In recent years, digital cash systems known as cryptocurrencies such as Bitcoin and Litecoin have exploded into the public eye. A blend of cash and stocks, their use and value has grown exponentially. In 2017, the IRS decided to focus great effort on taxing them. In theory, this should be as simple as calculating taxes on any other type of property, bond, or other assets. Cryptocurrency, however, presents a unique challenge. The full extent of one person’s crypto activity can stretch across dozens of platforms and take a variety of different forms. This makes it difficult to gather all of this information cohesively, much less begin the seemingly- complicated process of reporting it.
These three tips should help anyone looking to legally report their crypto activity to figure out where to start.
Documentation is key!
There are dozens of different “exchanges” individuals can use to change their cash into crypto. When the flat currency is changed into cryptocurrency at the exchange, you establish your cost basis. This makes this data crucial when you begin the process of reporting. Those who have used a variety of different exchanges should keep detailed records of everywhere that they made trades. Once tax season arrives, most exchanges will allow users to view their entire trading history with that exchange. This information will be necessary later to complete taxes.
Calculate your total gains
As with most other entities, taxes on cryptocurrency are determined based off of what was gained from trading. Therefore, the first step to starting taxes is determining exactly how much was gained (or lost!). The formula for your capital gain/loss is simple:
Fair Market Value – Cost Basis = Capital Gain/Loss
Fair market value refers to the price of the cryptocurrency (USD) when it was purchased. Cost basis is how much flat currency the user paid to acquire the crypto at the exchange. By subtracting cost basis from fair market value, you can determine how much of a gain or a loss you made from your initial investment.
Documentation is key again here. Users will need to know how much each asset was acquired for and how much it was traded for to determine their overall gain/loss.
Swallow your pride; report your losses!
Of course, the idea when trading cryptocurrency is to make money, not lose it. When things don’t quite pan out, however, there’s still a way to use your losses to your favor. Cryptocurrency tax only requires tax to be paid on gains in the capital. When an individual experiences losses, they not only do not owe taxes on that crypto but can also use the loss to save money later. By reporting heavy losses on one exchange, a user could offset some of their gains on a different platform. In some cases, cryptocurrency losses can even be used to balance out stock gains from a portfolio. If a user has experienced extreme losses, they may be in for extreme savings if they learn how to take advantage of it.
Taxes don’t have to be stressful for those with cryptocurrency. By staying organized and keeping clear records, reporting legally can be painless.
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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Global Coin Report and/or its affiliates, employees, writers, and subcontractors are cryptocurrency investors and from time to time may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency and read our full disclaimer.
Image courtesy of Jonathan Cutrer via Flickr
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