IRS Notice 2014-21 for use by taxpayers and their preparers that address the transactions in virtual currency, also known as a digital currency.

This means the IRS taxes cryptocurrency like property and investments, not currency. This means all transactions, from selling coins to using cryptos for purchases, are subject to the same tax treatment as other capital gains and losses

The Gain or Loss equals the difference between the value of a coin at the time it was purchased minus the value when you sold or traded the coin. If you buy and sell many coins over time, this can get complicated.

How can ZenLedger help?

ZenLedger takes the mystery of cost basis away by stitching together your trading history and exporting based on the accounting method you select.

In order to correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term.

Short-term capital gains tax is a tax applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are paid at the same rate as you’d pay on your ordinary income, such as wages from a job.

Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0% , 15% , and 20% , depending on your income. These rates are typically much lower than the ordinary income tax rate.

For any cryptocurrency being taxed, we find the appropriate incoming transaction and the find its fair market price in US dollars at the time it was bought and use it as the cost basis for the taxable transaction.

We calculate the fair market value (FMV) at any given timestamp for any given cryptocurrency, using market data from various price aggregators like CoinMarketCap and CoinGecko, integrating directly with them and other third-party APIs that specialize in calculating the fair market value for different cryptocurrencies.

Choosing between our supported accounting methods when running your reports affects the cost basis. Consult a tax professional to determine which method you should use and stick with it.

Cost Basis Accounting in ZenLedger

First In, First Out (FIFO) - cost basis is based on the OLDEST purchase first

Last In, First Out (LIFO) - cost basis is based on the NEWEST purchase first

Highest in, First Out (HIFO) - cost basis is the HIGHEST value purchase first

Examples of Taxable Events

  • Selling cryptocurrency for fiat currency such as USD

  • Paying for goods or services

  • Exchanging one cryptocurrency for another cryptocurrency

  • Receiving Mined or Forked cryptocurrencies

The following are not taxable events according to the IRS:

  • Buying cryptocurrency with fiat money and "HOLDing"

  • Donating cryptocurrency to a tax-exempt non-profit or charity

  • Making a gift of cryptocurrency to a third party within IRS allowable limits

  • Transferring cryptocurrency between wallets and exchanges ("self-transfer")

Can I get a more detailed guide to taxes on my cryptocurrency investments?

Our up-to-date Guide to cryptocurrency taxation, based on IRS guidance and reviewed by a CPA, can be found in this article.

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