What is the Best Way to Calculate Crypto Gains?
Whether investing for the first time in crypto, It’s widely recognized that taxing cryptocurrency isn’t easy.
While accountants can assist you in filing your tax returns each year, it’s beneficial to have an approximate concept of the amount you may be liable for.
However, you’ll need to learn how to calculate earnings and losses.
Without knowing what you’ve earned or lost with cryptocurrency in the last month or an entire year, you’ll be unable to calculate how much you owe for taxes or even include that amount in your expense tracking system.
It’s pretty simple: to pay your tax bill, you must know the value of your total gains or losses.
In the following paragraphs, we’ll explain how to calculate profits from crypto to help you determine what you need to be able to report and how much you must pay.
Monitoring Cryptocurrency Transactions
Investors love KuCoin due to its capacity to offer small-cap cryptocurrencies with a high upside potential, an extensive selection of coins, less-known cryptos, and generous profit-sharing benefits; KuCoin users earn part of their daily exchange earnings through taking a stake in KCS.
For example, If you own 10,000 KCS and the exchange pays 20 BTC in fees for trading (0.1 % of the daily trade volume), You would earn 0.001 BTC converted to KCS every day (20 + 50% (10000/100000000)).
To calculate your gains from crypto for tax purposes, It is essential to keep track of your transactions and their tax lots. Tax lots are the list of tokens bought or acquired through one trade.
Tax lots contain the following transaction details:
- Currency and amount for the digital asset that is sold
- Fiat value at the time of acquisition
- Date of acquisition
- Fiat value at the time of sale or trade
- Date of sale
It is essential to keep accurate logs of your trades because it’s challenging to locate and fill in the gaps in information that could be causing an increase in your profits.
The easiest solution to this issue is tax software for crypto that tracks your transactions.
Calculating your capital gains tax rate for crypto
The taxation of crypto transactions is different based on the asset’s duration.
If they were kept for a minimum of one year, it is considered one of the short-term trades.
If the purchases were held for more than one year, the transaction is considered long-term.
Long-term gains are treated with preference by the IRS with tax rates of 0%, 15%, or 20%, depending on your tax rate.
Gains from short-term investments are taxed at your average tax rate.
Because long-term and short-term trades have different tax rates, they are separately reported to the IRS.
That means you must separate them when calculating your capital gains from crypto.
Finding the cost base
A key term in the field of cryptocurrency tax is the cost basis. It is the initial value of an asset to be used for tax reasons.
The basic formula for calculating capital gains and losses for crypto is straightforward: proceeds x costs basis = capital loss.
But, two factors could impact your cost basis: the accounting method and transaction charges.
Methods for tax-free accounting using crypto
The IRS allows taxpayers to select the type of detailed identification accounting they use yearly.
Specific ID methods can match the acquisitions and sales differently; using one way for the data you trade on can result in different cost bases compared to another plan.
The most well-known methods include FIFO, LIFO, and HIFO.
- First in, First out (FIFO). Acquired assets are sold first.
- Last, in First Out (LIFO), the assets acquired last are the first to be sold.
- Highest In, First Out (HIFO) The highest price assets are first sold.
How to calculate your crypto gains
Once you’ve collected your complete record of transactions, you can begin calculating the profits and losses.
To help you understand the specifics of the calculations, we’ll go through some examples of how you can compare crypto trading.
If you purchase cryptocurrency, exchange it for a short-term trade to another currency, and then trade that cryptocurrency long-term to buy fiat currency, the capital gains tax calculation will be divided into the long-term and short-term crypto transactions, which are for less than one year or more than one year, and vice versa.
A good example of an exchange series is as follows:
- You purchased 1 BTC for $30,000. (including fees) so your cost basis for this quantity of one BTC will be $30,000.
- You have sold this one BTC at 32,000 dollars (including costs) of LTC on the same day, so the profits amount to $32,000.
- Take the basis value, $30,000, from the profits of $32,000, and the gain is $2,000. It is subjected to capital gains tax and is reported on the year’s tax return.
- A year after the year-end, you bought the $32,000 worth of LTC for $35,000. (including charges) for $35,000 in USD.
- Add the basic cost of $32,000 from the profits of $35,000, and the gain is $3,000. The sum is subject to capital gains tax and is reported on tax returns for the year it was transferred.
It’s not hard to figure out ways to determine crypto’s gains and losses; there are several online calculators that you can use if you don’t need to learn how to calculate payments from crypto yourself: Turbotax, TaxAct as well as The Crypto Profit Calculator are all a good starting point, along with tax-free crypto software such as Coin Tracker.