The largest cryptocurrency exchange in the United States, Coinbase has introduced a tool wherein one can calculate tax due in relation to Internal Revenue Service (IRS) guidelines regarding virtual currency earnings. Coinbase has also provided a step-by-step guide to calculate taxes with this tool, which is a very useful way of simplifying the often cumbersome and laborious procedure.
The first step is to establish a relatively complete view of trading activities so that the cost basis may be determined. You may click a button on the website that creates a detailed report which has all the transactions in the buy, sell, send and receive departments. These are associated with the Coinbase account and will provide a good snapshot of what needs to be submitted to the IRS.
Additionally, the report also provides a cost basis for purchases and proceeds for all the sales made through Coinbase with fees also included. This information is important to determine what gains or losses have been made. Coinbase also warns that payment reversals and refunds are usually not reflected in the report. The report is only created for Coinbase transactions so for a complete picture, one needs to create a similar report from other exchanges.
The second step would be to calculate the gains and losses, and Coinbase advises that it would be better for a tax professional to carry out this procedure. Relative gains and losses are calculated by subtracting the costs from each sale or exchange.
Since there is no standard guide from the IRS on how to file these taxes with regards to costs, Coinbase recommends two procedures that it calls FIFO (First in First Out) and SpecID or Specific Identification. The former assumes that the first assets that were purchased were also the first assets that were sold and exchanged. Apparently this is the most common approach used for traditional investments. With SpecID, the investor needs to specify what assets were sold and exchanged by informing a tax professional.
Adding the gains and losses from all of your sales and exchanges will give you your gain or loss for the year. Once the gains or losses for the year have been calculated, you are ready to file your taxes.