First In First Out Process To Calculate The Tax Dues On Cryptocurrency

By Steven Anderson July 24, 2019 Off

Regulations which do not restrict innovation or growth should be established, and cryptocurrency regulations are no exception to this need.

Cryptocurrency adoption is increasing among retail investor, institutional investors, Big Tech companies, businesses and individuals, and all of them have a dire need to know where they stand when it comes to tax liabilities.  This is important the burden of reporting the earnings and the tax liabilities are exclusively upon the taxpayers.

In the US, taxpayers are very clear about treating their property as a holding for taxation per the 2014 document published by the IRS.

Hard forks are typical in cryptocurrency holdings.  Hard forks are high profile splits will lead to the creation of newer cryptocurrencies.  When the hard fork takes place, the software rules are changed, and the latest software becomes incompatible with the nodes (servers). For the server to become functional anymore, they need to upgrade to the new software.

In cases of those who are holding private keys to the original coin, they will be facilitated to contain equal numbers of the newer tokens to the unique tokens.  The end investor will land up with double the number of tokens without having the option to opt-out from the doubling. This leads to a very important calculation of estimating the cost-basis on the forked coin.  The forked coin is basically received for free.  This does not seem correct as the value of the new tokens held never equals the original numbers of coins.

Forks are basically created in order to enhance the value of the original coin by creating the scarcity element.  The fundamentals are changed somewhere, and this becomes a reason to value the new coin in a different way to arrive at the cost basis.

Investors would like the IRS to elaborate on the approaches to cost basis in a different way for each person. Manual calculation to arrive at the cost basis is practically difficult for cryptocurrency.  The output of the unspent transaction should be tracked right from acquisition through the end disposal from the investors. Several of them are opting the First In First Out process to calculate the tax dues. 

Taxpayers are currently following the prudent move of recording every move in their cryptocurrency transactions in order to maintain an audit trail.  This should be further presented to expert tax analysts who will help arrive at the best method to calculate the tax liabilities.