FIFO Sucks, The Taxman F***s

in LeoFinance7 days ago

Neglecting accurate and complete accounting in crypto can be costly

Most countries tax profits on cryptocurrency and stock trades using the FIFO principle. What that means is that when you sell a stock or a cryptocurrency, you sell them in the order you bought them. First in, first out. If you trade stocks on a single platform, the platform itself does all the accounting for you. You also get clean reports. The above applies to most well-developed cryptocurrency trading platforms as well.

But the fun starts when you find yourself having bought cryptos many years ago and transferred them between different wallets and exchanges, some of which may have disappeared from the face of the Earth, or in case of wallets, simply forgotten.

To avoid the gigantic headache involved in tracking all your coins, you can just report the purchasing price as zero when you sell. Problem is that can be costly. Yeah, I know there exist software to automate all the accounting. But the problem with that is that you still have to have all the data at hand because you always sell the oldest coins first. What this does is that if your data are incomplete or very messy, the coins involved have become tainted in the sense that you will always lack the ability to provide a clean audit trail. New coins are different in the sense that if you and them have no history, you can start from a clean slate and keep your books in perfect order for perfect tax optimization.

The difficulty of using crypto is due to them being deemed property as opposed to currency

As long as cryptocurrencies are treated as property and not as currency by governments and tax authorities, there is zero chance they will become widely adopted as means of payment. Very few businesses are willing to accept cryptocurrencies as payment and not only because of the exchange risk but because of the added complexity of accounting.

The very low rate of cryptocurrency adoption as a means of payment also protects them from being banned by governments. Why bother to ban a new kind of digital property? The only type of governments that feel threatened by cryptocurrencies are those whose monetary systems are already very weak. Hence, we see the likes of Nigeria, Turkey, Russia (mostly to clamp down on opposition) or India making aggressive regulatory moves against cryptocurrencies.

Crypto has potential to bolster the dollar

In fact, the cryptocurrency sector may actually bolster the dollar hegemony. When cryptocurrencies are adopted by people under unstable regimes out of necessity, their currencies are further destabilized. That will also drive an increase in the usage of the dollar as currency in those countries. In Russia, for example, the 1990's saw widespread use of the US dollar as an everyday currency as inflation ran high.

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Taxes are a really complicated matter when it comes to cryptocurrencies that is for sure. Since I have never converted my holdings to USD fiat, it is not a worry for me right now.

I guess down the road I will have to delve deeper into this topic should I have need of converting my holdings to fiat.

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I agree with you on this. Those who think the USD is going anywhere anytime soon are mistaken. The global financial system is based upon trust and that takes a long time to develop. Plus, to act as the reserve currency, the banking system tied to it has to be advanced.

This is what happened 100 years ago when the USD started to take hold over the GBP.

We are in the same situation. The more disruption that occurs, the stronger the USD will become. Other currencies will bite it first.

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Yeah, I agree most other currencies will be in trouble first. I have to wonder though how the world is going to get out of the debt trap. I've heard talk about the ECB introducing perpetual bonds. Only interests would be paid. That's one potential trick.

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