018, making it likely that many people sold their cryptocurrency last year at a loss. And just like the IRS requires paying taxes on capital gains, so too can losses be deducted on tax forms, lessening what tax filers owe or increasing their eligibility for a tax refund.
But figuring out the Bitcoin price when you bought it—also known as cost basis—and the price at which you sold it may be harder than it seems, says Jake Benson, founder and CEO of Libra, which built the first cryptocurrency tax calculator. That’s because the IRS does not require cryptocurrency brokers to provide clients with the traditional form, known as a 1099-B, that stock brokers must use to provide such information to customers, Benson explains on the latest episode of Balancing the Ledger.
“The burden is left upon the fund or the individual that’s trading to track cost basis, and this is extremely challenging,” says Benson, calling on the IRS to update its guidance on the issue. “Some customers track their cost basis, some rely on proceeds, and it’s a really challenging scenario.”
TurboTax and H&R Block—the mainstays of do-it-yourself tax filing—may not be sufficiently versed in the complexities that come with cryptocurrency trading, Benson adds, so many people might want to seek out an accountant specializing in crypto.
Libra works with institutional cryptocurrency investors and firms, including Circle and Mike Novogratz’s Galaxy Digital, helping them calculate their investment performance and net asset value (NAV), and produce financial statements for auditors—some of whom are also Libra clients.
Those services could also be a stepping stone towards the approval of a Bitcoin ETF, or exchange-traded fund. The U.S. Securities and Exchange Commission (SEC) has rejected multiple applications for a Bitcoin ETF, citing a lack of oversight and safeguards, as well as concern that it would be difficult to consistently calculate NAV, and that Bitcoin trading “seems impossible to audit effectively.”
Benson, however, thinks Libra may be able to help with at least some of those problems. “I think it is currently being solved,” Benson says. “We’re not solving every piece of the infrastructural issues, but on an auditability side, on an evaluation side, yes, that is what we focus on.”