How to file taxes on cryptocurrency if multiple sources of funding

[curio1]

Hi! I've been doing some investing with cryptocurrency on the side this year with both my money, along with my fiancé's money. Unfortunately, I haven't been keeping track of what I do with each person's specific money, so now it's all just in a giant pool.

In order to calculate our taxes, I was thinking of setting up a general partnership where we can both specify I put in '$xx' and she put in '$yy' and hopefully settle taxes through Form 1065. I bought some coins last year with my money while she started contributing this year, but haven't created the partnership yet.

Would this be an issue since the EIN isn't created yet, or can I retroactively say that our business was created earlier this year? Or if anyone has any other suggestions! Thanks!

[rjs]

It seems unnecessarily complicated to form a partnership just to solve the problem of not having good records. Having a partnership might involve fees and filing requirements that you'd rather not deal with. And forming a partnership is not going to solve the recordkeeping problem that you are trying to solve. The tax return for the partnership has to allocate the partnership income to each partner. So you would still have to figure out how much each of you contributed, bought, and sold.

I would suggest instead that you do your best to figure out what each of you bought, sold, earned, and now own. File your individual tax returns on that basis. Write it all down in case the IRS questions your numbers. Then split your account into two separate accounts, keep your money separate from now on, and start keeping detailed records.

[curio1]

Ah, darn - the process of creating a partnership looked relatively trivial, but I may have oversimplified it. 

I have how much each of us initially contributed, as well as our swap/farm capital gains, and was hoping to just use that ratio to split each partner's income. 

I'll probably end up taking your advice and consult a lawyer, see what they recommend, and might be in store for some tedious book-keeping. Unravelling the tangled mess of swaps sounds horrible, since nothing was really segregated into 'buckets' during all of the trades, but hopefully can do better next year. Thanks!

[rjs · Accepted solution]

It seems to me that using the ratio would be a reasonable way to estimate your incomes for 2021, and it's a lot simpler than forming a partnership. You could file your 2021 tax returns based on the ratio, then start keeping accurate detailed records for 2022 and later. This is just my personal opinion, and not official tax advice. Check with a tax professional and see what they think.

It would be better still, as I suggested earlier, to divide your investments into two separate accounts instead of having everything in one "giant pool."

The IRS is on the lookout for people who aren't properly reporting cryptocurrency transactions. If they question your tax return, you want to have simple clear records so that you can easily and convincingly show that you reported everything correctly.

[curio1]

I agree - not having to form a partnership would be amazing news; You are right though, definitely wish we had kept it separate in the beginning, but once we get married, hopefully things will probably get a bit easier. Thanks again for your help! 

[fanfare]

For starters, partnership tax returns have to be filed on March 15th, not April 15th and a K-1 issued to the partners. There is a serious penalty for late filing.

It gets worse from there.

Just reach a handshake  agreement with your co-investor on how to split the profits and losses.

[curio1]

Hi again! Just took a look at some of the required tax forms - it seems that I would have to file Form 8949 which would list all of my transactions and then put the summary on Schedule D. 

The original plan was to split the capital gains/losses using a ratio, but it seems to me that would not be possible since we have to list each individual transaction? Hopefully I'm just missing something - thanks!

[rjs]

You're not missing anything. The overall ratio idea doesn't really work. You have to report your own sales on your own tax return and your fiancée's sales on her tax return. Hopefully you have or can retrieve some kind of records of each sale. If you sold coins that were purchased with commingled funds, you would have to each report your proportional share as if it were two separate sales. You could use the ratio to calculate your shares. There might be no choice but to fudge your 2021 tax returns. You can probably get away with that this year because the crypto exchanges don't report transactions to the IRS, as far as I know. But there's a big push in Congress to require them to start reporting, so I wouldn't count on the lack of reporting continuing.

I will repeat, with stronger emphasis, my earlier suggestion to consult a local tax professional and see what they suggest. And get your accounting straightened out in the next week so you can start off right for 2022.

[curio1]

Makes sense - There might be ways to make it slightly easier (have some long-term token holdings that I can just delegate to her). Got swept up with the holidays, but definitely need to stop putting off talking to someone. Thanks again for your advice!

[fanfare]

you're going to marry this person?

you are swirling in a tempest in a teapot.

once you file a joint return, your capital gains are combined on Schedule D.

until then, for reporting purposes, just treat the transactions as belonging to one of you.

[DanielV01]

I like what @fanfare suggests because crypto reporting can be extremely complicated to figure out whose investments belong to whom.  Until things are regulated to where crypto exchanges send out documentation to report all transactions, this is still a bit of a manual process.  Many of the exchanges have tools to either download .csv files or even attachable 8949 documents, but they are still manual calculations based on when transactions and initial investments were made, and what method you are electing to use to report the transactions.  (Whether FIFO, LIFO, or some type of optimization, for example). 

Splitting that via individual returns is near impossible to do accurately, particularly if you have a lot of transactions.  (It is not uncommon for there to be hundreds of crypto-transactions in a year).  A Partnership would more accurately address splitting, because you claim everything together and then split out the amounts to each, which can be based off of the percentage each invested in, for example.  But as commented above, a Partnership creates a separate return, and if you are going to get married, it would be a lot of extra paperwork for no real tax benefit or "necessity".  

However, there is one last factor to consider, and that is how much capital gain one person individually would have to claim.  Depending on the other income of each individual, it is possible that for one person to claim all of the income generated, it could result in a significantly higher tax liability than if you go through the extra work of a partnership or trying to figure out whose income is whose through your personal returns.  As mentioned above, it is probably a good idea to speak with a tax professional in order to make the best overall choice for your situation.

@curio1