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Paying taxes on Bitcoin and other cryptocurrencies is becoming a priority for individuals in the US after the IRS announced on July 2nd, 2018 that one of their core campaigns and focuses for the year is the taxation of virtual currencies.
Because cryptocurrencies are treated as property in the eyes of the law, they are subject to capital gains and losses rules just like stocks, bonds, real estate, and other forms of property.
The challenge with cryptocurrency in regards to taxes is that the data making up your crypto buys, sells, trades, transfers, mining income, forks, splits, air drops, wallet transactions, and other crypto activity is likely scattered across many different platforms and exchanges. This can make the tax calculation and reporting process difficult.
These five tips will help make the crypto tax reporting process easier and allow you to stay in the good graces of the law.
1. KEEP A RECORD OF EVERY EXCHANGE WHERE YOU HAVE BOUGHT OR SOLD CRYPTOCURRENCY
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Make a list of every cryptocurrency exchange you used within the past tax year. | Source: Shutterstock
Exchange data is essential in the crypto tax reporting process. Exchanges are likely the places where you originally converted fiat currency into cryptocurrency, and thus your cost basis is originally established here. You should have complete historical data from every exchange that you have used. Most exchanges have an option that allows you to export your complete trading history.
Having this data on hand will make the reporting process easy whether you are doing calculations by hand or with the help of crypto tax software.
2. MAINTAIN RECORDS OF ANY CRYPTO THAT YOU RECEIVED AS INCOME
Cryptocurrency that is received as income is treated differently than crypto trades for tax purposes. It’s important that you have records of income events such as Bitcoin mining payouts, crypto received from a job, or any other form of cryptocurrency received as income. You should keep track of the amount of crypto received as well as the date and time that you received it.
3. LEARN HOW TO CALCULATE GAINS AND LOSSES ON BITCOIN AND CRYPTO INVESTMENTS
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You owe taxes on what you gained from trading, so it’s important to understand how to calculate your gains. To calculate your capital gains and losses, you use this formula:
Source: https://www.ccn.com/5-essential-tips-for-preparing-your-cryptocurrency-taxes