- 1 Grand Unified Accounting: Your Tax Review
- 2 Superior Customer Support: All Your Bitcoin Tax Help
- 3 Back to Basics: How is Bitcoin Tax Calculated?
- 3.1 Who needs to file an IRS report?
- 3.2 When do I need to file a tax report?
- 3.3 Calculating Capital Gain/Loss
- 3.4 What is a taxable event?
- 3.5 Crypto Capital Gains Tax Rate
- 3.6 Figuring Out the Cost Basis on your Bitcoin & other Cryptocurrency
- 4 Other Considerations for your Bitcoin Tax Review: LIFO or FIFO?
- 5 Can Bitcoin Tax Software Help me Claim Losses?
- 6 Don’t Forget About Foreign Exchanges!
- 7 Leave it to Us!
Cryptocurrency is an exciting and cutting edge asset class. It appeals to our sense of cultural evolution, our infatuation with new tech, and our ambitions for personal wealth. While Bitcoin and other cryptocurrencies are an exciting opportunity for investors and technophiles alike, the legal ramifications of trading and owning cryptocurrency remain convoluted for most of us.
ZenLedger is much more than a Bitcoin tax calculator. We handle the tedious, confusing work of calculating taxes on Bitcoin, from beginning-to-end, providing you with money-saving tips and tools along the way. The final results are auto-completed tax forms and audit reports to check with your CPA.
Let’s review how ZenLedger’s Bitcoin Tax Calculator works
There are several steps to calculating your Bitcoin taxes:
- Capital Gains and Losses
- Owner’s capital gain tax rate
- Cost basis
- Accounting method
- Harvesting losses
- Foreign Currency reporting
IRS tax law considers Bitcoin and other cryptos an asset, comparable to a stock, NOT a fiat currency (like the Euro, USD or Yen). That means that when you sell or trade Bitcoin, you have to recognize capital gains or losses.
Capital gains are calculated by finding the difference between the price at which you sold the property and price at which you bought. Thus, capital gains calculations are the aggregation of all property bought or sold over the course of the year minus the cost bases (price at which you bought or received the property) of each respective property. Note that property held for less than a year (short term capital gains) is subject to a higher tax bracket than property held for a year plus one day (long-term capital gains) or more.
Conceptually, it’s not terribly tricky. But when you start realizing the record-keeping necessary for each transaction, and that the rules for calculating bitcoin taxes changes depending on a handful of factors … you want an automated solution, and quickly.
This is the power of ZenLedger’s tax calculation engine: every transaction inside of every exchange and every wallet, evaluated and calculated accurately in a matter of minutes.
So now you understand why you want to get Bitcoin taxes off your plate and into an automated software solution. But what about ZenLedger makes us the best Bitcoin tax software? Let’s talk about a couple of our features that makes us best in class.
Grand Unified Accounting: Your Tax Review
ZenLedger provides the most accounting transparency of any crypto or Bitcoin tax software. You don’t have to wonder about how we calculated taxes on your Bitcoin, the tax review provided to you in a separate spreadsheet goes over every single transaction, so you and your CPA can see precisely how we calculate your tax estimate.
The logic behind each calculation is spelled out on your Grand Unified Accounting (GUA) output. Accountants and CPAs love this feature because it means every transaction can be adjusted or tailored to fit the investor’s best possible tax outcome.
Superior Customer Support: All Your Bitcoin Tax Help
So, you’ve likely got questions about how to stay on the right side of Uncle Sam when it comes to your Bitcoin taxes. You don’t want to be caught unprepared, or end up owing more taxes than you were expecting.
ZenLedger’s customer support can help you with more than just navigating our software. While we don’t give tax advice (you need to speak to your CPA or tax professional for that) we do know the current crypto tax laws and we have CPA partners to ensure our solution keeps your taxes accurate. That means we can help you save money on your taxes by providing tools to harvest a tax asset on coins when you’ve lost money, or explain the basics of how and why Crypto taxes function the way they do.
We are also experts at helping you get your data out of your exchanges and wallets! With over two dozen integrations, we know how to get your data out, formatted and easily uploaded, should you get stuck. We have more than 70 support articles published and chat support availability online during business hours to answer any questions you have.
We support all of these features for every client, no matter the volume of transactions you have for a tax year.
In case you were wondering what this would look like to do by hand, or, what ZenLedger evaluates for each transaction, in this next section we will review the legal considerations for each crypto transaction in order to calculate Bitcoin tax correctly.
Back to Basics: How is Bitcoin Tax Calculated?
Now that you understand some of what makes ZenLedger the best of bitcoin tax software, let’s cover the actual laws and tax rules that ZenLedger handles, for every single transaction.
Given the IRS guidance and what we generally know about the tax code, we can lay out the following basic tenets.
Who needs to file an IRS report?
All US citizens who are required to file a US income tax return need to report the results of their crypto activity to the IRS.
Crypto activity can include:
- Trading (buying one Bitcoin with another cryptocurrency type)
- Buying goods or services with crypto
- Selling your cryptocurrency
In addition, anyone who has income from US sources may be obligated to pay US taxes. As a result, foreign nationals who transact on any of the US-based exchanges (Coinbase, Bittrex, Gemini, Kraken, Bitstamp, etc.) may also have tax requirements.
When do I need to file a tax report?
April 15 is typically known as “tax-day” because US returns are typically due on this day (or following Tuesday if the 15th falls on a weekend). With that said, US citizens living outside the US receive an automatic 2-month extension and anyone can get a 6 month extension (to file, but not to pay) by requesting via the IRS’ e-file service or by filing a paper form 4868.
Those running a business and those with capital gains of more than $1000 are expected to file quarterly.
Calculating Capital Gain/Loss
- Selling and exchanging (but not buying itself) is a taxable event. This includes crypto to crypto trades (i.e. selling BTC for ETH) in addition to crypto to fiat trades.
- Those holding cryptocurrency for investment purposes (i.e. in anticipation of it gaining/losing value and selling to capture the change in value) will realize a capital gain/loss on sale. No taxable events are triggered until the sale!
- Those holding for business purposes (like running a crypto ATM) will record ordinary income gain/loss upon disposal.
- This capital gain/loss shall be measured by subtracting the cost to purchase the Bitcoin from the price at time of disposition (a fancy way to say trade or sell, primarily).
What is a taxable event?
A taxable event for the IRS is a situation where you have to report to the IRS your capital gains and capital losses related to crypto transactions. The following points summarize the official IRS guidance from 2014, as well as the recent update released in October 2019:
- If you trade cryptocurrency to fiat currency like the US dollar, you create a taxable event .
- If you trade virtual currency to virtual currency, it is also a taxable event, and you have to work on your bitcoin tax reporting to file your gains or losses to the IRS using fair market value in the US dollars at the moment when the trade took place.
- If you accepted crypto currency as a way of payment for goods or services, you created a taxable event. Just like with trading, you must use the fair market value in USD at the moment of the transaction and your appropriate bitcoin tax rate for your bitcoin tax reporting.
- Crypto mining creates a taxable event.
- According to the IRS Revenue Ruling 2019 – 24, if you receive crypto units as a result of a hard fork , you do have gross income, and thus there is a taxable event. So moving forward you will have to report this information to the IRS. The good news is that using a bitcoin tax calculator like ZenLedger, you can run an automated bitcoin tax reporting for all years you owned crypto. There are good chances that you had capital losses, and in this case you can claim them and save on your taxes.
IS NOT a taxable event:
Here are some situations that don’t create a taxable event, so you don’t have to report them to the IRS:
- Giving virtual currency as a gift doesn’t create a taxable event (though the gift tax will still apply if you exceed the gift tax exemption amount).
- Transfers are not taxable events. In its new guidance, the IRS reconfirmed that “If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you” the transfer is not considered as a taxable event. This is gret news for crypto investors because some exchanges, such as Coinbase count withdrawals as taxable events, which means that now you can use a bitcoin tax software like ZenLedger to refile your taxes for the previous years and hopefully save on your crypto taxes.
- Buying digital currency with US dollars doesn’t create a taxable event. You don’t realize gains until you sell.
- Hard forks: if as a result of an airdrop following a hard fork you didn’t receive crypto units of the new cryptocurrency, you don’t have gross income, and you don’t have to report it.
Crypto Capital Gains Tax Rate
How much tax you pay will depend on how long you hold your Bitcoin. Depending on your tax bracket for ordinary income tax purposes, long-term capital gains, which are recognized when an asset is held for at least one year & one day, are taxed at a rate of 0%, 15%, or 20%. Short-term capital gains are recognized when Bitcoin is held for one year or less, are taxed at your ordinary income tax rates.
Figuring Out the Cost Basis on your Bitcoin & other Cryptocurrency
The basis of an asset is its cost to you (i.e. the amount you pay for it). Note this includes transaction costs, meaning exchange fees should be included when determining the basis.
Bitcoin as Income
The basis of cryptocurrency received as income is a bit different. Since you didn’t actually pay anything, the initial basis is 0, however, you must declare the USD value of the amount received as ordinary income. For example, if you earned some BTC consulting, and at the time you were paid the BTC was worth $4000, that is your basis. Thus, your basis in cryptocurrency that was received (and reported) as income is the Fair Market Value (FMV) when you were paid.
As gifts or Inheritance
Gift recipients receive the giftor’s basis, so if a recipient receives a batch of Bitcoin that was purchased for $1, and sells for $7000 upon receipt, the recipient is on the hook for the $6999 gain per coin (which would likely be a capital gain). For inheritances, the recipient can elect to have a “step-up” in basis to the FMV at the time of inheritance, rather than the decedent’s purchase price.
Other Considerations for your Bitcoin Tax Review: LIFO or FIFO?
Now that we have the basics of calculating basis down, let’s take the complexity up a notch! When investors sell multiple assets with differing basis, they can either choose to sell the crypto they’ve held the longest first (first-in, first-out aka FIFO), or sell the newest ones first (last-in, first-out aka LIFO). In theory you are able to choose which treatment you would like to apply, however, many in the crypto-tax industry believe FIFO is the only appropriate treatment unless you can specifically identify which coin you are selling. Contact a tax professional if you have further questions.
Let’s look at an example of how these would work:
|Lot Date||BTC||Price||Basis||Current Price||Gain (loss)|
|May 1 2013||10||127.13||1271.3||6263.98||61368|
|Sept 1 2016||5||582.23||2911.15||6263.98||28408.75|
|Nov 1 2017||1||5300.75||5300.75||6263.98||963.23|
Assume on Aug. 13, 2018, we want to sell 8 BTC @$6263.98 per BTC.
FIFO – Applying first-in, first-out, we would sell in the order we purchased, thus we sell:
- 1) 8 of the 10 BTC purchased on May 1, 2013
- Our sale would net us $50,111.84. This sale would be offset by the 1017.04 purchase cost of those 8 BTC.
- for a total capital gain of $49049.8
Now, because we held these BTC for longer than 1 year and 1 day, we would apply the 15% long-term capital gains rate for a total tax liability of $7516.78.
LIFO – If we apply LIFO, we sell in the reverse order of purchase. In this case, we sell:
- The BTC bought in 2017
- Total gain – 963.23
- Note – this would be taxed as a short term capital gain because we have held it for less than a full a year (plus a day)
- all 5 BTC bought in 2016, and
- Total gain – $28408.75
- This will be subject to long-term capital gains because the BTC was bought more than one year ago.
- 2 of the 10 BTC bought in 2013.
- Total gain – 12273.7. Calculated by taking the sale price of the 2 BTC, 12527.96, and subtracting the cost of 2 coins purchased in 2013 – 254.26
- This will also be subject to long-term capital gains.
Here, it would thus be advantageous from a tax minimization perspective to apply LIFO. Software services such as ZenLedger allow you to easily see the implications of applying either strategy. Please note, however, this example is made without consideration to the myriad of other factors that may affect the choice of which treatment to apply, such as trading activity of stocks, bonds, fiat currency, etc. We thus advise consulting a tax professional on this matter and do not intend for this example to be a full exploration of the wisdom of choosing either strategy.
Tax Lots: You Can Choose which Units of Crypto Were Involved in Transactions
In the new guidance that the IRS released on October 9th 2019, it describes the situation where you own multiple units of the same virtual currency that you purchased at different times with different basis amounts. The IRSs confirms that in this situation “You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.” The best way to choose them and save on your taxes is to use a bitcoin tax calculator like ZenLedger. With our automatic bitcoin tax reporting you can identify the cost basis or value of your crypto when purchased and sold, and thus choose the best option taking into account your bitcoin tax rate. Without a bitcoin tax software this task would be impossible to manage.
Can Bitcoin Tax Software Help me Claim Losses?
Generally speaking, losses resulting from cryptocurrency trades are tallied against any gains made in the current year. Note, however, that first short-term losses are applied against short-term gains and then long-term losses against long-term gains. The net loss of either type can then be deducted against the other type of gain (ie. Short term against long term).
For example, if you have:
- $5000 of short-term loss,
- $2500 of short-term gain,
- $3000 of long-term loss and
- $6000 of long-term gain
You sum the losses from the gains
- Short term: $2500 – $5000 = – 2500
- Long term: $6000 – $3000 = 3000
Resulting in a $500 total long term gain.
Don’t Forget About Foreign Exchanges!
Do you own $10k worth of Bitcoin or other cryptocurrency in one of the most popular foreign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong, China), Jaxx (Canada) and Huobi (Korea) are widely used bitcoin investors in the US and abroad. If you do have (or had thru the course of the year) $10,000 USD or more, you need to report that to the US Government.
Called “The Paul Manifort Rule,” holding over $10,000 USD in a foreign account or accounts at any point during the taxable year triggers a requirement to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). Note that although the filing deadline is the same as the tax return, the FBAR filing is not part of the tax return and is filed separately/directly with FinCEN. For crypto traders, this means those holdings at a non-US based exchange exceed $10,000 at any given point of the year will need to file Form 114 with FinCEN. Further, if you have two foreign exchange accounts that each had a maximum of $5,001, then you still need to file an FBAR, since the aggregate is over $10,000.
Leave it to Us!
You really wanna go through keeping track of all that?! We didn’t think so. Let us simplify things for you, and keep you compliant. Never over-pay, reduce your audit risk and gain peace of mind.
Now that you know about ZenLedger’s Bitcoin tax calculator, and the complexity it solves for you, sign up for an account today in order to see your tax estimate for free!