Cost Basis -- What do I not understand???

Walter Kraslawsky
Walter Kraslawsky Member ✭✭
edited November 2018 in Investing (Windows)
I am using Quicken 2016 on Windows 10. Recently I started putting money into bitcoins on http://gdax.com/, and know what I am doing -- but Quicken is really confusing me with what it is showing me on cost basis after a small amount of day trading.  Without giving attempting to advise me on trading strategy or wisdom of bitcoin investments, can someone simply tell me how to fix what Quicken is telling me?

With approximations for simplicity, I bought $400 worth at $5000 per bitcoin (B0.08) on Aug 31 just before it dropped.  Since I believe it is worth keeping with cost averaging, I bought another $200 worth at $4000 per bitcoin (B0.05), then bought another $300 worth at $3000 per bitcoin (B0.10).  So my cost basis is $900 for B0.23.  With the price back up to $4200 the market value is $966.  No problem.

Where the problem comes in is when I sell B0.08 at $4200 for $336,and then buy back $336 worth at $3733.33 and get B0.09.  Now my account, which used to have B0.23 has grown to B0.24.  I still invested only the original $900.  

Yes, when I sold B0.08 I can specify lots and show either a loss ($336 - $400 = -$64) with FIFO, or a gain ($336 - $240 = $96) with LIFO.  One or the other goes on my Schedule D next year.  But my problem is that I now have B0.24 in my account and I put $900 into the account.  So why is Quicken not showing a cost basis of $900 for the B0.24?????

Comments

  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    edited November 2018
    What does Quicken show as the cost basis in each of the selling scenarios you describe above?

    Your cost basis after the sale will be different depending on which lots you sold.

    If you sell all .08 shares of the first lot, after the sale you have .15 shares left with a basis of 200 + 300 or $500

    If you sell the .08 shares from the 3rd lot, you still have .15 shares left, but the basis is 400 + 200 + (.02*3000) or $660

    The fact that you subsequently used the proceeds of the sale to buy more shares does not affect this.
       

     
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  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited September 2017
    Thanks for the reply, Jim (and anyone else working on a reply).  I had to try to explain the problem to eventually figure it out.  I had been computing the cost basis of the account as a whole using the money deposited and retained before and after trades.  $900 went in, and nothing came out so the cost basis was $900 in my mind, even with realized gains or losses.  In the case of LIFO, with a $96 gain being reported on Schedule D, I failed to consider what would happen if I bailed out -- selling all coins and reporting the final results on Schedule D.  If the cost basis of the account stayed at $900 this way and I took a final cash out sale of bitcoins and withdrawal of $900, then I actually had no gain or loss.  So what happened to the original $96 gain?  

    The answer is that I had to stop thinking of the money sent to GDAX as the only investment. In fact I needed to do what Quicken was doing; i.e. counting the reinvested gains. Although I was approximating the real numbers, if I had done the trades exactly as stated here then Quicken would have shown the cost basis of the coins as $996.  I didn't see this because in reality the non-$900 basis in Quicken was the some of several smaller trades. Once I plugged in exactly as stated, the source of the discrepancy was clear.

    Bottom line, in this example, with an initial capital gain of $96, if I later cashed out for $900 Quicken would have shown I then had a $96 loss -- because my cost basis was increased to $996 by the earlier gain even though no cash entered or left the account until the end.

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  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    edited November 2018
    Also note that selling an asset at a loss then immediately buying back the same asset as in your example is what the IRS calls a Wash Sale and you would NOT be able to claim the loss on Schedule D. 
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  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    edited November 2018
    Another way of thinking about cost basis is that it is the total amount you paid for the shares that are currently in the account.

    If the share price has varied and you sold some along the way, then the cost basis depends on which shares you sold, and is generally not the same as your net investment.
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  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited September 2017

    Another way of thinking about cost basis is that it is the total amount you paid for the shares that are currently in the account.

    If the share price has varied and you sold some along the way, then the cost basis depends on which shares you sold, and is generally not the same as your net investment.

    Right.  I now understand that the amount I paid for bitcoins is not just the money deposited in the account from outside but also includes gains and losses from selling and repurchasing bitcoins within the account. Once I fixed my spreadsheet to include reinvestment it agrees with Quicken perfectly.

    That will help me next April when I make a final decision which lots I sold in 2017 to either maximize or minimize my capital gains.  I still have to do a bit more research to make sure I don't make an error regarding wash sales considerations.
  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited October 2018
    Well, the problem got a lot more complicated now that I am day trading BTC, ETH, and LTC.  Last night I traded BTC directly into LTC, buying 182 LTC with 1.58522 BTC.  The transaction never touched the USD currency.  But I had to pick a USD number to get the transaction into Quicken. 

    As soon as I did that, Quicken calculated a new cost basis for both cryptocurrencies -- and when Quicken tells me my gains and losses next April all the USD numbers are going to be arbitrary.
  • Sherlock
    Sherlock SuperUser ✭✭✭✭✭
    edited November 2017

    Well, the problem got a lot more complicated now that I am day trading BTC, ETH, and LTC.  Last night I traded BTC directly into LTC, buying 182 LTC with 1.58522 BTC.  The transaction never touched the USD currency.  But I had to pick a USD number to get the transaction into Quicken. 

    As soon as I did that, Quicken calculated a new cost basis for both cryptocurrencies -- and when Quicken tells me my gains and losses next April all the USD numbers are going to be arbitrary.

    the USD numbers are going to be arbitrary.
    The numbers are not going to be arbitrary.  They will based on the price and date you provide for the "Sell" of BTC shares and "Buy" of LTC shares.  Alternately, you could use "Remove" and "Add" to avoid triggering the gain (or loss) in Quicken.  The "Add" allows you to reset the cost basis and acquisition date.
  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited November 2017

    Well, the problem got a lot more complicated now that I am day trading BTC, ETH, and LTC.  Last night I traded BTC directly into LTC, buying 182 LTC with 1.58522 BTC.  The transaction never touched the USD currency.  But I had to pick a USD number to get the transaction into Quicken. 

    As soon as I did that, Quicken calculated a new cost basis for both cryptocurrencies -- and when Quicken tells me my gains and losses next April all the USD numbers are going to be arbitrary.

    Thanks for the reply.  I do understand your suggestions.  But you might have other advice with more information.  I believe removes and adds would be the worst choice.  I'm trying to do this with a discipline that will face any IRS audit test of reasonableness.

    The basic problem is in trying to determine the fair market USD value of multiple volatile coins that will eventually be frequently and rapidly traded. Here is a specific example, that highlights just how difficult it is to determine the fair market value of just one trade.  Then multiply this when it might be happening daily in the future with day trading.

    First trade:

    I placed a limit order to buy 182 LTC at the current 0.00871 bid last night.  GDAX automatically calculated the 1.58522 cost, which I had available.  GDAX then put my 1.58522 BTC on hold -- similar to escrow -- until the order is filled or killed, and added my offer to the book on a first-in-first-out basis waiting for someone to sell to me.

    Market buy and sell orders had been, and continued, whizzing back and forth between that 0.00871 bid and the concurrent 0.00872 asking price.  After a while I had no idea where I was on the book, because there had been hundreds of identical bids at that price before mine and hundreds of identical bids at that price added after mine. (Go to GDAX.com and watch the LTC/BTC book for a live action view of this in real time). 

    Eventually I went to bed, and the order filled in the middle of the night.  Now, keep in mind that 0.00871 is simply an approximate ratio of the relative value of LTC in USD divided by BTC in USD.  When I posted my order, BTC could have been selling near $8,200.00 and LTC would therefore have been selling near $8,200 x 0.00871 = $71.42. I simply have no better estimate what they were selling at when my order filled.  It could have been $8,100.00 and $70.55, respectively, or it could have been $8,300.00 and $72.29, respectively.

    However I do know for certain that, whatever I guess, the reality was that prices for both BTC and LTC were swinging back and forth with high volatility.  Even before I went to sleep, I saw that this was causing the  relative ratio to move higher, to 0.00872, then 0.00873, etc.  That meant that, relative to each other, BTC was becoming less valuable than LTC (which is what I would hope would happen AFTER my trade completed).

    Fortunately, the market consensus was that the relative ratio had eventually returned back to 0.00871 (or my order would never have filled).  I am also pleased to say that the ratio is now 0.00880 as I type this comment which means I made a good decision last night.

    So, my question is, in the middle of the night, did I buy 182 LTC with a fair market value of 182 x $72.29 = $13,156.78?  Or were my 182 LTC only valued at 182 x $70.55 = $12,840.10?  I split the difference of these arbitrary (though reasonable) guesses by selling the 1.58522 BTC for $13,000 at a Quicken-calculated price of 8200.75, and used the $13,000 to buy 182 LTC at a Quicken-calculated price of $71.43.

    Bottom line -- if I get audited by the IRS, I'm going to have to explain this all over again to that auditor. It would be much better if Quicken were improved to allow correctly entering this as a buy of 182 shares of LTC at a price of .00871 BTC for a total cost of 1.58522 BTC.  In fact, to document this problem for any auditor I'm going to have to add this information in the transaction memo field.

    Hey Quicken Guys!  Are you reading this????  
  • Unknown
    Unknown Member
    edited November 2017

    Well, the problem got a lot more complicated now that I am day trading BTC, ETH, and LTC.  Last night I traded BTC directly into LTC, buying 182 LTC with 1.58522 BTC.  The transaction never touched the USD currency.  But I had to pick a USD number to get the transaction into Quicken. 

    As soon as I did that, Quicken calculated a new cost basis for both cryptocurrencies -- and when Quicken tells me my gains and losses next April all the USD numbers are going to be arbitrary.

    Unless there's an (IMO unlikely) reinterpretation that applies 1031 to crypto assets, or a de minimis exception, I think you've arrived at a supportable approach: record direct pair trades as a sell to USD and a buy from USD, using a reasonably determined FMV.  As to overhead, yeah; what's new?  I just wrote a single memo to myself about how I determine the FMV, and then apply that method for the "sell" transaction; no need to memo each transaction.  As long as my determination method is reasonable and uniformly applied, I think I'm good.

    (To clarify: you propose "correctly entering this as a buy of 182 shares of LTC at a price of .00871 BTC for a total cost of 1.58522 BTC"; I have not seen any responsible opinion that supports this as "correct" fitting IRS interpretation of cryptos as commodities.)
  • NotACPA
    NotACPA SuperUser, Windows Beta Beta
    edited October 2018
    Cost Basis is, really, quite simple ... as long as you understand that it's per LOT (i.e., per purchase) and not Per Account or Per Security.

    When you report your Cap Gains/losses to the IRS, the want to know both the purchase date and the sale date.  Each purchase is a separate Lot ... even if you sell and immediately purchase something else (which itself, becomes a new lot of that security).

    Now, there is an exception for mutual funds only, where you can use "average cost basis per security", rather than per purchase ... but that has minimal value while using Q since Q will track Lot basis for you automatically.
    Q user since DOS version 5
    Now running Quicken Windows Subscription,  Home & Business
    Retired "Certified Information Systems Auditor" & Bank Audit VP
  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited October 2018
    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..
  • NotACPA
    NotACPA SuperUser, Windows Beta Beta
    edited November 2017

    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..

    What you've learned the hard way is that Q is not designed for day traders.  You need specialized software for that ... and it costs MUCH more than Q.
    Q user since DOS version 5
    Now running Quicken Windows Subscription,  Home & Business
    Retired "Certified Information Systems Auditor" & Bank Audit VP
  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited November 2017

    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..

    I agree with reservations.


    I was a day trader 1998-2000 until the bubble burst on March 9 2000. At the time, Quicken worked for me quite well, tracking everything and feeding it into Turbo Tax with little effort on my part.


    The difference between then and now is that I was day trading stocks on Schwab which downloaded directly into Quicken (which I can’t do with GDAX), and I wasn’t trading one investment directly to another ( which I am doing on GDAX).


    I’d be interested in recommendations for software that solves the problem for me by next April. In the meantime I have been playing with Visual Studio code to parse and convert QDAX reports exported in CSV format into Quicken QIF file format. If I succeed I’ll try to rebuild the investment lots in Quicken automagically.
  • Unknown
    Unknown Member
    edited November 2017

    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..

    I hope your plans for the QIF format don't require any kind of tracking of lots.  The QIF format doesn't have any syntax to do that.
  • Walter Kraslawsky
    Walter Kraslawsky Member ✭✭
    edited November 2017

    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..

    I should have said "import the investment transactions," not "rebuild investment lots."  I'm okay with the default Quicken behavior with respect to lots (which I think is FIFO) when importing investment buy and sell transactions with a QIF file.

    if I ever decide to have Turbo Tax import Quicken data again, which I haven't done in years, I'll make the decision at that time whether to edit the default lots to get a better tax result. 
  • Unknown
    Unknown Member
    edited November 2017

    I just changed my approach to the whole problem.  I had almost a hundred unmanageable BTC, ETH, and LTC lots recorded in Quicken with questionable accuracy or relevance.  I just deleted all of them.

    For personal use only to track my net worth, I now only have a proxy transaction in Quicken showing purchase of one "Gdax" share at a price equal to my total account basis, with current price equal to the current total account value.

    Next April I'll figure out how to correctly e-file the exchange activity on Schedule D as shown in the reports provided by the exchange. Even if I have to record each exchange transaction as a Schedule D line item in Turbo Tax, I'll do it without using Quicken to feed Turbo Tax..

    OK, and yes Quicken uses FIFO.  But even more important I saw the mentioning of options in the conversation.  There is no way that Quicken will properly combine option lots using a QIF import.
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