Everyone who traded cryptocurrencies in the United States during the tax year 2021 will be required to file a tax return, according to the Internal Revenue Service. Taxpayers have until April 18 to file their returns; if they do so after that date, they will be punished.
For tax purposes, cryptocurrency, specifically non-fungible tokens (NFTs), is still categorized in the United States as “property.” According to the Internal Revenue Service (IRS), the majority of taxable acts involving digital assets would be subject to capital gains taxes in 2014. This was stated in 2014. On the other hand, cryptocurrencies acquired through particular activities are regarded as income and as a result are taxed. Therefore, using a bitcoin tax calculator to calculate the precise amount is essential.
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Important Things to Keep in Mind
To calculate your capital gain or loss, subtract your proceeds from your cost basis.
Using a crypto income tax calculator and/or maintaining thorough records are two ways to accomplish this. But you can also use a tax app like FlyFin that helps you pay and file your taxes correctly. It’s a very useful tool for self-employed people and independent contractors.
Calculating your capital gains and losses, or the value difference between the asset’s purchase price and sale price, is an important part of figuring out your bitcoin taxes. The same formula is used to determine taxable earnings from stock trades and real estate sales.
Maintaining a record of your tax lots
To determine your tax liability, you must keep track of your tax lots. A tax lot is just a list of the tokens that were purchased or acquired in a single transaction.
A tax lot contains the following details from your transaction history:
the price of the coin or token that was purchased and the currency used to purchase it.
At the time of purchase, the Fiat value Purchased on the date At the time of a trade or sale, the Fiat value
The auction’s date
Maintaining precise records of your transactions is essential since it may be difficult to locate and fill in missing information retroactively—and any missing cost basis increases your tax liability.
The majority of the time, missing data can be found in exchange transaction confirmation emails and receipts, albeit this can take some time. You may prevent the hassles of losing trade data by having a cryptocurrency tax calculator maintain track of your tax lots for you.
It’s a good idea to keep track of odd scenarios like lost coins, cryptocurrency hacks, and initial coin offers with a cryptocurrency tax calculator (ICOs).
Making a cryptocurrency profit and loss calculation
In the area of taxes, the phrase “cost basis” is commonly employed. It refers to the asset’s original value for tax purposes. It’s simple to figure out cryptocurrency capital gains and losses: proceeds minus cost basis = capital gain or loss.
A few things, nevertheless, might have an impact on how you determine your cost basis and, consequently, your totals.
Accounting techniques using a cryptocurrency tax calculator
The IRS gives taxpayers the option of choosing the specific identification accounting method they want to use each year. The three most prevalent permitted alternatives are FIFO, LIFO, and HIFO. These methods match purchases and sales of tax lots of the same asset in different ways. In other words, each approach may lead to a different tax basis and, consequently, a range of gains and losses.
First-in, first-out refers to the order in which assets are bought and sold (FIFO).
The phrase “last in, first out” (LIFO) describes the sequence in which assets are purchased and sold.
The phrase “highest in, first-out” (HIFO) refers to the practise of selling the most expensive assets first.
Assume that despite buying one bitcoin for $8,000 in 2017, $4,000 in 2018, and $25,000 in 2020, you sold it for $35,000 in 2021. Your 2021 sale’s cost basis will have a substantial impact on the amount of capital gains that are taxable ($27,000 in gains, $31,000 in gains, or $10,000 in profits, respectively).
There are fees attached to a lot of cryptocurrency transactions, including fees for Ethereum, protocols, and/or exchanges. The cost basis of an asset is typically increased by these fees to reduce capital gains or enhance capital losses.
Transaction/gas fees may or may not be included in the cost basis depending on the type of transaction. We examine the variations in this post about deducting Ethereum gas fees.
Utilize a bitcoin tax calculator to determine your capital gains tax rate.
The taxes on each crypto transaction are different and there are varying rates, depending on whether the asset was held for less than a year (short term) or more than a year (long term) (long term). They are therefore each individually reported to the IRS. Therefore, while figuring your taxes, you should split them.
The IRS taxes Short-term gains at the same rate as your other income.
Example that was resolved using a cryptocurrency tax calculator
Once you’ve compiled your whole transaction history, you can start calculating your capital gains and losses. To further understand the mechanics of how to match up cryptocurrency trades, let’s go over some real-world examples.
You would buy bitcoin, exchange it for litecoin in the near term, and then sell the litecoin for cash in the long term. Capital gains tax will apply to both short-term and long-term trades held for a year or more.
Your cost basis for this lot of 1 BTC is $30,000 due to the fact that you spent $30,000 for 1 BTC (fees included).
The following day, you generated a $32,000 profit when you sold this 1 BTC for $32,000 (costs included) in LTC.
Your profit is $2,000 after deducting the $30,000 cost basis from the $32,000 in earnings. This amount must be reported on the tax returns for that year and is subject to short-term capital gains tax.
More than a year later, you sold the $32,000 in LTC for $35,000 in cash (fees included).
Your profit is $3,000 after deducting the $32,000 cost base from the $35,000 in revenue. This amount, which must be reported on the tax returns for the year in which it was sold, is subject to long-term capital gains tax.
Take into account what would transpire if $32,000 of LTC were sold at a loss as opposed to a profit. During that tax year, you also took part in another trading activity that produced a $50,000 overall long-term gain.
For the $32,000 in LTC, you receive $25,000 (including fees). Consequently, the entire revenue is $25,000.
For a $7,000 net loss, deduct the $32,000 cost base from the $25,000 in earnings.
$50,000 long-term capital gain minus $7,000 in long-term capital loss. The new long-term taxable gain threshold is $43,000.
Making money or losing money
Cryptocurrency gains (and gains on property in general) are not “realised” until the asset is sold, swapped, or used. You will only have unrealized profits or losses, not taxable gains or losses, if you buy them only once and keep them without ever selling or trading them.
Keep track of your unrealized profits and losses with the aid of our tax-loss harvesting dashboard so that you can strategically harvest them to lower your tax liability.
Can you exchange cryptocurrency for anything similar?
A like-kind exchange happens when you trade one thing for another that is comparable but does not lead to gains or losses in capital.
Like-kind is expressly prohibited in the cryptosphere. It is only applicable to the real estate sector.
Taxes on cryptocurrency income
Whether you receive cryptocurrency as payment for products or services, as interest or staking incentives, through mining, from a hard fork or airdrop, or as a reward for staking, it is taxed as ordinary income. Your tax rate is based on your federal income tax bracket.
How to calculate your cryptocurrency tax liability using a tax calculator
The cost bases and sales are automatically matched by cryptocurrency tax calculators utilizing accounting concepts like FIFO or LIFO. Depending on your information, they automatically calculate your revenues or losses and offer tax returns.
The principles of using a cryptocurrency tax calculator are as follows:
Import all of your bitcoin trading activity from exchanges as well as any off-exchange transactions.
In these situations, manually editing the data to make the necessary adjustments is recommended.
- Select a system for accounting.
- You should export your tax forms like the 1099-K, 1040-ES form.
- On your tax return, make a mention of your cryptocurrency taxes.