Another new year brings another tax filing season. While digital currencies didn’t replicate the banner year that they enjoyed in 2013, I like to think that both the community and the supporting infrastructure matured enough in the last year that bitcoin might actually still be a thing five years from now. However, that also means that with each passing year, the likelihood that the tax man will continue to ignore slipshod digital currency reporting shrinks a little more.
Digital currency tax reporting can be a daunting task. As property, digital currencies (the IRS calls them “virtual currencies”) are treated in much the same way as stocks and bonds: every purchase and sale/exchange must be recorded and taken into account at tax time. Even a casual user could have dozens, if not hundreds, of taxable events to report in a given year. LibraTax is a new(ish) tool for keeping the reporting straight.
Before I continue, I offer both a disclosure and a shameless self plug. Though I am not an employee of Libra Services, per se, I am a member of Libra’s professional advisory board. I provide tax and accounting advice as it relates to the platform and I have also assisted with testing in the past. At the risk of sounding like a shill for Libra, I actually do think it’s the best thing out there. However, LibraTax is only a tool for managing information and not a substitute for professional tax advice. Libra won’t prepare or file your taxes for you. If you don’t know what to do with the information once you have it, then feel free to shoot me an e-mail. My CPA and Legal services firm is always accepting new clients.
Getting Started
Once you’ve created your account with LibraTax (easy and unintrusive- no need to explain), you will need to consolidate your activity for the year in the software. Why do this? Because the IRS views your trading activity as a unitary activity, meaning that all of your trades will be treated as if they occurred in the same wallet or account. Failing to include ALL of your activity may adversely affect Libra’s ability to produce an accurate calculation. You could end up paying taxes that you don’t owe.
Libra uses an API to directly import trading histories from most of the major exchanges, but you have to share some information to make this work. If you don’t want to use the automatic import feature, have activity that isn’t on a supported exchange, or have local wallet activity, Libra also accepts a generic import in .csv format. Beware: the format shown in the example on the website must be followed precisely. If your file won’t upload, then you most likely made a mistake in your formatting.
Libra fills in the blanks where you have missing information. For example, if you provide the date and amount of BTC, the software will look up the exchange rate in USD on that day. Other information is optional, but will give you a better output file.
Calculating Gains and Losses
The free version of LibraTax will support of to 500 transactions and calculate taxes using either the first in first out (FIFO) or last in first out (LIFO) methods of lot tracking. For $19, users gain access to the “premium” version that will support up to 5000 transactions and also provide an “optimized” tax calculation. The optimized calculation replicates manual or specific lot identification. Note that the 5000 transaction limit is total, not per year.
For data loaded into LibraTax, all disposals are automatically counted as sales and all acquisitions are automatically calculated as purchases. This means that users must manually select (from a drop down box) the type of event for each transaction. Examples include income, gift / tip, sale, purchase, etc. Not all event types have tax consequences, but Libra knows what to do in each case. If and only if incoming and outgoing addresses are included on your transactions, then Libra will automatically identify transfers between wallets that you control and ignore them for tax calculations.
Once all transactions are loaded and categorized, LibraTax will calculate a report of gains and losses based on all the taxable disposals during the year (sales or exchanges for other property). Users are free to select the most advantageous reporting method, but the method chosen should generally be consistent from year to year. A word of caution here: LibraTax will not track disposed lots from previous years, so users must be careful to manage the data import in a way that ensures that the same lot isn’t “sold” more than once. This is a known limitation that Libra’s developers are working to eliminate.
Tax Reporting
Once a satisfactory solution has been generated by the LibraTax platform, users have the option to either print or export a listing of reportable disposals categorized by character (short term or long term).
Virtual currency transactions are reportable on Schedule D of Form 1040, just like stocks and bonds. Conveniently, the IRS allows summary reporting on Schedule D where records are voluminous, so long as the source data is also included as an attachment to the return. This means that just a few entries on the return may be enough to account for thousands of transactions using Libra’s report.
LibraTax is the best of the limited selection of tools out there for tracking and calculating capital gains on digital currencies. The software is under continuous development, so even the minor imperfections I mentioned are likely to be fixed in the coming months. Whether you liked it or hated it, if you have used LibraTax, please share your experience in the comments below.