Calculating Cryptocurrency Cost Basis for US Tax Filing

Photo by Volkan Olmez on Unsplash

I am fairly new to cryptocurrency investing, but I bought, sold, and moved enough around this past year that when it came time to filing my 2020 federal taxes, I ran into a fairly significant issue. I use TurboTax, and have for a number of years. I can’t recall if this question popped up on last year’s taxes, but it most certainly did this year. Perhaps it rings a bell:

The dreaded question. But don’t compound things for yourself by saying no.

Well, if you’re reading this, I’d say it’s safe to assume that for you the answer is also yes. Well, I am happy to share with you what I’ve learned, and hopefully it will save you some time and headache.

Since I hadn’t been religiously tracking my transactions throughout the year, importing transactions from a service wasn’t an option. I initially took it upon myself to figure out my own cost basis (which I will explain shortly). Upon clicking through, I came upon the following screen:

As you can see, all you really need is where you bought, the name of the asset,price you bought for, when you sold it, and for how much. But there are some factors about crypto that make this older approach a bit more difficult.

When it comes to cost basis, the Internal Revenue Service treats crypto just as they do any other asset such as a house, land, or stocks. But the factors that make crypto unique, are the same factors that make calculating cost basis hard and make it impossible for any one entity to give you a full cost basis calculation as you would with a stock brokerage. Crypto can be moved at will, sold in fractions, or multiple purchased fractions sold in a lump sum. The technology is way ahead of the regulation.

When I mapped out my transactions, I had used 11 different exchanges, apps, software and hardware wallets throughout the year. I was determined to do so to learn more about the process, how things work, and hopefully find areas where I can improve my personal processes (or in some cases develop some where none existed.

Before I go any further, it is probably a good point to lay out the three different scenarios that I discovered when working on calculating my cost basis for transactions. First things first, understand that when you swap one crypto for another, the IRS considers this a taxable event. It is looked at by them as you selling one, and buying another. It is my opinion that the big US compliant exchanges do a good job providing enough information to you to easily make these calculations. Also, keep in mind that the IRS doesn’t care what decimal point of a token you bought and sold. They only care about the USD value of it at buy and sell times.

So the first scenario is one where you bought one coin, or portion thereof, and disposed of that same exact amount in a later transaction. This would be one simple line item entered onto your cost basis worksheet, and also the easiest.

In this example, we bought $2K USD in May and sold for $6K USD in December for a gain of $4K USD (not real prices!)

The second scenario is one where you bought one coin, or portion thereof, and disposed of it in multiple smaller transactions. This could be handled by entering the purchase into multiple smaller buys matching up to the amounts that were sold.

In this example, $4K USD worth was bought in May and sold in December for $12K USD, for a gain of $8K. Note that the $4k purchase was broken into two $2K purchases to make cost basis calculation possible.

The third scenario is one where you accumulated a coin through multiple smaller buys and sold it all at once. This is essentially the exact opposite of the previous scenario. In this case, you would simply break the amounts sold into parts to match up to the buys.

In this example, $6K USD total was accumulated in multiple buys, and sold later for a total of $18K, for a gain of $12K.

Now, this all sounds great and easy, and it is if you don’t have a lot of transactions, and haven’t moved amounts all over the crypto-sphere in your eagerness to try out the latest and greatest hotness.

I should mention that, at least with TurboTax, the web form I showed above has a limit of 75 lines. I am way above that, so my only other option is to craft my own comma separated values (CSV) file and hope that it is ingested without problems by my internet tax overlords. Ultimately, this is not a time suck that I was willing to risk. I have since bitten the bullet and paid for a tracking app that does everything I described and much more, which I will likely cover in a later post.

The key takeaways you should remember are that the IRS considers a cryptocurrency to be sold whether it is for US dollars or exchanged for another token. Your gain or loss is based on the price relative to the dollar at the time of the swap. Also, you have just started what may be another cost basis entry on your form 8949 (unless you hold that one into 2021).

I guess the moral of this story is, if you only have a small amount of transactions to claim (75 or less) I would recommend hand calculating your cost basis as there really is no need to pay someone for something you can do for yourself in a spreadsheet. If you are over that, or your situation is overly complicated, I would recommend finding a paid service to help out. But, you may be one of those super stubborn people out there who would rather do it all yourself. As for me, I will sleep better at night knowing I didn’t miss anything, and I expect the insight I gain will help me recoup what is honestly not that expensive an investment relative to the amount I have invested in crypto.

If you have questions about taxes and crypto about things OTHER than calculating the cost basis, the IRS has a nice FAQ page here: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

If you’d rather just watch this on video:

https://youtu.be/jYbsGBnJK_Q