The IRS is watching your crypto! Learn how I calculated my cost basis for cryptocurrency taxes …
So how about that cryptocurrency, huh?
It's been on a bit of a wild ride lately. I just heard a few days ago that someone I knew had invested in some Dogecoin and had earned enough on the capital gains to buy a Jeep! All from a cryptocurrency that started as a joke.
Cryptocurrency certainly has performed very well recently.
The good performance means, though, that the IRS is keenly interested in its share. It's explicitly asking people on their 1040 if they've done any dealings in cryptocurrency:
At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
IRS Form 1040, U.S. Individual Income Tax Return
Front and center, right below the space for your name and address. Under penalty of perjury, and all that.
Track down your transactions to report your cryptocurrency taxes
There are two times when cryptocurrency becomes a taxable event. One of those is when you receive it as payment of some kind (income). The other is when you exchange the cryptocurrency for something else (capital gain/loss).
Starting last year, I did some activities that netted me some cryptocurrency.
The majority was from playing around with Cryptotab browser and the Brave browser.
(Check out this article to learn more about making money with these browsers.)
What I earn from using these browsers is income, so I have to report it.
I wasn't terribly organized about how I put the cryptocurrency in my wallets, so I had to track down some pieces of information to determine the proper valuation of the cryptocurrency.
Here's how I calculated my cryptocurrency basis
What I'm going to show below is the steps I used to put together the record-keeping for keeping track of the basis of the cryptocurrency I’ve received. This will allow me to calculate capital gains and losses when I exchange them.
First, here is the spreadsheet with my extensive cryptocurrency empire (haha!):
Here are the steps I went through.
1. Locate the transactions
This took the most time. Thankfully I didn't have a lot of places to look, and it wasn't for but a few months.
I found them by investigating the dashboards of the places I earned them (sometimes they would have them all in one place), the wallets I transferred them into, and in some cases my emails because they would send confirmations.
As I found them, I entered the date, the source (where I earned it), the exchange it went to, the specific cryptocurrency, and the amount (in cryptocurrency units). I put these in columns A through E in the spreadsheet above.
2. Track down the market price history of each cryptocurrency
I downloaded the price history for the kinds of cryptocurrency I earned. In my case this was Bitcoin (BTC) and Basic Attention Token (BAT).
Coindesk.com has price histories for both of these cryptocurrencies, as well as a bunch of others. To find these prices I clicked on the little orange down arrow to the right of the ticker in the top bar:
In my case, I downloaded the history for the previous year.
3. Enter the appropriate daily price for each cryptocurrency
Then, for each of the eighteen entries in the spreadsheet, I looked in the price history and entered the appropriate closing price in each corresponding row.
This is column F.
4. Calculate the dollar amount of each transaction
I then entered a formula that multiplied the amount of cryptocurrency by the price per unit in dollars to get the fair market value in dollars for each cryptocurrency payment.
The formula in cell G2 is shown in the spreadsheet picture (just to the left of the script “fx”). I “filled down” to replicate the function in all of the rows; I stretched the bordering box around cell G2 by dragging the square box in the lower right corner down to cell G19.
The data in column G serve as the cost basis for each transaction.
5. Calculate the total extra income from cryptocurrency
Finally, I selected all of the year 2020 transactions in column G to get the income, which was … $16.91. This is “other sources of income” that goes on Form 1040.
Keep good records for cryptocurrency taxes
So I think this will get me ready for the time that I exchange the cryptocurrency and need to account for capital gains and losses.
It's not a giant amount of work as long as it's kept up with as the events happen. It's not particularly complicated to calculate the basis either.
I hope that this was helpful. Leave any questions in the comments!
