Cryptocurrency investors must carefully track their crypto gains and losses in order to accurately report them on their tax returns. This can be a complex process, as the tax treatment and tax rates of cryptocurrency gains varies depending on the country of residence and the individual’s tax situation. In some countries it is not yet clear if gains on crypto is a taxable event. In this article, I will provide a detailed guide on how to calculate your crypto gains and losses, and how to determine your tax obligations.
1. Determine the Cost Basis of Your Cryptocurrency Investments
The first step in calculating your crypto gains or losses is to determine the cost basis of your cryptocurrency investments. The cost basis is the original price that you paid for your cryptocurrency, plus any fees associated with the purchase.
For example, if you bought 1 bitcoin for $10,000, and paid a $100 transaction fee, your cost basis would be $10,100. It’s important to keep track of your transaction history. This way you can accurately record the cost basis for each of your cryptocurrency purchases. This is pretty easy to do if you hold a couple of crypto tokens which you hardly traded. But for most people reality is more complex, in which case you may need an automated solution. I will explain how you can use such a solution further on.
2. Determine the Fair Market Value of Your Cryptocurrency Investments
The next step is to determine the fair market value of your cryptocurrency investments. The fair market value is the price that your cryptocurrency would fetch in an open and unrestricted market, between a willing buyer and a willing seller.
For example, if the price of bitcoin is $20,000 when you sell it, then its fair market value is $20,000. It’s important to note that the fair market value of your cryptocurrency can fluctuate significantly over time. What matters is the price that you sell it at (if you do). Most countries do not tax you until you sell. So if you buy within the year and do not sell then you do not get taxed.
However, if the total value of your initial investment has dropped then you might want to sell. Depending on the country you might be able to sell and immediately buy it back again. The reason for doing this is that you can show the tax authorities that you have booked a loss. Usually any gains are offset by losses. For example in my country capital losses can be used to offset any capital gains for 5 years.
3. Calculate the Gain or Loss on Your Cryptocurrency Investments
Once you have determined the cost basis and sale price of your cryptocurrency investments, you can calculate your gain or loss on those investments. To do this, simply subtract the cost basis from the fair market value.
If the result is a positive number, you have a gain, and if it’s a negative number, you have a loss. In the example above, your gain would be $9,900 ($20,000 – $10,100). It’s important to carefully track your gains and losses, as they will be used to determine your tax obligations.
4. Determine the Tax Treatment of Your Gains or Losses
The tax treatment of your crypto gains or losses will depend on your country of residence, and your individual tax situation. In most countries, gains from the sale of cryptocurrency are subject to capital gains tax. This is a tax on the profit that you make from the sale of a capital asset. But different countries treat crypto taxes differently.
The tax rate for capital gains varies depending on your country of residence, and your individual tax situation. For example, in the US, short-term capital gains are taxed at your ordinary income tax rate, while long-term capital gains are taxed at lower rates. It’s important to consult with a tax professional to determine your specific tax obligations.
5. Use a Crypto Tax Calculator to Determine Your Tax Liability
One of the easiest ways to determine your tax liability from cryptocurrency gains is to use a crypto tax calculator. These online tools are designed to help investors calculate their crypto gains and losses, and determine their tax obligations. As far as I understand, most of these tools are focused on the US use case. However, most countries are likely going to follow the US when it comes to their tax treatment of crypto.
To use a crypto tax calculator, you will need to input information about your cryptocurrency transactions, such as the date of the transaction, the type of cryptocurrency, the amount, the purchase price, and the selling price. The calculator will then use this information to determine your gain or loss, and will provide an estimate of your tax liability. You can usually find this information on the crypto exchange that you used. There will be a section titled “history” where you can download your transactions.
Now this is pretty easy to do if you are using one crypto exchange and have only invested in one crypto asset. However, things can become pretty complex if you have performed multiple crypto transactions across a range of coins and exchanges. Even when you download your history of transactions off exchanges things can look pretty confusing. I personally wasted a lot of time trying to figure those reports out.
In order to tackle this I recommend you use a tax reporting tool.
6. Consider Using a Cryptocurrency Tax Software
So a good alternative option for reporting your crypto gains or losses is to use a cryptocurrency tax software. These online tools are designed to help investors track and report their cryptocurrency transactions, and calculate their tax obligations.
Cryptocurrency tax software typically integrates with major cryptocurrency exchanges, and allows investors to import their transaction history directly into the software.
All you need to do is hook up the platform to each of the cryptocurrency exchanges or wallets that you use by allowing access to their API. The tax accounting service you use will have instructions on how to go about this.
Once you import the transaction data, the tax reporting tool uses this information to calculate gains or losses. It subsequently provides a tax report that can be used to complete a tax return. Some crypto tax reporting tools also offer additional features, such as the ability to track crypto gains and losses in real-time.
The benefit of doing this is that you get an output of your total capital gains for the tax year and automate everything.
Here are some of the most popular crypto tax reporting tools include:
Crypto tax reporting tools
CoinTracker: This platform offers a range of features, including automatic transaction import, real-time tracking of crypto gains and losses, and the ability to generate tax forms.
TokenTax: This one offers a range of features, including automatic transaction import, real-time tracking of crypto gains and losses, and the ability to generate tax forms.
CoinLedger.io: This platform offers a range of features, including automatic transaction import, real-time tracking of crypto gains and losses, and the ability to generate tax forms.
Koinly.io: Is available for 20 countries it automatically calculates taxes for you in 20 minutes. I think I used this one and it worked pretty well for me.
7. Report Your Crypto Gains or Losses on Your Tax Return
Once you have calculated your crypto gains and losses, and determined your tax obligations, you will need to report your crypto gains or losses on your tax return. In most countries, you will need to complete a special tax form for cryptocurrency transactions.
For some countries the capital gains tax rate on crypto transactions has not been defined yet. In such cases you probably need to check what the capital gains tax is for “other assets”. For example, in my country capital gains on all financial products is 15% hence I have assumed 15% for crypto
In the United States, investors must report their crypto gains or losses on Form 1040, Schedule D. Plus they must attach Form 8949, Sales and Other Dispositions of Capital Assets, to report the details of each transaction. It’s important to accurately report your crypto gains or losses. Failure to do so can result in penalties and interest charges.
8. Consult with a Tax Professional
If you are unsure about how to calculate your crypto gains or losses, or how to determine your tax obligations, it’s a good idea to consult with a tax professional. Tax experts can provide valuable advice and guidance on the tax treatment of cryptocurrency gains, and can help you to accurately report your crypto gains or losses on your tax return. This way you will be on the safe side.
In summary, calculating your crypto gains or losses is an important part of being a cryptocurrency investor. By carefully tracking your transactions, determining your cost basis and fair market value, and accurately reporting your gains or losses on your tax return, you can ensure that you are in compliance with your tax obligations. It’s also a good idea to consult with a tax professional for guidance on the tax treatment of your gains.
But what if you just want to monitor crypto gains /losses and are less interested in how much tax you have to pay?
9. Forget about taxes. I just wanna track my gains
Ah my friend in that case you probably want to use a portofolio tracker. This will allow you to track your crypto profits or capital losses.
Most crypto investors who want to track short-term gains will use a performance tracker.
Crypto portfolio performance trackers are online platforms that help cryptocurrency investors track the performance of their investments. These platforms typically allow investors to import their transaction history from cryptocurrency exchanges. They then use this information to calculate the value of your crypto portfolio over time.
Such performance trackers typically provide a range of features, including the ability to track the value of individual crypto assets, the ability to track the value of a portfolio as a whole, and the ability to see how a portfolio has performed over time. Some crypto portfolio performance trackers also offer additional features, such as the ability to set alerts, and to compare the performance of a portfolio to benchmarks or other portfolios.
There are several benefits to using crypto portfolio performance trackers.
- First, they can help investors to get a better understanding of the performance of their crypto investments, and to identify trends and patterns.
- Second, they can help investors to make more informed investment decisions, and to develop an effective investment strategy.
- Third, they can provide valuable insights into the overall health of the crypto markets, and can help investors to stay up-to-date with the latest developments in the crypto world.
Here are some of the most popular crypto portfolio performance trackers.
Popular crypto portfolio trackers
- CoinTracking: This platform offers a range of features, including the ability to track the value of individual crypto assets, the ability to track the value of a portfolio as a whole, and the ability to see how a portfolio has performed over time.
- Blockfolio: This is another tracker. However it was aqcuired by FTX who are not in good shape. So, yeah, I am throwing it out there because it is famous but I don’t think you should use it as the FTX debacle may leave you exposed.
- Delta app: This platform offers a range of features, including the ability to track the value of individual crypto assets, the ability to track the value of a portfolio as a whole, and the ability to see how a portfolio has performed over time. It allows you to hook up one of two exchanges for free and then has a monthly subscription. Delta is owned by the popular trading platform eToro.
Overall, crypto portfolio performance trackers are an important resource for cryptocurrency investors, and can help to improve the performance of a crypto investment portfolio.
Wrapping up how to estimate your crypto gains
Reporting capital gains on your crypto activity is pretty straightforward. First, you need to calculate your cost basis. Second, you need to calculate the fair market value of your assets when you sell. Finally you deduct one from the other to estimate your gains of losses.
Using a crypto tax calculator can help ensure that you are properly reporting and paying the right amount of taxes. For most people the easiest solution would be to use an automated solution that outputs how much you made or lost during the year.
Finally, if you just want to be able to track gains or losses, and don’t care about taxes you can use a portfolio tracker. There are multiple portfolio trackers out there.
I hope you found this article useful. If you are new to this space check out my guide to getting started in crypto.