1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

While the basics of long- and short-term capital gains for taxation of bitcoin are relatively straightforward, many cryptocurrency investors may have a very hard time calculating their cost bases. How might an investor who is an active trader in the bitcoin arena track cost basis when the fair market value of bitcoin typically varies considerably between exchanges and from day to day?

One factor that could potentially help Max to keep tabs on his cost basis is his decision to use third-party exchanges like Bitstamp or hosted wallet services like Coinbase. Some of these services allow users to track their transactions, making a determination of cost basis significantly easier to calculate. But what if Max wanted to make his own determination of the fair market value of his cash trades by utilizing his experience through various transactions and bitcoin commerce with local merchants?

First off, it is likely that many of the counterparties would have well-established accounts which could accommodate this type of tax reporting. Bitcoin and other cryptocurrencies have been increasingly widespread, but they have yet to crack into the world of mainstream, everyday transactions in a significant way.

IRS requirements: fair market value

The IRS requires that taxpayers report the fair market value of bitcoin holdings for the date that the currency was received, not for another time. Thus, as long as Max is able to determine his fair market value in a “reasonable manner which is consistently applied,” he maintains leeway when it comes to determining his cost bases. Thus, he could make a determination of fair market value using a daily high price from one exchange, so long as he didn’t also use a daily low value from a different exchange as a reference point for his sales. This would artificially reduce his tax liability.

At least in theory, the fair market value reported by a taxpayer selling bitcoin should be equivalent to the new cost basis for the new taxpayer buying bitcoin. In practice, however, there is as of yet no way to ensure consistent reporting across these lines. This could make it difficult or impossible to determine a fair cost basis. And this is for a major cryptocurrency like bitcoin; for brand new currencies, the issue becomes even more complicated.


Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
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