Your guide to understanding how cryptocurrency gains and losses are calculated and why they are so important to know.
Whether or not it’s your first time investing in cryptocurrency, it’s a truth universally acknowledged that paying taxes on crypto can be difficult. Although accountants can help you do this when you file your yearly tax returns, it can nevertheless be helpful to have at least a rough idea in your mind of how much you might owe.
But first, you’ll need to know how to calculate cryptocurrency gains and losses. Without knowing how much you have earned or lost on cryptocurrency over the past quarter or year, you won’t be able to figure out how much you owe on taxes or even add that amount to your expense tracker.
How to Calculate Crypto Gains & Losses
In the United States, cryptocurrency is viewed as a tax asset. As such, any time you dispose of it, you will either gain or lose money on that transaction.
There are four ways you can dispose of your cryptocurrency: (1) selling crypto for fiat currency, (2) swapping one cryptocurrency for another, (3) spending cryptocurrency on goods or services and (4) gifting cryptocurrency.
Note that any additional gains or profit that you make from disposing of cryptocurrency in one of these four ways is subject to capital gains tax in the United States. A capital gain or loss is the difference in value from when you acquired your cryptocurrency to when you disposed of it.
It’s relatively simple to figure out how to calculate crypto gains or losses:
Figure out your cost basis: This is how much it costs to acquire your crypto asset in the first place, including any transaction fees. If you were given cryptocurrency as a gift and it didn’t cost you anything to acquire it, you will instead use the fair market value of the cryptocurrency in USD on the day you received it as your cost basis.
Once you know your cost basis, subtract it from the value of the asset on the day you disposed of it to calculate whether you have a capital gain or loss.
If you have a gain, you will pay capital gains tax on that gain. If you have a loss, you won’t pay capital gains tax but you want to keep track of losses as you can offset capital losses against gains for tax purposes. You can offset your capital losses against your net capital gain for the year to reduce your tax bill.
(In the United States, there is no limit on how large a capital loss you can write off in any one year so if you have enough losses, you can write off your entire capital gain and pay no tax. If you have larger capital losses than your gains, you can offset up to $3K of capital losses against ordinary income to further reduce your tax bill. If you still have more losses, you can carry those forward to future years to offset against future gains.
This is why it’s so important to know how to calculate cryptocurrency gains and losses, while it’s essential to file taxes in the United States there can be benefits you take advantage of if you know your gains and losses.)
For example, if you buy 1 Bitcoin (BTC) in February 2021 at a price of $33K and are charged a 2% transaction fee, your total cost base is $33,600. You later sell your 1 BTC in October for $60K. Now, you subtract your cost base from your sale price to arrive at a capital gain of $26,340, which you will need to pay capital gains tax on.
Since you held your BTC for less than a year, you are subject to short-term capital gains tax (which is a different rate than the long-term capital gains tax but both rates are based on your income level).
While it isn’t difficult to learn how to calculate crypto gains or losses, there are nevertheless a number of handy online calculators you can turn to if you don’t want to figure out how to calculate crypto gains yourself: Turbotax, TaxAct, and Crypto Profit Calculator are all a great place to start as well as crypto tax softwares like Coin Tracker.
Calculating Crypto Gains: FAQs
Q: What is the difference between realized and unrealized gains?
A: In general, gains on cryptocurrency or even property are not “realized” until you sell, exchange, or spend your asset. That means that if you bought BTC and have held onto it without selling or exchanging it, then you don’t have any realized gains or losses, only unrealized gains or losses.
It can be a good practice to be mindful of your unrealized gains or losses, though, as in the past, crypto traders have been caught off guard when they exchanged BTC for altcoins (in 2017 and 2018) and triggered a large gain at the end of 2017 due to the market’s peak. When those altcoins dropped in value, traders were expecting a loss when filing for taxes only to realize that they could not claim that loss since they hadn’t sold the coins yet. As such, it’s important to distinguish between realized gains and losses and those that may be unrealized still.
Q: Is like-kind exchange allowed for crypto?
A: A like-kind exchange is where you exchange one asset for another similar asset without recognizing capital gains or losses in the transaction. This can only be used for real estate and is specifically disallowed for crypto since 2019.
Ultimately, learning how to calculate crypto gains or losses is just one step when calculating the taxes you need to pay on crypto, overall, but it is important to have a thorough understanding of how these gains or losses can impact your tax season, as well as what possibilities exist for offloading some of that tax burden. Moreover, understanding how to calculate crypto gains and losses can help you make better investment decisions, too, as the timing of when you decide to realize those gains matters more than you may have thought.
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Keertana Anandraj is a recent college grad living in San Francisco. When she isn’t conducting international macroeconomic research at her day job, you can find her in the spin room or planning her next adventure.
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