The Cryptocurrency Records You Need for Taxes
Keeping clear and accurate records of your cryptocurrency transactions is crucial for staying compliant with IRS regulations and avoiding costly tax issues. Every trade, purchase, or sale can trigger reporting requirements, and without proper documentation, you could face penalties or an inflated tax bill.
At Phoenix Tax Consultants, we assist clients in Pennsylvania and beyond in organizing their tax bookkeeping and records, enabling them to file confidently and protect their financial future.
Transaction Date and Time
Pinpoint the exact date and time of every cryptocurrency transaction. This record establishes the holding period, which usually determines whether a gain is long-term or short-term for tax purposes. Many tax authorities, such as the IRS, require this information to assess the tax liability based on the holding period.
Transaction Amount
Date and time are only a good start. For each cryptocurrency transaction, you should record the following data:
- Amount: Quite simply, the amount is the number of tokens or coins you bought, sold, or exchanged. Also, note the type of token.
- Fiat Value: Record the value of the cryptocurrency in your local fiat currency (e.g., USD, EUR, etc.) at the time of the transaction. This recording helps determine capital gains or losses, as you need to compare the purchase price to the selling price.
This data is critical when you are dealing with various cryptocurrencies, as each one has a different value at different times.
Transaction Type
In addition to sales and purchases, don’t forget to document conversions and transfers. Cryptocurrency conversions are like currency exchanges. These transfers alter the asset’s value. Sending crypto to another wallet has a similar effect because it is like sending cash to a different country that uses a different interest rate.
On a related note, cryptocurrency is considered income if it’s mined, staked, or obtained through a reward. Document these transactions accordingly.
Transaction Fees
Record any fees associated with each transaction, such as network fees (e.g., Ethereum gas fees) or exchange fees. These fees can be added to the cost basis (the amount you originally spent on acquiring the cryptocurrency). They can help reduce the taxable capital gains when you later sell or otherwise dispose of the asset.
Exchange or Platform Used
Note the exchange, wallet, or platform where the transaction took place. This information is essential because different platforms usually have different reporting requirements. Most people use other platforms, an approach that generally makes good financial sense but is confusing. Exchange records help track total gains/losses accurately.
Transaction Reference or ID
Every blockchain transaction has a unique transaction ID (TXID). Recording this ID for each transaction provides an immutable and verifiable record of the transaction. If any discrepancies arise, this ace in the hole can help you trace the transaction.
Counterparty Information
For transactions involving a counterparty (e.g., buying or selling from an individual or another platform), record any available information about the counterparty. This data could include their wallet address, platform, or any personal details required for tax reporting in your jurisdiction.
Wallet Information
Track which wallet was used for each transaction. If you are using multiple wallets, such as cold storage, exchange wallets, or hot wallets, it is essential to know the location of each asset. This information is important not only for record-keeping but also for tracking any potential losses resulting from theft or the loss of private keys.
For more information about other tax preparation strategies, please don’t hesitate to contact us online or call 610-933-3507.