With Tax Day rapidly approaching, cryptocurrency investors are scrambling to determine how their digital asset holdings are going to come into play when they file their taxes. (See also: Bitcoin IRS Tax Guide For Individual Filers.)
For much of the history of digital currencies, this question has confused many investors. However, as digital currency investing has grown increasingly popular, the U.S. government has firmed up its expectations for how individuals who trade in cryptocurrencies must report that information each year. (See also: How the New Tax Law Impacts Cryptocurrencies.)
Recently, the popular digital currency exchange Coinbase reported more than 13,000 clients to the U.S. Internal Revenue Service (IRS). In order to make the process of filing taxes more straightforward for these customers, Coinbase has also recently launched a new tax calculator. (See also: IRS Orders Coinbase to Hand Over User Data.)
New Tax Tools Simplify Cryptocurrency Reporting
The idea behind the new tax tools is to provide Coinbase users with support as they prepare their tax filings. The calculator is not designed to automatically report information on behalf of users, but rather to assist clients and their tax professionals by simplifying the work that must be done.
Effectively, the tax calculator generates a single report with the total buys, sells, sends, and receives of all currencies associated with a given Coinbase account, according to a report by Bitcoin.com. The report includes a cost basis for the purchases and proceeds, including exchange fees; this is helpful when making a determination of gains or losses.
Tax professionals typically use one of two approaches: first in first out (FIFO) or Specific Identification (SpecID).
Limitations of the Tool
Coinbase's tax calculator tools may be useful to some, but they are not designed to be universal. For example, they may not help clients who have transacted with GDAX, or those who have stored cryptocurrencies in a hardware wallet.
Individuals who have invested in initial coin offerings (ICO) must also address those transactions separately. For its part, Coinbase suggests that customers "will need to download similar reports from all other exchanges" they have used in order to "create a complete view of your digital asset investments." Nonetheless, it's likely the Coinbase tax calculator will save cryptocurrency investors and the tax professionals they trust a significant amount of time and frustration over the weeks to come.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.