Proper Cryptocurrency Cost Basis Assignment Methods

On October 9th, 2019, the IRS released long anticipated guidance on the tax income of cryptocurrency through Rev. Ruling 2019-24 and an consort FAQ. Specific to this article, the IRS issued extra guidance on proper cost basis grant methods. This article will discuss :

  1. Why monetary value basis assignment methods matter ; and
  2. acceptable and the most optimum IRS price basis assignment methods for lowering tax liability on cryptocurrency ;

1. Why Does Cost Basis Assignment Matter? The IRS requires taxpayers to report their price basis and proceeds when they trade or sell capital assets, such as Bitcoin. Simply put, your price footing is what you paid for an investment, including brokerage fees. Your capital gains/losses are determined by the remainder between the cost basis and the price you sell your capital asset. Cost footing grant method is the action of determining which capital assets you are selling and which assets you continue to maintain. The report method acting you choose to identify the shares you sell can make a big remainder in the amount of taxes you end up owing in a particular year. To be sure, if you sold all of your capital assets on a single day then you will have realized the lapp amount of gains/losses over the course of your ownership regardless of the monetary value basis assignment method acting used. Cost basis appointment deals with the question when is the taxpayer realizing their gains/losses. Certain cost footing appointment methods may result in more immediate losses in early tax years, and potentially greater gains in late tax years. As a general rule based on the time value of money, a dollar today is worth more than a dollar tomorrow. Absent special circumstances, choosing the price basis grant method that lessens tax liability in the immediate condition is typically the best carry through. however, it is authoritative to note that the IRS expects you to apply whatever price footing assignment method acting you choose systematically in future tax years. mean, you can not switch cost footing assignment methods from year to class. Whichever method you choose you should feel comfortable using going forward into future tax years. 2) Acceptable Cost Basis Assignment Methods for Cryptocurrency After much prediction, the IRS issued guidance on acceptable cost footing methods for calculating gains/losses on cryptocurrency. Prior to the IRS ’ guidance there were numerous potential price basis grant methods taxpayers could choose from such as First in First Out ( FIFO ), last in First Out ( LIFO ), Highest Cost, Lowest Cost, Average Cost, and specific Identification. however, the IRS ’ new steering specifically allows for only two cost basis assignment methods : 1 ) First in First Out ( FIFO ) ; and 2 ) specific recognition . (i) FIFO Cost Basis Assignment The IRS ’ preferred cost footing grant method acting is FIFO. Pursuant to FIFO, the first assets that you purchased will be the first assets that will be disposed.

For exercise, for chasteness sake assume the taxpayer purchased one Bitcoin five different times on the follow dates : 1 ) January 1, 2019 ; 2 ) March 1, 2019 ; 3 ) July 1, 2019 ; 4 ) September 1, 2019 ; and December 1, 2019. If the taxpayer sold two Bitcoin on December 12, 2019, then pursuant to FIFO the taxpayer would have disposed of the Bitcoin that was acquired on January 1st and March 1st. FIFO is the IRS ’ preferred monetary value basis appointment method acting and therefore the most conservative approach to avoid an audit. TaxBit supports FIFO tax calculations for its users . (ii) Specific Identification Cost Basis Assignment pursuant to the IRS ’ recent gross rule, taxpayers may besides use specific identification to report cryptocurrency taxes. specific identification allows taxpayers to select which assets they are disposing of. For model, in the previous exercise the taxpayer is able to specifically identify that they are disposing of their assets that were acquired on July 1 and September 1. Selecting which assets you are disposing of can optimize your taxes. For case, it is typically better to dispose of assets that have a higher cost basis. Disposing of assets that have a higher monetary value footing will result in a lower overall tax indebtedness. TaxBit automates the work by specifically identifying the assets with the highest price footing and consequently lowering realized taxable gains. If you choose the specific designation method then the IRS requires to show the specific unit of measurement ’ s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single score, wallet, or address. The IRS does not require this extra data if the taxpayer uses FIFO. TaxBit meets the IRS requirements of tracking alone digital identifiers and storing an audit trail in order for taxpayers to use specific identification. TaxBit supports specific identification and mechanically disposes of a users highest cost basis assets first. By selecting specific designation taxpayers will realize less taxable gains by disposing of their highest price basis assets first.

Conclusion TaxBit users can easily connect their exchanges and produce their cryptocurrency tax forms. TaxBit ’ south team of tax experts stand ready to ensure proper tax submission with the new IRS regulations and to legally optimize its users taxes. Written by Cryptocurrency Tax Attorney Justin Woodward

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Category : Finance

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