Crypto Taxes: A Never-Ending Maze of Madness

The IRS's Crypto Compliance Demands are Unreasonably Challenging

IRS Making Crypto Compliance Impossible

It seems that once again, the crypto industry is trying to fit into the regulatory round hole, but it’s like trying to fit a square peg into a round hole…while blindfolded…and with one arm tied behind your back. The proposed 6045 digital asset broker regulations are causing quite a stir, and for good reason. These regulations are filled with problematic requirements that make taxpayer compliance downright impossible. It’s like asking a unicorn to squeeze into a pair of skinny jeans. It’s just not going to happen.

So, what exactly are these regulations? Well, digital asset brokers are now being asked to report proceeds and cost-basis on a proposed Form 1099-DA information return, which is like a 1099-B but for digital assets. Sounds simple enough, right? Wrong. The complexity of cost-basis reporting creates multiple issues for both brokers and taxpayers, making the already daunting task of calculating crypto taxes feel like navigating a maze of madness.

The Battle of Cost Basis: FIFO vs. Specific Identification

According to the proposed regulations, taxpayers have two choices when it comes to cost basis: FIFO or specific identification. Now, FIFO is like the reliable old grandpa of cost basis methods. It deems the oldest purchases as sold first, just like a grandpa would deem the oldest candies in his pocket as served first to his grandkids. It’s predictable, it’s straightforward, and if you’ve been in crypto for a while, you’re probably familiar with FIFO. But here’s the catch: if you don’t choose FIFO, you’re thrown into the wild world of specific identification, where most of the cost-basis issues arise for digital assets. It’s like being thrown into a pack of hungry wolves while wearing a meat-scented cologne. It’s risky, it’s chaotic, and it’s bound to lead to some serious tax headaches.

The Nightmare of Specific Identification Requirements

Now, specific identification requirements are where things get really interesting. According to the IRS, taxpayers are responsible for specifically identifying the units of digital assets they sell BEFORE the trade happens. It’s like asking someone to predict the future before it even happens. Taxpayers have to dig through their records and mark the specific BTC (or any other asset) they intend to sell in their “crypto inventory”. It’s like trying to find a needle in a haystack without the luxury of a magnet. And to make matters even more complicated, if taxpayers use a broker, they have to instruct the broker which digital assets they intend to sell before-the-trade. It’s like trying to direct a squirrel to find its buried acorns. Good luck with that.

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But here’s the real kicker: if you don’t meet the specific identification requirements, your cost basis defaults to FIFO and you could end up with a tax liability that feels like a punch in the gut from a heavyweight boxer. Your specific identification dreams get crushed under the weight of FIFO, and you’re left questioning your life choices.

Impossible to Notify, Impossible to Calculate

These regulations were supposedly designed for securities sales, but crypto operates in a league of its own. It’s like expecting a cat to behave like a dog just because they’re both four-legged creatures. It’s simply not going to happen. Centralized exchanges like Coinbase and Kraken don’t provide a notification mechanism for specific identification, leaving taxpayers stranded in a sea of confusion. It’s like being lost in a corn maze without a map. And even if taxpayers could notify brokers, they still need a system to track and report the 1099-DAs on a specific identification basis. It’s like juggling flaming torches while riding a unicycle. It’s a balancing act that’s bound to end in disaster.

But wait, it gets even better. Crypto tax software providers, the knights in shining armor of the crypto tax world, typically include FIFO and other cost-basis methods like HIFO and CCFO in their software settings. But here’s the catch: these methods are just logic-based calculations that happen after the trade is made. They weren’t designed for taxpayers to identify digital assets before the trade. It’s like trying to bake a cake with a recipe that tells you what to do after the cake is already in the oven. It’s a recipe for disaster.

So, What’s the Solution?

Now, you might be thinking, “Is there a light at the end of this dark tunnel of tax madness?” Well, there might just be. The IRS should listen to the thousands of comments flooding in and eliminate 1099-DA cost basis reporting. Instead, they should switch to “proceeds only” reporting, which would solve most of the headaches. It’s like finding a secret passageway out of the maze and into the land of sanity.

But until that happens, we’re left with a never-ending maze of madness. Crypto taxes will continue to be a source of confusion, frustration, and maybe even a few tears. It’s like trying to solve a Rubik’s Cube blindfolded, with one hand, and while riding a roller coaster. It’s a roller coaster ride that never seems to end.

So, fellow crypto tax warriors, buckle up and brace yourselves. The battle for fair, reasonable, and manageable crypto taxes is far from over. But hey, at least we have each other to laugh, cry, and navigate this maze of madness together. Cheers to that!

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