How to Calculate Your Crypto Taxes for Gains and Losses October 2024

Navigating crypto taxation can pose a challenge for even the most seasoned crypto investor. The IRS treats cryptocurrency as property, making it subject to both short- and long-term capital gains tax rules. This structure aligns crypto gains with those from stock transactions. Additionally, when cryptocurrency is received as income, it is taxed according to standard income tax rates.

Properly calculating gains (and losses) when calculating crypto taxes is important. A crypto tax calculator like ours at TokenTax can help, and you can use our free crypto profit calculator to make plans and imagine future gains.

What are the factors considered for the calculation of crypto tax?

Cryptocurrency is either taxed as short- or long-term capital gains. There are two key factors to consider when calculating crypto gains for taxes. If you traded or sold crypto in the United States, the rate of tax is calculated depending on:

• Your realized gains (or losses)

• How long you hold a given cryptocurrency before selling or trading (that is, the holding period)

The holding period starts the day after you purchase or make a transaction of crypto and ends the day you trade or sell. Purchasing items with crypto also triggers a taxable event.

Crypto tax calculation example:

Annual crypto tax calculation can feel like an overwhelming chore, especially if you’ve been an active trader.

• You purchased $20,000 worth of Ethereum (ETH), then a month later traded your ETH for $30,000 Bitcoin (BTC).

• Here the taxable gain is $30,000 − $20,000 = $10,000.

• Three months later, value of your BTC has risen to $60,000 and you use it to purchase a new Tesla.

• Here the taxable gain is: $60,000 − $30,000 = $30,000.

• Imagining that these were your only crypto transactions for the year, your total taxable short-term capital gains are $40,000.

How do you calculate profit on crypto?

Profits are simple to calculate in crypto. Simply subtract the amount you paid for it (in fiat) from the amount you’ve made when you sell. Say, for example, you purchase $10,000 worth of Ethereum and sell for $15,000. You’ve made a $5,000 profit. Easy enough. 

Looking to calculate your Ethereum profit? Try our free Ethereum profit calculator.

How TokenTax can help you to calculate crypto taxes for gains and losses

TokenTax VIP is your full-service crypto tax accountant. We offer you a dedicated team and tailored crypto tax solutions for your needs. Get in touch with us and have us calculate your crypto gains and taxes with our platform and own crypto taxes calculator, or simply leave your crypto gains and tax calculations to our experts.

Because TokenTax is both a full-service accounting firm and a crypto tax calculator, we can handle all your crypto tax calculations for you. We’ll help you report crypto gains and losses, determine your cost basis, prepare crypto tax forms, determine your crypto rate tax and more.

The simplest way to minimize your crypto taxes is to hold until your short-term gains become long-term ones. This means holding for at least a year before selling. Of course, the crypto markets are famously volatile, so it’s important to make the right decision yourself, given your risk tolerance and goals.

Looking to minimize your crypto taxes? Strategies how to reduce your crypto taxes

It’s pretty basic: to pay your tax bill, you’ll need to know the amount of your cumulative gains or losses. In what follows, we’ll outline how to calculate crypto gains so you will in turn know how to calculate crypto taxes. Again, a crypto taxes calculator can be a big help through this process.

1. Tracking crypto transactions

Let’s learn how to calculate crypto taxes. First, you need to track your transactions and their associated tax lots. A tax lot is simply the record of tokens purchased or otherwise acquired in a single transaction.

A tax lot includes the following transaction information:

• Amount and currency of the digital asset sold

• Fiat value at time of acquisition

• Date of acquisition

• Fiat value at time of trade or sale

• Date of sale

It’s very important to keep detailed records of your trades, as it can be difficult to retroactively find and fill in the missing data that may be inflating your gains. The simplest solution for this challenge is crypto tax software that tracks your transactions.

Be aware, however: if you are using a crypto tax calculator, it's a good idea to keep notes on special situations, such as lost coins, crypto scams and rug pulls, and ICOs. No two years in crypto are alike, so take extra care when you calculate crypto gains.

2. Finding your cost basis

An important term in cryptocurrency tax is cost basis. This refers to the original value of an asset for tax purposes. In order to calculate crypto capital gains and losses, we need a simple formula: proceeds - cost basis = capital gain or loss.

Note that two additional variables may affect your cost basis: accounting method and transaction fees.

• Crypto tax accounting methods - The IRS allows taxpayers to choose which variation of specific identification accounting they will use. Specific ID methods match up sales and acquisitions differently. One method on your trading data to calculate crypto gains can produce a different cost basis than using another. Among the most popular allowed methods are:

  • First in, first out (FIFO): Assets acquired first are sold first

  • Last in, first out (LIFO): Assets acquired last are sold first

  • Highest in, first out (HIFO): Highest price assets are sold first

• Transaction fees - Many crypto transactions involve transaction fees (paid to exchanges or protocols) or gas fees on Ethereum or other networks. In many cases, these fees can be added to your asset’s cost basis to decrease your capital gains or increase your capital losses, which will impact how you calculate crypto gains.

3. Determining your crypto capital gains tax rate

Crypto transactions are taxed at different rates depending on the length of time the assets were held. If they were held for a year or less, the transaction is a short-term trade. If assets were held for more than a year, the transaction is a long-term trade. 

The IRS treats long-term gains preferentially, with rates of 0%, 15%, or 20%, depending on your tax bracket. Short-term gains are taxed at your ordinary income tax rate.

Because short- and long-term trades are taxed at different rates, they are reported separately to the IRS. This means you should also split them up when calculating your crypto capital gains. A crypto tax calculator can assist in this process.

4. Calculate profit on crypto

With your full transaction history, you can calculate your capital gains and losses. Let’s look at some concrete examples of how to match crypto trades and learn how to calculate crypto taxes based on this.

If you buy cryptocurrency, trade it short-term for another coin, and then sell that coin long-term for fiat currency, your capital gains tax calculation will be split between short- and long-term crypto trades held for a duration of less than a year or greater than a year, respectively.

Here’s an example of how to calculate profit on crypto:

• You bought 1 BTC for $30,000 (including fees), thus your cost basis for this lot of 1 BTC is $30,000.

• You sold this 1 BTC for $32,000 (including fees) worth of LTC the next day, thus the proceeds are $32,000.

• Subtract the cost basis of $30,000 from the proceeds of $32,000, and your gain is $2,000. This amount is subject to short-term capital gains tax that year.

• More than a year later, you sold the $32,000 of LTC for $35,000 (including fees) in dollars.

• Subtract the cost basis of $32,000 from the proceeds of $35,000, and your gain is $3,000. This amount is subject to long-term capital gains tax and reported on the tax returns of the year in which it was sold.

Now imagine that instead of $32,000 of LTC being sold at a gain, it was sold at a loss. That tax year, you engaged in other trading that resulted in cumulative long-term gains of $50,000.

• You sell the $32,000 of LTC for $25,000 (including fees). The proceeds are thus $25,000.

• Subtract the cost basis of $32,000 from the proceeds of $25,000 for a net loss of $7,000.

• Subtract your long-term capital loss of $7,000 from your long-term capital gains of $50,000. Your new taxable long-term gains amount is $43,000.

A crypto tax calculator like ours at TokenTax can simplify the process of calculating your crypto gains. Crypto tax calculators aggregate your data and then automatically link your cost basis to your sales, using accounting methods like FIFO or LIFO to calculate your gains or losses and generate tax reports for you.

1. Import all your cryptocurrency exchange trade history, as well as any transactions made off-exchange.

2. Verify that all historical data has been imported and that your crypto taxes are calculated properly. If not, manually edit the data to correct it.

3. Decide on a crypto accounting method.

4. Export your crypto tax forms.

5. Include your crypto taxes on your return.

Here are answers to some common questions about how to calculate crypto taxes.

How to calculate crypto gains percentage

Calculating crypto gains as a percentage involves a simple formula: 

[(price sold - purchase price) / purchase price] x 100 = crypto gains percentage

For example, if you sold Ethereum for $10,000 having paid $5,000 for it, you simply divide $5,000 by $10,000 and multiply by 100 to give you 50% realized gains.

Looking to calculate your Ethereum profit? Try our free Ethereum profit calculator.

How is a crypto gain or loss "realized"?

Gains on crypto are not “realized” until you sell, exchange, or spend the asset. In other words, if you purchased a token and simply hold it without selling or exchanging it for another token, you won't have any taxable gains or losses. 

Our tax loss harvesting dashboard can help you keep tabs on your unrealized gains and losses, so that you can potentially strategically harvest your losses to lower your tax liability.

Are there any ways to avoid paying taxes on crypto?

The simplest way to avoid crypto taxes is to purchase and hold without exchanging or selling. There are a few other methods to avoid paying taxes on crypto. Options include:

• Gifts to family

• Donations to charity

• Offset your gains with losses

• Sell assets during a low-income year

Different countries have varying rules about crypto. That noted, regardless of where a US citizen resides, they are taxed worldwide on their income, which includes cryptocurrency gains. 

Moving to another country and renouncing citizenship is a bit of a stretch for most people, so if you’re transacting crypto, odds are you will have to deal with tax consequences.

Is like-kind exchange allowed for crypto?

A like-kind exchange is when you exchange one asset for another similar asset without recognizing capital gains or losses on the transaction.

Like-kind is specifically disallowed for crypto. It can only be used for real estate.

What percentage of tax do you pay on crypto?

In the US, crypto tax rates vary based on your income and how long you hold the assets. Short-term gains are taxed at ordinary income rates ranging from 10% to 37%, while long-term gains are taxed at preferential rates ranging from 0% to 20%, depending on income. Income from crypto is taxed at regular income tax rates.

Are crypto-to-crypto trades taxable?

Yes, crypto-to-crypto trades are taxable events in the US. When you exchange one cryptocurrency for another, it triggers a capital gain or loss that must be reported on your tax return. It's crucial to keep track of the value of each crypto at the time of the trade to calculate the gain or loss accurately.

What are the penalties for not correctly reporting crypto taxes?

Failure to correctly report crypto taxes can result in penalties and interest. The IRS has increased its focus on cryptocurrency transactions, and non-compliance may lead to fines or legal consequences. Using a reliable crypto tax calculator, maintaining detailed records, and consulting with crypto tax professionals can help ensure accurate reporting and compliance with tax regulations.

How do I report rewards from staked crypto on my taxes?

Reporting crypto staking rewards on your taxes involves recognizing these rewards as income when you receive them. You'll need to determine the fair market value of the staked crypto at the time it's received, as this amount is considered taxable income. This income should be reported on your tax return and will be subject to your regular income tax rates. If you later sell or trade the staked crypto, you’ll need to calculate and report any capital gains or losses based on the difference between its value when received and its value at the time of sale or trade.

Keeping complete records of your staking rewards and transactions is crucial for accurate reporting. Crypto tax software like ours at TokenTax can help simplify this process by automatically tracking and calculating your crypto taxes. Consulting with a tax professional is always recommended to ensure you’re following all tax regulations.