This article details the steps required in order to properly account for bitcoin, altcoin or other digital currency transactions without using Libra. Warning: these steps can be very time-consuming and may require performance-enhancing supplements like tylenol or coffee to remove headaches or decrease drowsiness after hours (or days) of prolonged effort toward achieving this goal – you should first consult a physician.
Before we begin, a brief note – unless you’re never going to use Bitcoin or digital currency again, you will need to do the following process over and over and over again to keep your transactions you’re accounting for up to date. Not a problem? Ok, let’s continue:
- Export your transactions from where you made them. Hopefully the place where you have bitcoin or digital currency transactions lets you export them. If not, you’ll need to copy and paste them or transcribe them. From here you’ll need to put together a spreadsheet (oops, yes, you’ll need to be familiar with how to use a spreadsheet program) and add your transactions to them. If you’ve had multiple transactions on different sites, you’ll need to reformat the spreadsheet so that the multiple places you’ve exported data from all have the same data format.
- For every time you purchased Bitcoin, you need to determine the what the price of it was that day and add it next to that transaction in your spreadsheet.
- For every time you sold Bitcoin (this includes times when you may have purchased something, like a cup of coffee for example – this is considered a sale since it is being redeemed for something) – you need to determine what the price of it was that day as well, and add it next to that transaction in your spreadsheet.
- If you received any Bitcoin in exchange for services you provided, or something you sold to someone, you need to add up all of the these transactions and keep track of of this total number in a separate area of your spreadsheet classified as Income.
- If you mined any Bitcoin, you need to add up all of the transactions that were mining rewards and keep track of of this total number as well in the Income section of your spreadsheet.
- If you donated any Bitcoin, you need to add up all of the transactions that were donations and keep track of this total number in a separate area of your spreadsheet classified as Donations.
- You now need to determine what your cost-basis method is going to be. There are several, such as FIFO, LIFO and Selective. Cost basis methods determine what your gains and losses are in conjunction with your transactions. These gains and losses are required in certain tax reporting situations, like in the United States, for example.
- If you’re using the FIFO cost-basis method, for every sale/disposal/redemption of Bitcoin that you had, you need to go find the oldest purchase of Bitcoin and compare your redemption price with your purchase price to determine if it’s worth more or less than you are selling it for. Also, keep in mind that the quantity of Bitcoin you’re selling is also important. If it isn’t equal to the purchase quantity you’re comparing it to under the FIFO method, once you’ve exhausted the initial quantity, you need to them move on to the second oldest purchase quantity and repeat this process over and over until you’ve established your gain or loss under the FIFO method. For each purchase you need to make sure it hasn’t already been attributed to a previous sale/disposal or redemption. For each sale, put the calculated gain or loss as per the FIFO method next to each transaction in your spreadsheet.
- If you’re using the LIFO cost-basis method, you need to follow the steps outlined in Step 8, but attribute each sale to the most recent purchase of Bitcoin, and repeat/follow the process for each sale going back through time, using the most recent purchases to establish a gain or loss that haven’t already been attributed to a previous sale/disposal or redemption. For each sale, put the calculated gain or loss as per the LIFO method next to each transaction in your spreadsheet.
- If you’re using the Selective cost-basis method, for each sale/disposal or redemption, you need to find the purchase price that gives you the lowest possible gain or maximum possible loss and repeat this process going back through time, being careful not to use a portion of any purchase twice for a corresponding sale/disposal or redemption events. For each sale, put the calculated gain or loss as per the Selective method next to each transaction in your spreadsheet.
- For whatever cost-basis method you utilized, you now need to total up all of your gains and losses in your spreadsheet and put the total in it’s own cell. This is your realized gain or loss for the period you are accounting for.
- If you’re in the United States, you need to go through and pull out your gains or losses that occurred in the last 365 days and total it in it’s own cell. This is your short-term gain or loss that you may need when filing your annual taxes. You need to also do this process again for gains or losses that occurred more than 365 days ago. This is your long-term gain or loss which you may also need.
A few additional things you may need to do:
- If you’re an individual that has held Bitcoin and are accounting for the purposes of determining a potential tax liability, and you didn’t do steps 1-12 for the last calendar year, you need to repeat the steps again so you have the correct numbers and timeframe.
- If you’re a trader staying on top of accurate gains or losses you need to repeat steps 1-12 frequently to efficiently keep track of your positions and bottom line over time.
- If you’re a business that accepts Bitcoin, you may need to follow steps 1-12 frequently throughout the year as well depending on the number of transactions you’re receiving and the amount of time Bitcoin is being held.
- You should consult with a CPA or tax professional to make sure you’ve properly accounted for your transactions.
- If you’re a CPA or tax professional, you will need to follow steps 1-12 anytime you have a client that has Bitcoin, alt coin or a digital currency, and repeat them over and over again depending on the different intervals of time you’re accounting for.
The Libra Alternative
If at any point in time you decide you’d rather have an easier way of accounting for your Bitcoin or digital currency use, we’d love to invite you to try Libra. In most cases, we automate all of the steps above, which can change hours or days of work into only a few minutes of your time.
We currently offers three products:
- LibraTax for Individuals: LibraTax for Individuals is Libra’s entry level accountancy application for the blockchain designed for most uses of Bitcoin. It includes support for trading, holding, using, mining, gifting, tipping, and donating. LibraTax for Individuals is free to sign-up for. It also includes an optional $19/year feature that can be unlocked post sign-up via credit card or Bitcoin that allows users to generate a tax form, should they need it, that can accompany tax documents downloaded from the IRS website or generated in widely-used programs like TurboTax.
- Libra for Business: Libra for Business is the workhorse of the Libra accounting suite. Like LibraTax, it is also built on top of the blockchain. It offers all of the features included in LibraTax for Individuals with the additional benefits of monthly reporting, and several different comprehensive reports that give businesses a full and complete perspective of anything they would need to know relating to their digital currency use that can be found in the blockchain. Libra for Business is $49/year.
- Libra Pro for Accountants: Libra Pro is a new product that has been designed for the accounting community at large that marries all of the features found in LibraTax and Libra for Business together under one application. As mentioned previously, it is very difficult for individuals and businesses to efficiently account for their digital currency use without Libra. For accountants, this problem becomes a nightmare as it is replicated with each additional client they onboard. Libra Pro, like LibraTax and Libra for Business, is also engineered to run as a real-time application on top of the blockchain in conjunction with the Bitcoin protocol – it is $99/year.
Or if you prefer, you can always bookmark this page, skip signing up and follow the aforementioned steps for accounting without Libra. 🙂