By Joseph "Joey" Ryan, CPA - CFO at Gilded
If you’re dealing with digital assets, you may know that the IRS now asks you to report your gains and losses on cryptocurrency in your taxes, which involves calculating cost basis. Wondering what that entails? You’re not alone. To put it simply, in the United States, the IRS treats virtual currency as property. Like real estate transactions, you must track your gains and losses on the sale of cryptocurrency.
The basic principle surrounding cost basis is that the "cost" of the cryptocurrency you purchase equates to the fair value, or spot price, of the cryptocurrency at that point in time. Easy, right?
The actual tracking of the purchase and sale of transactions is where it gets tricky. Let's suppose that you purchase bitcoin at three separate points in time: one for $7,000, one for $8,000, and another for $9,000. Now you wish to make a purchase using your newly acquired bitcoin. For each sale, you must determine which specific bitcoin you’re selling. I'm not talking about the technical transfer, but the value transfer. Are you selling the one you purchased for $7,000, $8,000, or $9,000?
The IRS has determined that individuals can use various methods to determine their "cost basis removal" when selling cryptocurrency. These include FIFO (first-in-first-out), LIFO (last-in-first-out,) or Specific Identification (dealer’s choice.) The idea here is that once you choose your initial method for cost basis removal, you must stick to it.
Once you commit to a given method, you then calculate the gain or loss on each cryptocurrency sale by taking the fair market value (or FMV) price of the bitcoin at the point in time of the sale and subtracting it from the cost basis. This result is a realized gain or loss. Cryptocurrency held less than one year is categorized as a short-term gain/loss, and cryptocurrency held for more than one year is categorized as a long-term gain/loss, which allows you to utilize long term capital gains tax rates.
Confused? Makes sense? Either way, Gilded has you covered. With our new cost basis features, there's no need to manually track your crypto transactions. Gilded tracks your transactions and produces a gain/loss report based on your preferred method of cost basis, saving you time and money. Spend less time tracking and recording your crypto transactions and more time running your business.