IRS auditors have taken notice as more people purchase, sell, and exchange crypto currencies – and are looking for their share. Though these assets don’t resemble stocks or real estate investments, capital gains and losses still accrue when sold; fortunately they’re easier to track and tax.
Cost basis has an enormous bearing on how much taxes you owe when selling crypto assets, so understanding its effects could reveal straightforward, cost-cutting opportunities that could save money when selling. Understanding Specific ID, FIFO and HIFO could reveal tax saving opportunities you hadn’t considered previously.
To meet Specific ID requirements, it is imperative that you maintain comprehensive records of your purchases and sales. This requires noting the dates, types of coins/tokens purchased, cost per unit for transactions made during each sale period as well as total sale proceeds with any associated fees – which can be time-consuming and complex for investors who have invested across numerous platforms over time.
Thanks to cryptocurrency tax software, there’s now an easier solution available for tracking and calculating crypto taxes. By automatically recording and synchronizing transaction data across wallets, exchanges, and coins, this tax software enables the collection of essential tax filing information.
The software will then apply the appropriate tax lot ID method – either Universal or wallet specific. For example, using HIFO would allow you to sell any coins that have been held for an extended period at their highest possible cost basis price and therefore lower capital gains and tax bills.