Why the cost base is so important for doing crypto taxes

With the rapid growth of the crypto market, the government certainly wants its share of the revenue produced by its citizens.

The cryptocurrency market has grown exponentially in recent years. According to CoinMarketCap, as of June 2022; The market capitalization has grown to almost $1 trillion since July 2020 from $300 billion! This rapid growth emphasizes how the government wants its share of the income produced by its citizens to bear the risk of such investments.

While many investors use Bitcoin or other popular currencies like Ethereum for their investments, others choose lesser-known digital currencies like BAT (Basic Attention Token), Dogecoin, and other altcoins. Some investors may be interested in investing in tokens that offer them unique benefits, such as privacy, while others may simply want to invest with no particular goal in mind. Whatever your reasons, it’s important to keep track of these transactions so you can report them on your tax forms. In the USA, most cryptocurrency transactions are taxable events! Gone are the days when Bitcoin cost $100 and most cryptocurrencies made negligible profits or losses.

This article will explain how to track and do crypto taxes. We will also provide tips on how to report income earned from trading crypto assets on the federal 1040 Schedule 1 return. For information on tracking taxable events for cryptocurrencies, check out our cryptocurrency tax software review. As always, this is a basic understanding necessary to gather the required information. All taxes and bookkeeping should be discussed with a licensed professional, such as an accountant, and nothing in this article is financial advice.

How to track and do crypto taxes

There is no single way to “track” money because everyone’s financial situation varies depending on their goals. Different programs work for different people, many would. These are common taxable events:

• Income (from airdrops, bitcoin cashback, LP, etc.)
• Income from swaps (trades, etc.)
• Expenses (such as gasoline for swaps, mints, etc.)

The following steps outline what you need to know when filing your 2020 federal income returns. Collecting all the information related to operations, exchanges and wallets is the first step for anyone.

Create a list of exchanges where trades were made

The most important thing is to create a list of all exchanges with transactions associated with your name. The exchange is where most exchanges occur. Lots of people use DEXs, and those count too. Most crypto tax software could collect DEX transactions by the affiliated wallet. It is crucial to export the CSV file for all transactions so that the tax software can report the cost basis for each asset and lot. Many people consider using Bitfinex for margin lending, but this advanced passive income strategy is not for everyone.

Make a list of all wallets

Creating a spreadsheet of all wallet addresses used will help inform the cost basis of batches transferred between these accounts. This is also useful for keeping track of every transaction, type, and date. The date is useful in determining the market value at the time of a transaction. Using Ethereum for gas can be a taxable expense, but if the base cost of the ether used for gas is less than market value, it would be reported as a capital gain.

Calculate cost basis

Most tax programs can determine the cost basis automatically when transaction dates are posted. With cryptocurrency, the market is 24/7 and global, with various exchanges. It is important use the same source for the cost base and the same time zone to ensure consistency across platforms. When calculating gross profit, always convert cryptocurrency holdings in foreign markets to US dollars or your local currency. By doing so, you ensure that you accurately calculate the taxable profit made from the purchase and sale of goods, even if you never physically see the actual dollar bills.

Report interest income received from DeFi

Most people earn interest from banks or other institutions on their checking accounts. When paying for purchases by credit or debit card, you may be charged interest along with the transaction fee. Depending on how often you have used your account, the total amount of interest paid throughout the year may exceed passive dividend earnings. Since the interest is taxable, you should properly track and label it as such. In many cases, capital gains have lower tax implications than income.

Identify expenses incurred throughout the year

Just like traditional businesses, people involved in the cryptocurrency business face myriad challenges when trying to track their daily spending habits. Fortunately, modern technology offers many ways to store receipts quickly and efficiently. These tools range from basic smartphone scanners to sophisticated software designed specifically to handle accounting tasks. Regardless of your preferred method, make sure you document everything correctly so you don’t end up owing fines later.

Do not forget to take into account state and municipal taxes

Depending on where you live, you may owe additional taxes in addition to federal income taxes. State and municipal governments typically charge higher fees compared to states with fewer residents. Additionally, cities impose special assessments on homeowners. Local jurisdictions differ widely in terms of tax rate structures. Consequently, it is It is crucial to consult with a licensed accountant and/or financial planner to determine the best course of action.

Cryptocurrency taxes are confusing and difficult

Do not give up! Cost base monitoring, checking accounts and accurate records are the critical components. Once all the transactions, accounts, changes, etc. Interpreting the information is crucial. Although many say that cryptic taxes are difficult and IRS regulations are not clear.