Figuring out how much tax you need to pay the IRS can be a very complex process. You’ll need to not only look at the transactions you made in 2019, but also look at your previous transactions to establish the cost basis (meaning the price at which you purchased cryptocurrency or the price it was valued at when you received it - this ultimately determines how much profit you made, and how much tax you owe as a result).
Interestingly, cryptocurrencies are not actually treated as currencies in the United States - they are treated as property. Therefore, disposing of a cryptocurrency is a taxable event, which should be recorded and reported on your tax filings.
Disposing of a cryptocurrency includes actions such as:
- selling your cryptocurrency for fiat (USD)
- trading your cryptocurrency for another cryptocurrency
- paying for goods or services with cryptocurrency (including network and exchange fees)
However, transferring cryptocurrencies between personal wallets and buying cryptocurrencies with fiat currency (USD) are not classed as disposals, and therefore are not taxable in the US.
In the US, there are a few different options for calculating your capital gains, such as FIFO (First In First Out), LIFO (Last In First Out), HIFO (Highest Price First Out) and more.
FIFO, for instance, would mean that when calculating your potential taxes that you would look at the price of the first time you bought cryptocurrency (let’s say it was 1 BTC for $1k) and use that transaction to determine your cost basis. So if you bought 1 BTC for $1k a few years ago and sold it in 2019 for $5k, you would potentially need to pay taxes on the $4k difference. FIFO is the default cost basis method for calculating gains used by the IRS (see question 40).
If you were using the LIFO model and bought your last BTC at $5k in early 2019 and then sold it for $5k also in 2019, you would owe nothing because with this model you did not make a profit.
Additionally, when calculating the gain or loss for each transaction, you should account for trading fees, which should reduce your overall capital gains.
You also need to accurately price, in USD, the cryptocurrency you are disposing of when establishing the basis price as well as the disposal price. This can be difficult information to obtain and tedious to record for each and every transaction.
With Recap, you can quickly and securely connect to your favorite exchanges and get a report in minutes detailing if you owe any taxes in the US (and for how much) with a fully automated report that is 100% compliant with the IRS. You can decide if you want to use FIFO, LIFO, etc. to calculate your crypto capital gains.
Recap also produces the relevant information for the required IRS tax forms that need to be submitted, streamlining the entire process of calculating your cryptocurrency tax gain or loss. You can also easily integrate with TurboTax online or for desktop - sign up now to try it out for free.
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Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.