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How To Understand Crypto Taxes and Cost Basis

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Your Pre-Tax Season Guide


If you take a look at the most prominent Google searches for crypto, around five years ago, there are a variety of questions that people searched for. What is Bitcoin? How can I buy Bitcoin? How does blockchain work? What is a cryptocurrency? Today, everyone more or less understands the fundamentals of what Bitcoin, blockchain or cryptocurrencies are.

However, the questions they are asking today are very different. Do I have to pay taxes on my crypto? What is the best tool for crypto tax? Best accounting software for crypto accounting? How do I know if I need to pay tax on crypto?

If you are a new investor, a crypto company, blockchain business or industry professional, this short guide will help answer the most important questions for understanding crypto tax and cost basis.

Is cryptocurrency taxable?

All cryptocurrencies listed on CoinMarketCap are taxable currencies that require investors to file and pay tax liabilities based on their capital gains or losses. Over the last few years, most notably, 2019, the IRS and governments around the world have set forth the first glimpse of legal framework to govern the world of crypto taxation.

In mid-2019, the IRS issued a major update on crypto tax, providing some much awaited clarity.

The three key points in the IRS announcement addressed the following; Understanding the tax liabilities created by cryptocurrency forks & airdrops; The acceptable methods of valuing cryptocurrency received as income; How to calculate taxable gains when selling cryptocurrencies.

There is a lot of information to digest, so here is a visual infographic and blog post to help identify taxable versus non-taxable crypto transactions, click this link here.

As you can see, there is quite a lot to learn when it comes to crypto taxation, and it will only get more complex as new legal guidance sees the light of day.

For the few brave souls that may be searching for, “Can I avoid crypto taxes”? the simple answer is “No, you can’t.” 

 

In fact, 2020 will now see the IRS taking a more proactive approach to ensure crypto investors are paying their respective crypto taxes. Bitcoin buyers beware!

 

How does cost basis work for crypto?

The arrival of cost basis in the world of crypto was bound to become one of the major industry challenges, but businesses never realized how quickly that time would come. Today, the ability to accurately calculate crypto cost basis is reserved for cutting-edge companies like Blox. Businesses and professionals are both required to calculate cost basis when reporting their taxes, and one error can lead to unwanted financial and even legal repercussions.

 

Cryptocurrency cost basis is similar to traditional “basis”, and is the means of calculating the net profit and loss of asset value based on a particular asset and its accompanying transaction activity and costs. To put it plainly, cost basis is equal to the amount of money in fiat currency that an asset costs for an investor to acquire. Because cryptocurrency is a taxable asset, the process of calculating the correct gains and losses requires having the correct basis in place for your crypto portfolio.

 

If you want to learn more details about how to calculate crypto cost basis, feel free to check out this in-depth article.

 

How to minimize your crypto tax liabilities?

It should be clear by now how taxable cryptocurrencies really are. In fact, most crypto activities are completely taxable events in the eyes of the IRS, and most accountants believe that will only grow more expensive for investors. While there is no way to skirt around the law, there are legal ways to help reduce the cost of your total crypto tax liability.

Try Out Tax Harvesting

One strategy is tax loss harvesting. This term is a strategy often used to offset and reduce investment losses regardless of financial instruments. When a crypto investor chooses to sell an underperforming asset at a loss, to offset realized capital gains, it ultimately decreases the amount of their tax obligation.

 

Since crypto is treated as “property” under IRS guidelines, this means the same capital gains rules apply. Therefore, any crypto losses (up to $3000) can be used to offset gains on other investments you traded, such as stocks, bonds and other assets in a portfolio.

 

For more on crypto tax harvesting, click here.

 

Review potential realized vs unrealized gains

It is imperative to note that gains on crypto can only be realized once an asset is sold or exchanged. Meaning, if an investor buys one Bitcoin and holds it for a long period of time, they have not yet realized any of the possible gains or losses for that asset.
If the same investor buys one Bitcoin and sells it for a profit, they are required to pay the capital gains tax based on the amount earned from the sell. If the investor has lost money from a trade or the selling of an asset, they can only claim that loss for a deduction by selling the asset (and realizing the loss).

 

For example, during the hype of Bitcoin, many investors have spent thousands of dollars on Bitcoin and either held the currency, sold or traded it for AltCoins. They may have also sold it when it was high to earn a quick profit. This is all acceptable, but can lead to various taxation implications.

 

For those that bought Bitcoin high and traded/sold for AltCoins, which ultimately lost most of their value, they incurred a confusing and expensive tax obligation.

 

Having a better understanding of realized and unrealized gains can help improve your productivity and reduce your future tax liabilities.

 

Automated & intelligent technology

Crypto tax is in an entirely new league of its own. As the cryptocurrency ecosystem grows and new guidance continues to trickle down, the complexities of calculating cost basis and facilitating tax services for medium-to-large operations is increasingly tedious and laborious. The Blox Crypto Accounting Report, found that tax and accounting professionals are in need of an all-in-one enterprise-ready solution capable of calculating cost basis, organizing transactions without ever compromising on accuracy.

 

This is why industry giants such as eToro, IDEX, Aetenity and 0X all rely on the Blox platform to handle their unique and emerging crypto finance necessities. For example, the launch of our Cost Basis Calculator introduces speed and accuracy for all users. Traditionally, tax pro’s may spend hundreds of hours calculating a few hundred transactions. With Blox, we can calculate over 50K transactions in minutes.

 

Moving forward with a little help.

Once you have reviewed all of this information and are ready to proceed, Blox recommends reviewing our tax submission organization guide to help get you started!

 

If you are looking for a tax firm or professional to help you – we even have a list of the top crypto firms you should know.

 

We wish you luck and happy syncing with Blox!