How to Calculate Your Crypto Taxes for Gains and Losses December 2024
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Calculating crypto taxes involves tracking all transactions, establishing the cost basis, and applying the appropriate tax rate depending on the holding period. In the US, short-term gains are taxed as ordinary income, while long-term gains enjoy reduced rates.
A crypto tax calculator, like TokenTax, can streamline the tax process by linking cost basis to sales and generating accurate reports. Accurate calculation and reporting are crucial to avoid penalties and stay compliant with tax regulations.
Why trust our crypto tax experts
How is cryptocurrency taxed?
Navigating crypto taxation can be challenging, even for experienced investors. The IRS treats cryptocurrency as property, meaning it falls under both short- and long-term capital gains tax rules, similar to stock transactions. Additionally, when cryptocurrency is received as income, it is taxed according to regular income tax rates.
Calculating crypto taxes involves tracking transactions, determining gains or losses, and applying the appropriate tax rates. Accurate reporting ensures compliance and reduces potential liabilities. Properly calculating gains (and losses) when calculating crypto taxes is critical. 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.
Schedule a FREE crypto tax consultation
How to keep your crypto taxes to a minimum
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
How to calculate crypto gains and losses
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
Accounting method variations example
You have 3 BTC: 1 BTC was purchased in 2018 for $8,000, 1 was purchased for $50,000 in 2021, and 1 was purchased for $19,000 in 2022. In 2022, you sell 1 BTC for $23,000.
If you choose FIFO, your capital gain will be $15,000 ($23,000-$8,000).
If you choose LIFO, your capital gain will be $4,000 ($23,000-$19,000).
If you choose HIFO, you will have a capital loss of $27,000 ($23,000-$50,000).
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.
Cost basis calculation example
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.
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.
Basic steps of using our TokenTax crypto calculator
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.
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.
Schedule a FREE crypto tax consultation
Calculating crypto tax for gains and losses FAQs
How to calculate crypto gains percentage
How is a crypto gain or loss "realized"?
Are there any ways to avoid paying taxes on crypto?
Is like-kind exchange allowed for crypto?
What percentage of tax do you pay on crypto?
Are crypto-to-crypto trades taxable?
What are the penalties for not correctly reporting crypto taxes?
How do I report rewards from staked crypto on my taxes?
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