On October ninth, 2019, the IRS launched lengthy awaited steerage on the taxation of cryptocurrency by means of Rev. Ruling 2019-24 and an related FAQ. Particular to this text, the IRS issued further steerage on correct value foundation task strategies.
This text will talk about:
- Why value foundation task strategies matter; and
- Acceptable and essentially the most optimum IRS value foundation task strategies for reducing tax legal responsibility on cryptocurrency;
1. Why Does Value Foundation Task Matter?
The IRS requires taxpayers to report their value foundation and proceeds once they commerce or promote capital belongings, equivalent to Bitcoin. Merely put, your value foundation is what you paid for an funding, together with brokerage charges. Your capital good points/losses are decided by the distinction between the price foundation and the worth you promote your capital asset.
Value foundation task technique is the method of figuring out which capital belongings you might be promoting and which belongings you proceed to keep up. The accounting technique you select to establish the shares you promote could make an enormous distinction within the quantity of taxes you find yourself owing in a selected yr.
To make sure, for those who offered your whole capital belongings on a single day then you’ll have realized the identical quantity of good points/losses over the course of your possession no matter the price foundation task technique used. Value foundation task offers with the query when is the taxpayer realizing their good points/losses. Sure value foundation task strategies could lead to extra fast losses in early tax years, and doubtlessly higher good points in later tax years.
As a basic rule based mostly on the time worth of cash, a greenback right this moment is price greater than a greenback tomorrow. Absent particular circumstances, selecting the price foundation task technique that lessens tax legal responsibility within the fast time period is usually the perfect motion. Nonetheless, you will need to be aware that the IRS expects you to use no matter value foundation task technique you select constantly in future tax years. Which means, you can’t change value foundation task strategies from yr to yr. Whichever technique you select it is best to really feel snug utilizing going ahead into future tax years.
2) Acceptable Value Foundation Task Strategies for Cryptocurrency
After a lot anticipation, the IRS issued steerage on acceptable value foundation strategies for calculating good points/losses on cryptocurrency. Previous to the IRS’ steerage there have been quite a few potential value foundation task strategies taxpayers may select from equivalent to First in First Out (FIFO), Final in First Out (LIFO), Highest Value, Lowest Value, Common Value, and Particular Identification. Nonetheless, the IRS’ new steerage particularly permits for under two value foundation task strategies: 1) First in First Out (FIFO); and a pair of) particular identification.
(i) FIFO Value Foundation Task
The IRS’ most well-liked value foundation task technique is FIFO. Pursuant to FIFO, the primary belongings that you simply bought would be the first belongings that shall be disposed.
For instance, for simplicity sake assume the taxpayer bought one Bitcoin 5 totally different occasions on the next dates: 1) January 1, 2019; 2) March 1, 2019; 3) July 1, 2019; 4) September 1, 2019; and December 1, 2019.
If the taxpayer offered 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’ most well-liked value foundation task technique and subsequently essentially the most conservative strategy to keep away from an audit. TaxBit helps FIFO tax calculations for its customers.
(ii) Particular Identification Value Foundation Task
Pursuant to the IRS’ current income ruling, taxpayers might also use particular identification to report cryptocurrency taxes. Particular identification permits taxpayers to pick out which belongings they’re disposing of. For instance, within the earlier instance the taxpayer is ready to particularly establish that they’re disposing of their belongings that have been acquired on July 1 and September 1.
Choosing which belongings you might be disposing of can optimize your taxes. For instance, it’s sometimes higher to eliminate belongings which have the next value foundation. Disposing of belongings which have the next value foundation will lead to a decrease total tax legal responsibility. TaxBit automates the method by particularly figuring out the belongings with the very best value foundation and subsequently reducing realized taxable good points.
When you select the precise identification technique then the IRS requires to point out the precise unit’s distinctive digital identifier equivalent to a personal key, public key, and handle, or by information displaying the transaction info for all models of a particular digital forex, equivalent to Bitcoin, held in a single account, pockets, or handle. The IRS doesn’t require this extra info if the taxpayer makes use of FIFO.
TaxBit meets the IRS necessities of monitoring distinctive digital identifiers and storing an audit path to ensure that taxpayers to make use of particular identification. TaxBit helps particular identification and routinely disposes of a customers highest value foundation belongings first. By choosing particular identification taxpayers will notice much less taxable good points by disposing of their highest value foundation belongings first.
Conclusion
TaxBit customers can simply join their exchanges and produce their cryptocurrency tax varieties. TaxBit’s staff of tax specialists stand prepared to make sure correct tax compliance with the brand new IRS laws and to legally optimize its customers taxes.
Written by Cryptocurrency Tax Legal professional Justin Woodward
