Lots and Capital Gains Discussion

[John Ralls]

> On Dec 30, 2015, at 1:55 AM, Emily Zora <milliehandshrimp at gmail.com> wrote:
> 
> Hi all. I've been working a lot with bitcoin lately and I've noticed some
> deficiencies in the way lots and capital gains are handled, particularly
> when multiple wallets (accounts) are involved. From my googling, this
> appears to be an acknowledged problem. Before taking a stab at trying to
> fix, I wanted to get some input from y'all.
> 
> Using a FIFO policy, say I bought 1 btc in wallet #1 two years ago, 1 btc
> in wallet #2 one year ago, and today I sell the 1 btc from wallet #2, if
> I'm not mistaken, the cost basis and acquisition date for the sale should
> be the purchase in wallet #1 two years ago, not the purchase in wallet #2
> last year. However, with current implementation, the purchase from the same
> wallet as the sale would be used.
> 
> Options to fix it: 1) track lots by commodity rather than account. 2) allow
> lot tracking at a common parent account. 3) Keep the current implementation
> and search for other accounts in the same commodity and kinda hack it to
> work.
> 
> Another issue: Wash Sales, transfers and acquisition date
> 
> When there is a wash sale according to US tax law, no capital loss is
> allowed for the recent sale, instead the loss is added to the cost basis of
> the new purchase and the acquisition date is adjusted by the days
> previously held.
> 
> With current implementation, a lot does not track its acquisition date.
> Instead, you use the earliest split. This is also a problem with transfers
> between accounts, as the earliest split will be later than the acquisition.
> Propose adding an acquisition date field to lot.
> 
> Let me know your thoughts.

If we're going to offer the option to consider lots across accounts for basis policy it should be up to the user but that in most cases it should be per-account. I'm not an accountant or enrolled agent, but my understanding is that the IRS expects you to apply your selected basis policy (FIFO, LIFO, average cost, or designated lot) per account, not per asset.

Consider the analogous case where you own shares of XYZ in two accounts: If you sell the shares from one of the accounts the broker will report on your 1099-B the basis and period for the shares in that account without reference to the other account, even if it does happen to be at the same broker.

We need to ask our European colleagues about the wash sale rule — which says that if you buy a like asset (most commonly means shares of the same stock) within 30 days of selling at a loss you don't get to book the loss but instead increase your basis in the new shares — do your tax laws have such a provision?

I'm pretty sure that that *is* a case where the IRS would expect you to consider multiple accounts: If you sell XYZ at a loss from broker A's account and buy it a few days later in broker B's account, neither will know that you've got a wash sale and it won't show on your 1099-B, but the IRS will object if they catch you.

It might anyway be venturing too much into tax accounting for GnuCash to implement that.

Rather than simply adding a date field to the Lot class I think we need a way to maintain lot identity through a transfer. That would require a more fundamental change in the way lots are handled within GnuCash so that a lot is always created when buying an asset that should be managed with lots (lot-able for brevity) and explicitly linking lots and splits. What's lot-able may depend on its intended use as well as what it is: For example, currency wouldn't normally be lot-able, but if one does forex trading where the sole reason for holding the currency is to make capital gains then it might become lot-able. That would be a question for one's tax accountant.

Regards,
John Ralls