How to Calculate Crypto Gains Step-by-Step
We outline how to calculate your crypto capital gains tax, including tracking crypto transactions, choosing an accounting method, and finding your cost basis.
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To find your capital gain or loss, subtract your proceeds from your cost basis.
To calculate your capital gains and losses, you need to track your tax lots. Using crypto tax software and/or taking detailed records will help you do this.
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’ll know what to report and pay.
1. Tracking crypto transactions
To calculate your crypto gains for taxes, 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, which automatically tracks your transactions.
2. Finding your cost basis
An important term in cryptocurrency tax is cost basis. It refers to the original value of an asset for tax purposes.
At its core, calculating crypto capital gains and losses is simple: proceeds - cost basis = capital gain or loss.
However, two 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 each year. Specific ID methods match up sales and acquisitions differently; using one method on your trading data can produce different cost bases than using another.
Among the most popular allowed methods are FIFO, LIFO, and HIFO.
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
For example, imagine you have 3 BTC: 1 BTC was purchased in 2018 for $8,000; 1 was purchased for $4,000 in 2019, and 1 was purchased for $25,000 in 2020. In 2021, you sell 1 BTC for $35,000.
Whichever tax lot you choose as the cost basis for your 2021 sale will have a large impact on your taxable capital gains amount ($27,000 of gains in FIFO, $31,000 of gains in LIFO, or $10,000 of gains in HIFO).
A lot of crypto transactions involve transaction fees (paid to exchanges or protocols) or Ethereum gas fees. In many cases, these fees can be added to your asset’s cost basis to decrease your capital gains or increase your capital losses.
For example, let’s say that to swap 3,000 USDC for 1 ETH on Uniswap, you had to pay $100 in fees. You can add that $100 to the ETH’s cost basis, making it $3,100.
Note that whether transaction/gas fees can be added to cost basis depends on the type of transaction. We write about the distinctions in this post about deducting Ethereum gas fees.
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 more than a year, the transaction is a long-term trade.
Long-term gains are treated preferentially by the IRS, 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-term and long-term trades are taxed at different rates, so they are reported separately to the IRS. This means you should also split them up when calculating your crypto capital gains.
4. Calculating your crypto gains
Once you’ve assembled your full transaction history, you can start calculating your capital gains and losses. To illustrate the specific details of the calculation, let’s walk through some concrete examples of how to match up crypto trades.
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 out between short-term and long-term crypto trades held for a duration of less than a year or greater than a year, respectively. An example of such a transaction series is below:
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 and reported on that year's tax returns.
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.
You can simplify this process by using a crypto gains calculator. These work by aggregating your data and then automatically linking your cost bases to your sales, using accounting methods like FIFO or LIFO. hey calculate your gains or losses and generate tax reports with your data.
These are the basic steps of using a crypto tax calculator:
Import all your cryptocurrency exchange trade history, as well as any transactions made off-exchange.
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.
Decide on a crypto accounting method.
Export your crypto tax forms.
Include your crypto taxes on your return.
FAQs about calculating crypto gains
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 held it—never selling or exchanging it—you don’t have any taxable gains or losses.
Our tax loss harvesting dashboard can help you keep tabs on your unrealized gains and losses are, so that you can strategically harvest your losses to potentially lower your tax liability.
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.
For more info on crypto tax basics, visit our Crypto Tax Guide.
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Last reviewed by Tynisa (Ty) Gaines, EA on May 23, 2022 · Sources