Post Menu and Details.
- How Tax on Cryptocurrency is Calculated?
- A Short Example Of Crypto Tax Calculation
- Tax Calculation For Multiple Transactions
- A Cryptocurrency Tax Calculator
- Unrealized Capital Gains And Losses
- Here’s How a Crypto Tax Calculator Can Help
- Final Thoughts
Reading time: ~5 minutes
Calculating crypto tax can be a painful, long, and arduous process. Especially, if the investor is a newbie. Even for experienced and high-volume traders, reporting crypto taxes can sometimes be a challenge. So, is there an easy way to calculate crypto taxes? The answer is a resounding ‘yes.’ With a cryptocurrency tax calculator, the pain-inducing crypto taxation process can become effortless and straightforward.
Even though a cryptocurrency tax calculator can make life easier, an investor still has to understand the basics of paying capital gains tax on income from cryptocurrency.
Cryptocurrencies are considered as capital assets and hence while calculating taxes the rules of capital gains tax are applied. Taxes are calculated on the grounds of how long the digital currency was held.
For instance, if you hold your currency for less than one year, you are liable to pay short-term capital gains tax. Similarly, if you hold on to it for more than a year, you owe long-term capital gains tax to the government. However, for investors who booked a loss with their trade, there is some relief. For these investors, a deduction on losses against other capital gains is levied and they can reduce their owed taxes.
If we delve deeper into the topic, to accurately calculate your taxes, tracking your tax lots is required. And to track the tax lots, your transaction history must be correctly recorded. Furthermore, the information mentioned below will be needed for each sale or trade:
- Cost basis (original amount paid for the particular cryptocurrency)
- The amount and the currency in which the coin or token was sold
- Value of the token at the time of purchase
- Date of purchase
- The duration of coin or token held
- Value at the time of sale/exchange/trade
- Selling date
It is highly recommended to keep detailed records of the above information as backfilling trades can be challenging and any missing detail can increase the tax liability. You can recover the missing data from transaction confirmation emails. However, documenting your information regularly is advised as it keeps the taxation process simple and easy. Documenting all this information can be cumbersome and prone to error. However, a cryptocurrency tax calculator can automatically perform these tasks by looking at the investment and the history of trading.
The process of capital gains/losses calculation can begin after assembling your entire transaction history. Let’s take a look at an example for a better understanding.
We are going to take both scenarios of short-term trade and long-term trade. The first one would be when an investor buys bitcoin (BTC) and then trades it for Litecoin (LTC) within a year. The second scenario would be selling Litecoin after holding it for more than a year by the same investor. The taxes will be calculated as shown below:
- The investor purchased 1 BTC for $5000 (including fees), and therefore the cost basis of the BTC would be $5,000
- The next day, the investor sold the BTC for $8,000 (including fees) worth of LTC bringing the proceeds to $8,000
- By subtracting the cost basis of $5,000 from the proceeds of $8,000, the capital gain is $3,000. The short-term capital gains tax will be calculated at $3,000
- After a year, the investor sells the $8,000 LTC for $10,000 (including fees). Hence, the proceeds will be $10,000
- Similarly, by subtracting $10,000, which is the cost basis from $8,000, the investor’s long-term capital gains will be calculated at $2,000
As seen in the above example, calculating crypto taxes is subtracting the cost basis (the original price of the crypto at the time of purchase) from the amount the token was sold. And then calculating the gains or losses from there.
However, a trader always has multiple transactions or cost bases which makes it a bit more challenging to calculate taxes. For instance, an investor buys 1 BTC for $3,000. The next year, he wants to invest some more and buys one more BTC for $7,000, and three years later he sells 1 BTC for $11,000. In this situation, which cost basis should be used?
A Cryptocurrency Tax Calculator
In this tricky situation, accounting methods such as FIFO, LIFO, and Minimization can be used to decide which cost basis should be considered. If we consider the method FIFO (first in, first out) then by subtracting the first buy $3,000 and the sale three years later $11,000, the profit would be $6,000.
If an investor has a handful of crypto trades, calculating the gains/losses for every sale and entering those of Form 8949 becomes easier. However, with multiple trades, cost bases, tokens held for multiple years, a cryptocurrency tax calculator may make the process hassle-free.
It is important to note that if the token is not sold/exchanged/spent then the gains on the token aren’t ‘realized.’ For instance, if an investor buys 1 BTC and decides not to sell/exchange it then the investor has unrealized taxable gains/loses. If an investor holds a digital asset at loss, they have to sell the asset to claim losses.
Understanding and documenting unrealized gains/losses is a good practice and highly recommended. For instance, in 2017, many crypto traders exchanged their BTC for altcoins. And when the altcoins’ value fell at the beginning of 2018, these traders were looking to claim their losses but they could not as they didn’t sell those coins, resulting in unrealized losses.
Organizing and sorting purchases, trades, and sales reports in different formats can be very tedious. Especially, if an investor needs to track hundreds or even thousands of trades. A crypto tax calculator can automatically import data from exchanges and keep them in one single record. Furthermore, crypto calculation software can automatically track down the fiat cost of each digital asset on the date of each transaction. After organizing the records and tracking the fiat value, a crypto tax calculator automatically uses all the accounting methods accepted by the IRS to determine the capital gains/losses. It even helps in incorporating the capital gains/ losses in tax forms like FORM 8949 and other international tax reports.
Every time an investor sells or exchanges a cryptocurrency, they are realizing a taxable event. It is important to understand the basics of crypto taxation before getting into crypto investing and trading. And with a crypto tax calculator designed to simplify the process, the tax filing process becomes a breeze.
How is crypto tax calculated?
Learning tax calculation on cryptocurrency is crucial when it comes to decreasing tax liability. It is also important to ensure that you are in the good books of the IRS. Here is how you calculate crypto taxes:
- Determine whether the asset was held short-term or long-term.
- Determine the price at which the crypto is sold.
- Multiply the number of coins sold by the sale price.
- Subtract the purchase price (including fees) with the sale price to find out crypto gains or losses.
- How do I report crypto on my taxes?
Reporting crypto on your taxes can be simple but for a new investor, it can be confusing and intimidating.
Here’s how you report crypto on your taxes.
- Find out whether you have crypto gains/losses
- Fill up the IRS Form 8949
- Incorporate the totals from 8949 on Form Schedule D
- Enter crypto income if any.
- Finish up the rest of the tax return.
Do I pay taxes on crypto if I don’t sell it?
Taxes are applicable only if you sell/trade/use crypto tokens for profit. If you buy a token and hold it and never sell, it is not applicable for taxation. However, if an investor is holding a token for a loss, they can only claim the losses if they sell it.
How do I cash out crypto without paying taxes?
If you wish to eliminate tax on your crypto investments then one of the easiest ways is to buy inside of an IRA, 401-k, defined benefit, or other retirement plans. A cryptocurrency purchase within a traditional IRA can defer you from the taxes until you begin to take distributions. However, if you buy within a ROTH then you don’t pay any tax on the capital gains.
Thank you for reading!