It’s tax season, which can be about as unpredictable as recent coin prices for crypto enthusiasts. Although some general guidelines exist, investors have to be very careful when looking at how the tax collector will consider their gains and losses from the past months of frantic trading in exciting, but volatile cryptocurrency markets.

The United States does not yet consider cryptocurrencies as currencies, but as taxable property. Any increases in the coin or token price between acquisition, and sale means some percentage goes to the tax authorities.

The Internal Revenue Service (IRS) is very serious about cryptocurrency tax collection because in recent years it has observed underreporting, and expects more tax returns from the stellar rise of cryptocurrencies in 2017.

With this in mind, here are four fundamental principles to understand before calculating your owed taxes:

1. Gains

Taxable gains (or losses) are the money that you made while investing. They can be calculated by the formula:

Gains = Sale price — Acquisition price/Cost basis

2. Cost basis

The cost basis is the purchase price in USD at the time that you bought a certain amount of an asset that you later sold.

Consider this example: In January you buy 1BTC for $1000, then it goes up. In June, you buy another 1BTC for $3000, and it still keeps going up. In November, you buy another 1 BTC for $10000, and then you finally sell all 3 BTC in late Dec for 3 x $15000 = $45000

Your basis is $1000 + $3000 + $10000, so $14000. Your gains are $45000 — $14000 = $31000, on which you have to pay taxes.

3. Taxable event

Any sale or other transferring of ownership of your assets away from you is a taxable event. You will have to report all taxable events because each is taxable independently.

Here is a list of the major taxable event regarding cryptocurrencies:

  • Trading your coin or token to a fiat currency like the US Dollar
  • Trading from one coin or token to another
  • Purchasing goods and services with your coins or tokens
  • Using forked coins or coins you mined
  • A business paying wages to an employee in crypto

Here is a list of actions that are NOT usually taxable events:

  • Wallet-to-wallet transfers of the same cryptocurrency
  • Buying cryptocurrency with USD, which is not taxable until you trade or sell it
  • Mining a coin, which is also not taxable until you trade or sell it
  • Giving cryptocurrency as a gift to someone else, where the recipient inherits your cost basis

4. Holding period

Another significant factor in how much taxes you will have to pay is the holding period. It describes the continuous time for which an amount of an asset was in your possession. If it exceeds one year, the IRS considers your profits long-term gains, and you pay between 0–20% of taxes, instead of a regular income tax rate of up to 39.6%. This means the best way to minimize taxes is to HODL!

So when the time comes to actually calculating your taxes, first get together records of all your trades in 2017. The exchanges you used may have extractable records of your trades. Then, look up or estimate the fair market value of the cost basis of each asset you own or traded in 2017. Once you have the cost bases, record all your taxable events and the holding periods for the different coins and make a list of your gains and losses in USD terms. Finally, count them against each other and figure out your tax rate.

Since the details of this may be complicated, it can help immensely to talk to a tax accountant or attorney.

One last thought: you can use your crypto holdings as non-cash charitable contributions by giving to a good cause and get a tax deduction for the donation you make. This way, you would avoid paying taxes on the assets you would otherwise sell, the amount gets counted against other taxable gains, and you benefit society on your terms, not those of the government!

This article was originally published on Cointelligence on Apr 17, 2018. For more updated information on calculating your DeFi taxes, read our 2020 article here.