HOW you calculate the profit and loss on your crypto is simple. Unfortunately, that’s about the only thing about this that is simple.
The IRS has a kind of quasi-property definition as far as what cryptocurrency actually is, in the eyes of the tax man. Each transaction needs to be separately tracked. And the “how” is the same as any other asset, when it comes to determining how much gain or loss you have:
Less:Cost of sales
Equals: Gain or Loss
The equation itself is simple enough. The first big question with cryptocurrency tax is WHEN you have to report gain or loss. The answer is, quite simply, “every time.” If you use it to buy a good or service, it’s reportable as a sale. If you exchange it for another crypto, it’s reportable as a sale. If you sell it, it’s reportable as a sale.
The next big question is how do you determine the basis. That’s still a little up in the air with the IRS. The most common method is with FIFO, first in, first out. In other words, if you have Bitcoin, what is the value of the oldest Bitcoin you have? That’s the one you sold, according to FIFO.
One strategy here is to have multiple wallets and group the crypto according to value. That way, you can still consistently use FIFO, but do it per wallet. In other words, if the current selling price means you could have a gain with some crypto and a loss with other, which gives you the best tax advantage now? This multiple wallet technique gives you some leeway to chose the crypto value you prefer to use because you have multiple walletswith different crypto values to pick from.
The loss in crypto is immediately realized when you sell even when even if you immediately buy back the same crypto at a lower price. If you tried the same thing with stock, you’d have what the IRS calls a “wash sale”. The IRS defines that as you buying back the same stock within 30 days of the sale. There is no loss allowed with a “wash sale”. In the case of crypto, though, you are allowed to usethe loss to offset other income.
Like many things in the financial world, there are strategies to reduce and even eliminate tax simply by having done some planning ahead of time. If you have crypto and are wondering how and when you should take advantages of the tax laws, there are a number of ways that we can help you:
Becoming a year round tax client,
Having a personal consultation with me,
Joining the USTAS Coaching program, or
Asking a question at https://www.ustaxaid.com/tax-question/or through the Facebook group, “Diane Kennedy’s US Tax Group.”
If we can help, give Richard a call at 888-592-4769 or drop us a note at Info@USTaxAid.com.