How to Calculate your Basis in Bitcoin and Other Cryptocurrencies

So it’s finally time.  You got that last-long awaited W-2 and have compiled all of your crypto transactions into one gigantic spreadsheet, and it is time to follow that time-honored tradition of reporting your earnings and paying your taxes because we all like roads, parks, and military superiority, right?

The challenge of filing your return boils down to this: When is a gain reportable and what is the basis?

Depending on whether you are a day trader or a HODLer like me, the difficulty in making those determinations can vary widely.

Well, fear not because, as the title indicates, I am going to show you how to figure out what the heck you gained and what the heck you owe.

I considered adding a subtitle: “Why, oh why, did I choose to day trade?  LIFO, FIFO, Long-Term, Short-Term – I’ll never figure all this mess this out.  Oh, Roger Ver!  Will you please hurry up and establish your Libertarian country so I can move there and be free of all this tax chaos?”

But then I realized I don’t want to live in such close proximity to Roger Ver, even if he did tone down his use of Bitcoin’s twitter account to pump Bitcoin Cash.

So let me start with an example to easily help you determine when you have a taxable gain.  The accounting language we use is if the gain has been realized or remains unrealized, and it is actually quite simple.

If you bought a bitcoin in 2017 for $2,000 and still have it today, it is worth, $20,000, oh – $14,000, crap! –  $8,900, relief – $10,500.  Good grief, the market is volatile right now.  For the sake of this example, let’s just say $10,000.  Your Bitcoin being at $10,000 today is a true gain of $8,000 but because you haven’t “realized” that gain by selling your Bitcoin, you have not triggered a taxable event.  Therefore, you have an unrealized gain and nothing to report to the IRS so life is good.  On paper, you are $8,000 richer, but the IRS can’t charge you for that.

On the other hand, if you sold your Bitcoin for $10,000 on or before December 31, 2017, after buying it for $2,000 earlier in 2017, you have “realized” that gain of $8,000 and triggered a taxable event – specifically, a short-term capital gain.  If you held it for longer than a year, it is a long-term gain.  I won’t expand on that here since I have covered long-term and short-term gains sufficiently in What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions?

Now, we have been doing a little basic math here.  $10,000 – $2,000 = $8,000.  In that equation, the $10,000 represents the Fair Market Value, the $8,000 represents the gain and the $2,000 represents your basis, or cost.  It really is just about that simple.  Basis means cost.  Or, more specifically, all costs incurred in the acquisition of the asset.  That means you can add to your basis any fees or other charges associated with the acquisition.

For example, let’s say you used Coinbase to make your crypto purchase and paid a fee of $30 to buy that $2,000 of Bitcoin.

Side note ->  Before I continue, I know someone is skipping to the end already to comment to me that I’d be an idiot to use Coinbase to buy anything when I can transfer everything for free to GDAX and pay no fees on a limit order.  I can assure you, I and the 60,000 Youtube content creators claiming to have just “discovered” this tip on their own are aware of this.  This is just an example to show how to treat a fee.  Now go delete your comment and chill out.

So you paid a $30 fee to acquire that $2,000 Bitcoin.  Because the fee was a cost of acquiring the Bitcoin, you add it to your basis which becomes, in fact, $2,030.  That means your gain is actually only $7,970.00.

You can also deduct the cost of any fees associated with selling your Bitcoin so if it cost you another $30 to sell it, then you would report that as a deductible fee against the gain and reduce the capital gain to $7,940.00.

That, in a nutshell, is how you calculate your basis, your realized gain, and what you report to the IRS.

Like all things associated with the IRS, however, things tend to be much more complex.

For example, let’s assume you don’t have $2,000 to drop on Bitcoin at any given time so you have purchased $200 in Bitcoin per week since October effectively dollar cost averaging your purchase.

Using real, historical  prices now, that means that, roughly, you made the following purchases.


Following that methodology, on December 31, 2017, you own just over 0.22 Bitcoin with an overall basis of $2,000.  On December 31, the price of Bitcoin closed at $14,156.40, so the value of your investment at 12/31/17 is $3,167.68, giving you an unrealized gain of $1,167.68.  Not bad.  Would have been a lot better if you could have picked up a whole Bitcoin at $2,000 back in July but you missed the early train same as me.  Talk about a validation for FOMO.

Now, the fun part.  Let’s pretend that on December 31st, you needed to sell some Bitcoin to cover the cost of the new mining rig Santa brought you.  So how do you account for which Satoshis you sold and what your basis was in those specific trades?

First, I need to make a correction.  See two paragraphs ago where I said you have an overall basis of $2,000?  Well, smack my hand because you can’t think of an “overall basis” in terms of your taxable gains and losses. You have to identify each transaction individually to determine the basis and subsequent realized gain or loss on what you sell.

Two common methods of identification are First-In-First-Out (FIFO) and Last-In-First-Out (LIFO).  They mean exactly what they say.  FIFO means you sell the oldest (or “first in”) asset in your holdings.  LIFO means you sell the most recently purchased (or “last in”).

Generally speaking, in times of rising prices, it is most tax beneficial to utilize LIFO.

Think about that.  Prices generally rose from October to December.  Would you rather sell your First-In Bitcoin purchased October 23rd, realizing a gain of $277.42, or would you rather sell the Last-In Bitcoin purchased on December 25th and realize a gain of $1.85?  I’d much rather pay tax on $1.85 than $277.

Likewise, in times of falling prices, it is frequently more tax beneficial to utilize FIFO which will create the bigger loss.  Of course, you can only take the capital loss to offset against existing capital gains but you can carry the loss forward into future tax years if you can’t use it all in this year.  This is the part where I again remind you to read my previous columns and, more importantly, consult with your tax professional.

Also, you should know that the default assumption by the IRS is that you are selling everything FIFO – of course, because that most often creates the largest gain and the biggest tax revenue for them.  The burden is on you to document if you use a method other than FIFO and ensure that you track everything very carefully.

Another method I haven’t mentioned yet is Specific Identification.  This is more challenging in that it requires a more detailed level of tracking but it can be the most beneficial because you can take advantage of the benefits of both LIFO and FIFO, depending upon the current environment, by handpicking which portions of your Bitcoin you will sell specifically.

So, for example, let’s say you need about $800 to cover that mining rig.  You could sell the Bitcoin acquired on November 27th, and December 11th, 18th, and 25th, but not that purchased on December 4th.  That would put $805.51 in your pocket and result in a realized net capital gain of only $5.51, and you are not left with any Loss Carryforward like you would be by selecting December 4th instead of November 27th.

I feel like I need to touch again briefly on a topic I have addressed more specifically in Will we finally get some relief from taxes on our Crypto? (U.S. Tax Code).  That is trading cryptocurrency for cryptocurrency.  If you exchange Bitcoin for Stellar Lumens for example, you are deemed to have sold your Bitcoin for fiat currency at its market price at that moment and purchased Stellar Lumens for their value in Fiat currency at that moment as well.  Although we all know it is a trade, it is deemed to be a separated sale and subsequent purchase thereby creating a taxable gain or loss on the Bitcoin and establishing a new basis for the Stellar Lumens.

Yep, this stuff is complex.  And, honestly, even though you are smart enough to figure out investing in crypto, you cannot get what you need to prepare a tax return from a column like this.  What you can get from a blog like mine is a strong general knowledge that enables you to speak the same language, ask the right questions, and compile and provide the necessary data when meeting with your personal tax professional.

Even if they are new to the crypto space, they have spent a ton of time educating themselves on how to best handle every single scenario they might face and how to thoroughly research new ones like crypto.  And since the tax code has sweeping changes for 2018, they get to do all the research and study again to figure out what best suits your tax situation next year.  But the bottom line is, doing your part by reading columns like this saves your tax professional from spending time educating you on the basics, and saving their time means you get to keep more of your crypto gains for yourself.

As usual, feel free to subscribe for future updates, and when your tax professional marvels at your foundational knowledge and intellect, please consider making a small donation so my wife will quit griping about how much time I waste “goofing around with crypto.” Support The Crypto Tax Center

© Michael L. Collins


Will we finally get some relief from taxes on our Crypto? (U.S. Tax Code)

The answer is, “Maybe” but we might all go to jail for money laundering as well.

A brief search through the various bills introduced by the 115th Congress reveals at least 15 which at least mention cryptocurrency, digital currency, or virtual currency.  Their topics are as widely varied as the ICOs being pumped out now on an almost daily basis.

These bills range from Senate Bill S722 – Countering Iran’s Destabilizing Activities Act of 2017 to HR 4530 GAME Act of 2017, which essentially includes language that gambling with “virtual currencies” will be subject to the same rules and regulations as gambling with fiat currency.

It does seem somewhat ironic that the official IRS stance still maintains that cryptocurrency is property while our legislators identify it as having similarities with other forms of currency.  I guess, technically, you could go out and bet your house (aka “property”) on a wager, but clearly the point of this bill is that cryptocurrencies have become an additional viable means to participate in various forms of gaming.

A couple of bills stood out to my particular interests:  H.R. 3708 – To amend the Internal Revenue Code of 1986 to exclude from gross income de minimis gains from certain sales or exchanges of virtual currency, and for other purposes, and Senate Bill S1241 – Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017

Both of these bills could have significant impacts on the cryptocurrency space for multiple reasons.  To ensure I give each of them the appropriate amount of attention they deserve, I will focus on HR3708 in this column and follow up with a second column on S1241 within the next day or two.

I wrote about the foundations of today’s topic, HR3708, in a previous column – What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions? The bill was introduced in September and was promptly referred to the House Committee on Ways and Means.  It sought to introduce an exemption of $600 in cryptocurrency transactions from income taxes and capital gains taxes.  It was a favorable bill for those of us trading in cryptocurrencies which as of today, is still a very unfriendly tax environment – especially for those that spend their cryptocurrency like money and don’t utilize it so much as a store of wealth.

Unfortunately, this bill has apparently made no further progress.  But, have faith, dear reader, for there is an alternative – House Concurrent Resolution 97, Directing the Clerk of the House of Representatives to make corrections in the enrollment of H.R. 1.

Before I delve too deeply into what HCR97 aims to achieve, I need to provide a little background.

After a series of convoluted machinations, amendments, and reconciliation with the Senate bill, HR1 ultimately transformed into the gigantic tax reform bill signed into law by President Trump on December 22nd, making significant changes to the Internal Revenue Code of 1986 for both individuals and corporations.  Depending on whether you listen to Fox or CNN, it is either the biggest tax cut for the middle class in decades or the biggest corporate tax cut ever, carried on the backs of the middle class.

Whichever is closer to the truth, one thing is for sure:  I have no earthly idea.  I asked my sister, who is also a CPA with a thriving tax practice, and her thoughts were similar.  They doubled the standard deduction, which is good, but they reduced exemptions, which has an opposing effect but then they increased the child tax credit which is good.  With so many changes that conflict with one another, it will take some time to determine exactly who will benefit from this tax bill. For better or worse, in 2025 all of the individual tax changes expire.

What HCR97 aims to do is modify HR1 to include, among other things, many exact provisions sought with HR3708.

In a nutshell, the most relevant provision states:

“For transactions occurring after December 31, 2017, gross income (aka taxable income) shall not include gains from the sale or exchange of virtual currency for transactions under $600 for other than cash or cash equivalents.”

Note the use of the language “other than cash or cash equivalents.”  To me, this indicates that a transaction on an exchange where you sell Bitcoin for USD would be a taxable event for any amount including those under $600.  Personally, that is a little disappointing to me and not the way I understood it to be in my previous column.  I had expected the language to include an exemption for an exchange of crypto for cash up to $600.  No such luck.

What about an exchange of cryptocurrency for cryptocurrency?  The bill includes this language:

(c) VIRTUAL CURRENCY.—For purposes of this section, the term ‘virtual currency’ means a digital representation of value that is used as a medium of exchange and is not otherwise currency under section 988.  

Section 988 of the Internal Revenue Code refers to Foreign Currency transactions, so this seems to be an indication that they will not consider cryptocurrency to be cash or a cash equivalent (either foreign or domestic) for the purposes of this bill.  I am hopeful this means the greenlight will be on to make sub $600 exchanges of crypto for crypto without there being any tax impact.  Currently there is no clear guidance on this and some (not me or most other tax professionals) believe that exchanging crypto for crypto qualifies as a 1031 or like-kind exchange.  There are many reasons why this doesn’t make sense including the IRS stance that many other forms of property including gold, silver and other properties are explicitly disqualified fromm like-kind exchange status.

The consensus is that, under current IRS treatment, if we make an exchange of Bitcoin for Litecoin today, we are deemed to have sold the Bitcoin for Fiat/USD, triggering a taxable gain or loss depending upon the basis, and then subsequently to have purchased the Litecoin with Fiat/USD – even though that is not the reality of what happened.

This bill would give us a little wiggle room to avoid taxes on the exchange of one crypto for another.  For me, in 2017, I will have numerous small transactions to report where I traded Bitcoin for several altcoins.  If this legislation had been in place, I would have to report nothing.  Yeah, I’m a really small time trader.  Don’t laugh at me.

HCR97 also contains an aggregation rule which disallows a “series of related transactions” from being exempted.  It is hard to say how they will identify “related transactions” but I think it is safe to say that if you talk the dealership into letting you pay for that Lambo by making 350+ transfers of $599.99 each to their wallet hoping each individual transaction will be exempted, you will likely be in for a rude awakening come tax time.

Promisingly, the bill does provide for an increase in the exemption amount periodically by way of a cost of living adjustment from a base year of 2017.  This could turn out to be especially critical if the true converts are right and the value of USD begins to implode.

Of course, while the tax overhaul that started as HR1 has passed and is now officially law, this concurrent resolution has only just been introduced and must yet be agreed upon by the House and Senate and signed by the President in order to be added to the law.  It is not everything we had hoped for, but it is a step in the right direction in terms of establishing a more tax friendly environment for the crypto space.

Keep an eye out in the next day or two for my follow-up column on Senate Bill S1241.  And if you have other interpretations of the proposed language of HCR97, or run into opposing viewpoints elsewhere about its implications, please comment and provide links where possible.  Between the complexities of cryptocurrency and the sausage-making process of legislating, we need to keep as many eyes on this Congress as possible.

As usual, feel free to subscribe by providing your email for updates whenever I publish a new column and if you have found anything I have published of value, please consider a donation to the Crypto Tax Center by clicking here: Support The Crypto Tax Center

© Michael L. Collins


What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions?

October 13, 2017 by: Michael Collins

So maybe you own some Bitcoin but, like my 6 year old with tooth fairy money, it’s burning a hole in your pocket. Maybe you are eyeballing a new video card for that mining rig to capture some more NEO and get GAS from or you might just be picking up a much-needed microvelvet lounger for the pooch at  The good news is you can pay for all of this with just a little bit of Bitcoin.

Well, under today’s rules, those purchases result in a capital gains (or loss if your timing is as bad as mine).  That is because the IRS currently identifies Bitcoin as property.  They laid the groundwork for this treatment in Notice 2014-21 (click here to read n-14-21), which I personally believe was rushed just to get something out there as cryptocurrencies began growing exponentially in popularity and there was no previous guidance as to the tax treatment.

Our friends in the U.K. have a little more breathing room than we do here in the U.S.  While the IRS equivalent in the U.K. identifies Bitcoin and other cryptos similarly, as property, they also give each tax payer an exemption of £11,100 (around $14,000 US dollars) so that those spending it like cash don’t get hammered with capital gains taxes.  They actually have capital gains taxes there too – even spelled the same but read it in your best John Oliver voice for the most accurate pronunciation.

Here in the US, we currently have no exemption so every single Satoshi of Bitcoin you spend is treated like a property sale and subject to either long-term (hopefully) or short-term (not hopefully) capital gains taxes depending upon how long you held it (or, better yet,  how you identified it – which I will explain in a future column).  Every single transaction.  Even the .000213 BTC fee on an exchange of two other coins.  In the stock exchange world, transaction fees can simply be added as part of the cost of the transaction and get added to the basis.  In the crypto world, the fee itself is its very own transaction, treated from the current IRS perspective as a unique sale of property on its own. Note to self – if an exchange will accept USD for transaction fees, pay it with that and just add the fees in as part of the basis of the acquired coin.  That would also save a lot of cost on these exchanges that are slow to adjust the crypto rate as the value of the coin increase against the U.S. dollar.  More about that in a later column too.

With all of this incredible hassle to just spend Bitcoin in the United States, how will it ever truly catch on and be perceived widely as a viable alternative currency, rather than a black market of criminals who aren’t paying taxes anyway?

Enter our heroes, Representative Jared Polis, D-Colo., and Representative David Schweikert, R-Ariz., who serve as chairmen of the Congressional Blockchain Caucus.  In recognition of the challenges faced in its growing adoption, the Caucus was formed during the 114th Congress in February of 2017 to educate and inform policymakers on blockchain technology and help the United States remain competitive in the international arena.

Polis and Schweikert introduced The Cryptocurrency Tax Fairness Act of 2017, which by its very name and the fact that they belong to different parties, suggests bipartisan understanding of the dozens of complaints generated by my last column that paying capital gains taxes on every single transaction is just “not fair.”  I could use other quotes besides “not fair” but I’m trying to avoid an R- rating.

As the IRS strong-arms exchanges into revealing the potentially unreported, tax-consequential activities of their customers, Polis and Schweikert seem to have taken the stance that at least part of the blame for low self-reporting falls on the IRS for providing only vague guidance for taxpayers and preparers about the tax treatment of something with hybrid-like characteristics such as cryptocurrencies.

Prior to the introduction of The Cryptocurrency Tax Fairness Act of 2017 in September, Polis and Schweikert sent a letter to the Commissioner of the Internal Revenue Service, John Koskinen, requesting that the IRS “clarif[y] how to properly tax these forms of transactions.”  Polis expanded by saying, “I look forward to hearing from Commissioner Koskinen and receiving clear-cut guidance for how digital currency users report their taxable income.”

The opinion of Polis and Schweikert seems clear that buying a soda from a Bitcoin-friendly vending machine should not trigger a capital gains tax situation and that eliminating capital gains taxes on at least some of the day-to-day transactions is exactly what they hope to accomplish.   Like in the UK, the Act would exempt transactions under a certain amount from triggering a taxable capital gain.  Unlike in the UK, the exemption is not $14,000 US, only $600.  That is not anywhere close to where I would like see it, and this Act still has a long way to go before it becomes reality, but it is a huge step in the right direction as recognition of the legitimacy of cryptocurrencies in the United State continues to gain ground.

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© Michael L. Collins

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