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Using Stablecoins Between Wallets For Tax Tracking

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@travelwritemoney
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Trying to figure out crypto taxes is challenging. If one were to simply do one transaction here or there, it would not so much trouble. However, if you are even somewhat active as an investor, dabbling in DeFi, and transferring between wallets, then things can get gnarly when it comes time to figure out your taxes. So far, I have not found a single tax accounting software capable of sorting out taxes for all the crypto wallets and exchanges I have used.

Before going into stablecoins, perhaps I should mention that it will be much easier for you to use as few platforms and wallets as possible. In particular, use ones that are easily supported by crypto tax software.

The Problem

One of the challenges with many of the software packages is that they don't easily recognize transfers between wallets. When it comes down to it, they are mainly interested in your positions as a whole. When it comes to transfers, the software can ignore them, treat them as sales and deposits, or it just might figure out that there was a transfer.

If transfers are ignored, the problem is that you'll have no accounting of your transaction fees. If the software treats transfers as sales and deposits, you will be realizing capital gains and receiving income in your sending and receiving wallets.

One of my biggest problems is that the software often cannot figure out the cost basis for some transactions. At this point, I can go through hundreds of transactions to try to figure out the cost basis, or let the software count it at zero cost basis, which inflates my capital gains. I often leave the cost basis at zero as I can't make heads or tails of it either.

This zero cost basis problem is often the result of crypto that is moving between exchanges or wallets.

Stablecoin Saves the Day

The other day, I read an article on Leo Finance detailing how to move out of HBD using BHBD-BUSD using PancakeSwap on the Binance Smart Chain. This was when the light bulb turned on in my mind.

First, having this alternative way to move value off of HIVE is extremely useful. BUSD is accepted on the exchanges I use. It's an alternative. But, it is still gnarly. To the tax people, converting from HBD to BHBD is considered one sale.

Then converting from BHBD to BUSD is considered another sale.

And converting from BUSD to fiat is yet another sale.

The only blessing in all of this is that stablecoins largely hover around $1 in value. That means that guessing the cost basis is not that difficult. You can also use this to figure out how much you lost to transaction fees.

The Revelation

THIS was my big revelation. If I'm transferring from an exchange wallet to a personal wallet (or the other way around), then I would be better served by transferring stablecoins rather than the intended crypto. My Crypto.com DeFi wallet, for example, is able to do swaps within the wallet.

If I want to transfer $500 of BTC, then I would sell it into USDC, transfer to my wallet, then buy back BTC or WBTC within the wallet.

The only problem with this is that you are going to realize gains every time you convert to stablecoin before a transfer. However, keep in mind that when the software and I both fail to figure out a cost basis, it's costing more in taxes than it should. I'd rather pay capital gains than eat the cost of transactions for which I can't figure out the cost basis.

When tax time comes around and the software can't figure out the cost basis of an incoming transfer, I can always guess that it was $1 for the stablecoin. On average, some will be slightly over, some will be slightly under. It is going to be more accurate than a zero cost basis.

While this does increase the number of transactions. At least they will make the work of untangling the gnarled mess easier. I may very well make stablecoins the intermediate step between all transactions, except going straight to fiat. This is a primitive solution. But, it is effective.

Posted Using LeoFinance Beta