Cryptocurrency Taxation
What are my crypto taxes based on?
The taxes on crypto are based on the difference between the price of the asset at the time of receipt and its price at the time of disposal. Crypto taxes are triggered when one sells, disposes of, receipt as payment, income, mining reward or staking reward, or trades a crypto asset for another asset, whether it is another crypto asset or buying a physical asset with a crypto asset, such as paying for your grocery in crypto.
Things that do NOT trigger a taxable event:
Transferring crypto between your digital wallets or exchanges, sending someone crypto as a gift (up to $15,000), and donating crypto to charity are not considered taxable events.
The method of calculating gains or losses:
The IRS will determine that there is a gain if an asset is sold at a higher price than the purchase price. Likewise, a loss is realized when the price at the time of the sale is lower than the purchase price; a taxpayer can use this loss to offset their taxable income. For example, John buys 1 bitcoin at $1,000 and sells it for $2,000; his gains can be calculated using the following equation:
According to the above equation, the realized gain is:
1 * (2000 - 1000) = $1,000.
I bought an asset at different prices; if I decided to sell some of them, how do I know which purchase I am selling?
There are a few methods that are used to determine which assets are sold and which ones have remained. The most common methods used in cryptocurrency are First in First out (FIFO), Last in First out (LIFO), and Highest in First out (HIFO).
FIFO method states that the assets are sold according to their purchase time. Through FIFO, the oldest assets in the inventory are the ones that are taken out of the inventory the first when a sale takes place. For example, Shawn buys 0.5 BTC at $1,000, 2 BTC at $2,000 and 1 BTC at $1,500. He holds his assets for a while and then decides to sell 1 BTC out of his total holdings of 3.5 BTC when it reaches $5,000 per BTC. If he decides to use the FIFO method, then it is determined that out of his total sale of 1 BTC, 0.5 BTC is from his first purchase that he bought at $1,000 and 0.5 BTC is from his second purchase of 2 BTC at $2,000. Based on that, he will calculate his realized gains or losses. He will calculate his gains (or losses) as follows:
[0.5 * (5000 - 1000)] + [0.5 * (5000 - 2000)]
= 2000 + 1500
His capital gains = $3,500 using FIFO method.
LIFO method also states that assets are sold according to the time of the purchase. However, LIFO is the opposite of FIFO in that the assets that are sold are the newest ones in the inventory. Using the previous example, the 1 BTC that is sold is from his last purchase of 1 BTC at a price of $1,500. Using LIFO method, his capital gains are:
1 * (5000 - 1500)
= $3,500 (Note that the result of LIFO is the same as FIFO in this example, but this rarely happens due to real cases being more complex).
Lastly, HIFO considers the assets that are sold are the ones that have the highest purchase prices. By using the previous example again, the 1 BTC sold is from his second and highest cost basis purchase of 2 BTC that he purchased at $2,000. The capital gains can be calculated as follows:
1 * (5000 - 2000)
= $3,000 (HIFO method produces the least capital gains among the three methods almost always but it has its own implications).
Luckily for you, we have a team of crypto experts who deal with crypto tax problems and its complexity on a regular basis. If you have tax problems, it is our job to resolve it for you!
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