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I bought a bunch of BTC in early 2013. Since then, I've bought very small parts of Bitcoin every now and then up until now, for much larger (and increasing) price.

Many of those "original" coins have been lost. While there was a "hard fork gold rush", I gained some more from the ones I already had by claiming "Bitcoin Gold" and "Bitcoin Diamond" and all kinds of such things and then trading them back to real Bitcoin using various non-KYC/AML webpages which allowed me to do this without registering any account. I can't even remember the name of those services, let alone the exact details of when I did it or how much I got.

I have no idea whether the coins I have left today are all from those original coins, which I bought for next to nothing, or if some of them are part of the ones I bought in later years, at a much steeper price. I have no idea how I'd even figure that out.

With such a messy situation, how can I possibly calculate how much taxes I owe to the government if I were to sell/spend my coins? I seriously don't understand how I can possibly determine how much "gains" I've had considering the messiness of it all.

With this in mind, what am I supposed to do? Assume that all the coins I have left are part of my first batch of coins, even though this will mean that I have to pay taxes on basically the full balance? And even if I go that route, I can't prove how much I paid or when. (It was Localbitcoins pre-KYC/AML.)

I don't understand how I'm supposed to figure this out, and the government's website is (of course) to no help. What would be the most reasonable thing to do? Just "bite the bullet" and pretend that I got all the coins I currently have for free, and thus have to pay taxes on the entire balance?

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    This sounds like a question for an accountant or tax advisor who is familiar with your local tax code.
    – Pieter Wuille
    May 15, 2021 at 16:16
  • Maybe a better question for Money.SE. You'll have to specify your jurisdiction.
    – Nate Eldredge
    May 15, 2021 at 22:49
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    The government's position is likely to be that you were supposed to be keeping those records all along, and if you didn't know you were supposed to, well, ignorance of the law is not an excuse. So not being able to deduct the actual cost, but only what you can prove (or nothing at all), could be the price you pay for this omission. Kind of like how if you donate to a charity but don't keep the receipt, you can't take the deduction - if you want the tax benefit, you're responsible for the associated record keeping.
    – Nate Eldredge
    May 15, 2021 at 23:05

2 Answers 2

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It may be a bit of work, but you should be able to trace on a blockchain explorer (eg blockstream.info) when you acquired the bitcoin with the current addresses you have.

If you can't prove how much you paid for it with a record for each purchase, your tax jurisdiction may accept a historic exchange rate from a well known and reputable public exchange at that time. I suggest asking your government if that is a possibility first, before reporting that you received the coins for free.

To calculate your gains from your purchases and sales, different accounting methods exist (FIFO, LIFO, WAC, etc). If your government is not clear on which method they accept or don't know how to do that, you may need to contact a local tax advisor to help you out further.

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THIS IS NOT FINANCIAL ADVICE SPEAK TO AN ACCOUNTANT FOR CONFIRMATION

Because your gains are 'unrealized' you may consider not realizing them and instead finding a way to take out a loan against your known holdings. That way you can mitigate taxes from the liquidation. Don't take my word for it though, it's just something I have heard of before, ask an accountant or do some research on it. Also I do not condone putting the bitcoin into a centralized loan product, there are decentralized permission-less bitcoin backed loan products in development currently which I think would be worth holding out for.

Here is one source discussing what Im talking about: https://law.stackexchange.com/questions/64713/can-you-avoid-capital-gains-tax-by-taking-out-a-loan-and-not-repaying-debt

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