Cryptocurrencies have taken the world by storm but for crypto accountants and tax professionals, the storm continues to loom over them in the form of cost basis for calculating cryptocurrency gains and losses. Crypto accounting and tax professionals are already battling the difficult series of unique taxation challenges as new guidance becomes more clear and permanent.
Understanding Cost Basis For Crypto
Cryptocurrency cost basis is similar to traditional “basis”, and is the means of calculating profit and loss of asset value based on a series of assets and their accompanying transactions 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. Essentially, cost basis is an accounting term that refers to purchase price + fees + other purchase costs.
To articulate cost basis more easily, if an investor purchased a Bitcoin in 2015 for $400 the basis on that Bitcoin is $400. If the same investor sold their Bitcoin one-year later for $2000, they would owe taxes based on their gains of $1600. (Let’s exclude the fees & other factors for this example)
By understanding the fundamentals of crypto cost basis, it is important to understand why crypto cost basis is a growing concern and challenge for the industry, tax professionals and even the government and federal institutions.
The IRS Is Providing Crypto Clarity
As of October 2019, the IRS has issued more guidance and clarity on cryptocurrency accounting and taxation than in the last five years. Most crypto investors may not even know that in May 2019, the IRS issued 10,000 letters to known crypto holders warning them to disclose their crypto assets. This was due to record lows in crypto reporting in the USA and around the world.
As of October 2019, the IRS has recently updated its tax forms to include a section that solely focuses on individuals or businesses crypto earnings and assets. Moreover, the IRS issued more clarity on how to handle debated issues such as cost basis techniques, taxation on hard/soft forks, airdrops and more. While most of this news only clarified what taxation professionals already knew, it’s important for investors, new and experienced alike to make more proactive actions when it comes to filing for tax season 2020.
When Manually Calculating Cost Basis
Calculating crypto cost basis can be exceptionally difficult, even for seasoned veteran accounting and taxation professionals. If you ask your traditional accounting CPA, they may not even know where to begin to handle crypto taxation.
When manually calculating your gains and losses, users will need access to their crypto wallets, accounts, portfolios and exchanges and their history of transactions. From there, users would need to find a way to consolidate all their various information, download their transaction history, find a calculator and begin calculating using the FIFO method (First In, First Out). This method is the recommended approach to calculating cost basis, according to the Internal Revenue Service.
Calculating 100 transactions could take days, and one mistake can dramatically affect the final result. This is why today’s crypto companies, mining operations, and blockchain businesses rely on Blox for their crypto accounting and taxation. Technology is available to help streamline the entire process of crypto accounting, tax prep and more.
If you are interested in calculating your own cost basis and preparing your crypto taxes, we have a blog post to help guide you through the process.
Technology Can Produce Powerful Tools
For those that may not be tech-savvy or simply have far too many transactions or account activity to attempt a manual calculation. It’s time to try Blox, the industry’s first automated and accurate cost basis calculator for cryptocurrency gains and losses.
The new cost basis tool from Blox is one of the first in the industry to provide a precision-focused cost basis calculation tool that leverages Blox’s proprietary automation technology. With this feature, instead of spending hundreds of hours calculating manually, users can use the FIFO method to automatically calculate more than 5000 transactions in seconds – with unprecedented accuracy in the results.
Beyond calculating cost basis, this new tool comes alongside a suite of powerful features for crypto accountants, tax professionals and cryptocurrency investors. Some of the core features that empower investors and businesses like eToro, 0X and Decentraland include a versatile Transaction Table to organizing and reviewing transactions in greater detail with unparalleled control. The Blox Address Book keeps all your wallet address for customers, clients, businesses or family organized to keep you truly connected and in control of your crypto.
Understanding Crypto’s Taxable Events
When an investor, business or professional is ready to calculate cost basis, it is essential to understand what are taxable versus non-taxable crypto events and activities. Blox has already teamed up with Bitcoin Magazine to help you better understand these taxable events.
The diagram below illustrates some of the more popular and common taxable events for the world of cryptocurrency taxation in the U.S.
The average investor may have no clue of what is taxable. With the right accounting or tax professional, they will already have the necessary knowledge to help handle cryptocurrency cost basis and calculate gains & loss according to the most recent updates and guidance.
When it comes down to crypto cost basis and calculating gains & losses, the industry is changing so quickly that federal institutions and regulatory bodies like the IRS are incapable of keeping up with the rapid speed of the crypto community. Blox suggests that it is always prudent to be proactive, remain informed and always be transparent and forthcoming when reporting your cryptocurrency portfolios and activity. While crypto may be decentralized, it is still under federal jurisdiction, creating a new era of crypto tax obligations.
The best time to start learning about crypto tax and accounting is today – and the biggest names in the business trust in Blox to handle all of their needs, for businesses and individual investors.