To beat the IRS, you need a legal team that understands the IRS.

Crypto gains accounting methods

On Behalf of | Nov 18, 2022 | Cryptocurrency Issues & Audits

Cryptocurrency might be a relatively new asset, but the way people earn profits from crypto follows a long-established strategy: buy low and sell high. Georgia residents who sell cryptocurrency at a profit might soon discover they owe capital gains taxes. Using an appropriate accounting method could help the taxpayer when the time arrives to file a return.

Crypto and accounting methods

Accurate records help someone keep track of their capital gains. Logging the number of crypto transactions and their purchase and sale price factors into such accuracy. Only some people log their accounting with cryptocurrency transactions, which can create problems for them at tax time.

Cost basis also factors into any capital gains. Cost basis refers to appropriate expenses that detract from the profit margins. Those who do not use the proper indicator could end up paying more in taxes. With cryptocurrency, the cost basis refers to the purchase price. So, crypto purchased at $1,000 per coin has a cost basis of $1,000 per coin.

With cryptocurrency, there are three accounting methods to utilize: HIFO (highest-in-first-out), FIFO (first-in-first-out) and LIFO (last-in-first-out). These strategies focus on when the crypto trader/investor sells the assets concerning their acquisition. With FIFO, the trader would sell the first crypto assets purchased. However, LIFO involves selling the last assets purchased. HIFO focuses on the highest purchase price sold first. The cost basis may vary depending on the method chosen.

IRS issues

Cryptocurrency audits could take Georgia taxpayers by surprise. Reasonable concerns may arise about the IRS attempting to collect tax that is not rightfully due. Submitting proper documentation proving the claimed capital gains’ accuracy could help. If the IRS does not accept the documentation, the taxpayer may appeal.

Proper accounting from the outside may avoid issues. Those requiring help maintaining thorough records might want to work with a tax professional.