- To calculate gains or losses, you need to know the date you acquired and sold or disposed of the cryptocurrency, the amount you received in USD, and your cost basis.
- Short-term gains are taxed as ordinary income, while long-term gains are taxed at a lower rate depending on your tax bracket.
- To minimize your tax liability, hold your cryptocurrency for over a year and consider donating to charity instead of selling.
Cryptocurrencies have been on a wild ride over the past year or so, with prices skyrocketing and dropping seemingly at random. If you're like most people, you've probably made some money on cryptocurrencies – but how much? And more importantly, how do you report those gains come tax time?
Cryptocurrency transactions are reported on Form 8949 and Schedule D, which reports capital gains and losses. To figure out your profit or loss, you need to know three things:
- The amount of money you spent buying the cryptocurrency.
- The value of the cryptocurrency when you sold it.
- How much commission (or other fees) you paid on the sale.
In this article, we'll walk you through how to calculate your crypto gains (and losses) and your tax bill and provide some tips on how to minimize your tax liability.
How to Calculate Your Capital Gains (and Losses)
In the United States, the Internal Revenue Service (IRS) classifies digital currency as property, which means you will either make money off of it or lose out when disposing of your coins and tokens.
There are four ways to dispose of your crypto: selling at market price, swapping one type for another, gifting, and paying for goods and services using cryptocurrency.
When calculating your gains, you'll need to know the following:
- The date you acquired the cryptocurrency
- The date you sold or disposed of the cryptocurrency
- The amount you received for each unit of currency (in USD)
- Your basis in the crypto (how much you paid for it, including any costs associated with acquiring it)
- Once you have that information, follow the steps below:
What's Your Cost Basis?
Your cost basis is the amount you paid for the cryptocurrency, including any costs associated with acquiring it. If you received your crypto through an exchange, your cost basis is the price of the coin at the time of purchase plus any fees charged by the exchange.
If you mined your own crypto, your cost basis equals the value of the electricity and hardware used to mine it.
If you received crypto as a gift, your cost basis is dependant on the value of the crypto when you received it. If the fair market value of the crypto is equal to or more than the donor's cost basis, then the receiver simply takes on the donor's cost basis and holding period.
If you received crypto as a gift and the fair market value of the crypto is less than the donor's cost basis, then it is a little bit more complicated. The recipient's cost basis will then depend on whether there is a gain or loss when they eventually dispose of that cryptocurrency.
I will use an example to show the three different scenarios that can apply. Pretend that Daniel buys one Litecoin for $1,000, and after three years he gifts it to Luke, when the market price of litecoin is $500. A week later, Luke wants to sell his Litecoin. Depending on the market value of Litecoin, there are different outcomes. If the market value of Litecoin is:
- $1,100. Luke takes on Daniel's original basis of $1,000, therefore he has a long-term capital gain of $100.
- $400. Since there is a capital loss using Daniel's basis, he can't use Daniel’s original cost basis of $1,000. Instead, he takes on the fair market value at the time of transfer as basis ($500), leaving a long-term capital loss of $100.
- $900 (the sale price is between the donor’s cost basis and the fair market value when crypto was gifted). Luke will not recognize any capital gains or losses.
Calculate Gains or Losses
Once you know how much each unit was worth when you sold it or disposed of it, calculate your loss or profit by subtracting your basis from the sale price (or disposal value). This will give you either a positive number if you made money on the disposal or a negative if you made a loss.
How to Calculate Your Capital Gains Tax on Crypto
If you made a profit on your crypto disposal, you might be required to pay taxes on your gains. Short-term capital gains are classified as ordinary income and are taxed at your marginal tax rate.
On the other hand, long-term capital gains are taxed at a lower rate, and the exact amount depends on your tax bracket.
The IRS considers any crypto held for less than a year a short-term gain, while anything held for more than a year is deemed a long-term gain.
How Much Tax You Owe
To determine how much tax you owe on your crypto gains, you need to know your marginal tax rate. This is the highest tax bracket you fall into and can range from 0% to 37%.
The IRS publishes the tax rates every year, so you should make sure to stay up-to-date. For 2022 it remains at a high 37% rate for individuals who earn over $539,900 and $647,850 for married couples filing their taxes jointly.
Gains are taxed at your marginal tax rate if they last less than a year (short-term gains), while gains that last longer than a year are taxed at a lower rate of either 0%, 15%, or 20% (long-term gains).
To calculate how much you owe in taxes on your crypto gains, you need to:
- Determine if you have short-term or long-term gains
- Calculate the total amount of gain for each type
Multiply the total profit by your marginal tax rate (for short-term) or the appropriate long-term tax rate (0%, 15%, or 20%)
Add up the total amount of taxes owed for both types of gains.
Can You Minimize Your Tax Liability on Crypto?
Here are some tips on how to minimize your tax liability on crypto
Long-term capital gains have a lower tax rate, so if you can hold your crypto for at least a year before selling, you'll be minimizing your tax liability, especially if you fall between the 20%- 37% tax bracket.
Itemize Your Deductions
If you're in the US, you may be able to deduct some of your crypto-related expenses from your taxable income. This could include things like computer equipment used for mining, accounting fees related to tracking your investments, and even internet service used to trade cryptos.
Donate or Gift Your Crypto
Crypto gifts come with some significant benefits. If you give away cryptocurrency as a present, then there are no income taxes owed by the giver or recipient of that gift - it's like they're receiving money from nothing at all!
Plus, if the value of the cryptocurrency has gone up since you purchased it, then you're also avoiding capital gains taxes by giving it away.
Of course, there are limits to how much you can gift in a year without triggering a gift tax, but those limits won't be relevant for most people.
Take a Cryptocurrency Loan
The IRS has yet to release official guidance on cryptocurrency loans, so if you're looking at cashing out soon and need an incentive, consider taking a loan instead.
Taking a cryptocurrency loan is an excellent way to minimize your tax liability on crypto. The interest rates associated with these types of loans are usually low, meaning that they can help you save money in both cash and inflation-adjusted terms over the long term.
Can You Calculate Your Crypto Gains?
So, there you have it! You are now a crypto expert. Well, maybe not an expert, but you definitely know more about calculating your crypto gains than when you started reading this guide. We hope that you found this information helpful and that it will make filing your taxes a little less daunting.
Remember to keep good records throughout the year—it will make tax season a breeze!
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