If you have investments in the cryptocurrency market, whether it’s Bitcoin, Ethereum, Litecoin, or another crypto coin, there’s one important question you need to ask yourself: How much do I have in gains? By calculating your gains and losses on your crypto portfolio over time, you can make better decisions about when to sell and when to keep riding out the storm.
Tracking crypto transactions
Calculating crypto gains for taxes means tracking your transactions and associating them with the proper tax lots. A tax lot is just the number of tokens bought in a single transaction.
Tax lots include the following information:
- The purchase amount of the digital asset and what it was traded for.
- Simply a payment of the acquisition cost at the time of the transaction.
- The date you picked it up.
- The real value of a thing becomes clear when it is traded or sold.
- Date of the purchase
It’s imperative to keep detailed records of your transactions as it may be difficult to locate the records you’re missing that are inflating your gains. An easy way to get around this challenge is crypto tax software that automatically tracks your transactions. However, if you’re using a crypto tax calculator, it’s best to keep notes about occasions such as coins that have been lost, crypto scams, and failed ICOs.
Finding your cost basis
Your cost basis is the original value of your investment, which includes the price you paid for your coins, plus any fees or commissions. If you’re mining cryptocurrency, your cost basis is the cost of the hardware and electricity used to mine the coins. If you’re trading on a crypto exchange, your cost basis is the price you paid for each coin, plus any fees or commissions.
You can calculate your cost basis for your cryptocurrency trades using a spreadsheet, like Excel, or with specialized crypto software. Both options take a bit of effort, but some people prefer to track their gains manually as a way of ensuring accuracy. Once you have an idea of your cost basis, you can use it to determine your taxable gain when you sell or trade digital currencies.
Determining your crypto capital gains tax rate
The type of tax varies based on the length of time the assets were held. Assets which were held for more than a year are taxed at the rate for long-term capital gains. Short-term capital gains are taxed at the short-term capital gains rate. Long-term trades are done on assets that have been held for more than a year. The IRS offers a preferential tax rate to long-term gains (either 0%, 15%, or 20% depending on your tax bracket) while short-term gains are taxed as income at your regular income tax rate. Due to the differing rates of taxation on short-term and long-term trades, you’ll have to break them up on your tax form. This means that you will also need to allocate them according to the date of your original investment for crypto capital gains calculations.
The classification of the asset determines whether it will be classified as a short-term or long-term gain. To figure out how much capital gains tax you’ll have to pay on cryptocurrency, follow these steps. There are a few different ways you can go about calculating your gains, depending on how much work you want to put in and how accurately you want it calculated. If you want something that is fairly quick and easy, then a spreadsheet or calculator can help. Using these tools means you can enter all of your trades into one convenient location, so you have all of your information on hand when it comes time to prepare your taxes. You will have to take the time to input this information and that can be tedious and time-consuming, but if you trade frequently it will likely be easier for you to rely on spreadsheets.
Calculating your crypto gains
After all of your transactions are tallied, you can start calculating your capital gains and losses. I’ll explain the steps to follow in calculating the specifics in an example about cryptocurrency trading. If you buy cryptocurrency, trade it for another cryptocurrency, and then sell that coin for currency, your capital gains tax will be divided up depending on whether or not the transaction took place for less than or greater than a year.
One way to simplify the process described in this article is to use a crypto gains calculator. These take data input and account for different accounting methods, like FIFO or LIFO. balance your profit and loss reports, then generate taxes based on the data.
Let’s quickly go over the steps involved in using a crypto tax calculator:
- Get all your trade history from your crypto exchange, as well as any off-exchange transactions.
- Be sure to import all the historical data and calculate your crypto taxes properly. If not, manually edit the data to make corrections.
- Choose a crypto accounting method.
- Generate your cryptocurrency tax forms.
- Be sure to include crypto taxes on your return.
Consult with a tax professional
Before getting too deep into the weeds of calculating your digital currency gains, it’s important to consult with a tax professional. They can help you understand the relevant tax laws and ensure you stay compliant. Tax laws vary between countries, and even between states and cities. In fact, that’s part of what makes crypto taxes so tricky; tax professionals who are experts in cryptocurrency and trading know that there isn’t a one-size-fits all answer for everyone. That said, it is possible to break down a cryptocurrency trader’s tax situation into three simple buckets: short term (assets held less than a year), mid term (assets held over one year) and long term (assets held more than 5 years). For each bucket, an expert can guide you through determining how much profit you’ve made on your coins.