How Is Crypto Tax Calculated?
Calculation of taxes can be a complicated process, and doing so for cryptocurrency can be all the more tricky. From aggregating all your crypto transactions to calculating the cost basis and gains and losses for the determination of your crypto tax rate, it's very easy for you to get confused.
But the good news is that a number of crypto tax-related services, such as crypto tax calculator can help you calculate your crypto taxes fuss-free. In this article, we'll understand how crypto tax is calculated and how you can ease this process by using a crypto tax calculator.
Regulations By The IRS
The Internal Revenue Service considers crypto as property or asset, similar to stocks, instead of fiat currency (U.S. Dollar, Euro, etc.). This implies that the IRS needs to be reported when selling and trading the crypto you hold.
How Is Crypto Tax Calculated?
Cryptocurrency tax calculation requires you to accumulate all your crypto transactions, which have to be subtracted from your cost basis. This brings us to our main question, how is crypto tax calculated? Let's find out how!
Cost Basis
The cost basis of crypto is the price at which the crypto has been bought or sold. But there are a few categories that make its calculation easier:
Crypto investment, including your basic investment (cost of asset) and the transaction cost
Crypto income, where the initial basis is considered zero but the amount of the income in USD must be declared as ordinary income
Inheriting crypto, where the recipient can declare 'step up' in the fair market value (FMV)
Receiving crypto as a gift will be subjected to capital gains
Capital Gains & Losses
The capital gain or loss is the difference between the selling price of crypto and the price at which crypto had been bought. If the price at which crypto is sold is higher than the price at which it was bought, the gains are subjected to capital gains tax, while on the other hand, if the cost basis is greater than the price at which crypto was sold, the loss qualifies as capital losses, which can later be harvested to reduce tax liability.
It must be noted that the capital gains and losses are also dependent on the holding period of the cryptocurrency. If the gains are sold at a period less than a year (365 days or less), they are subjected to short-term capital gains and if they are sold after a year (366 days or more), the gains are subjected to long-term capital gains.
As of 2021, the short-term capital gains tax ranges from 10% to 37%, whereas the long-term capital gains tax ranges from 0% to 20%, depending on various subcategories.
Crypto Tax Calculator
There are a number of crypto tax software available these days that can help you calculate your crypto taxes. One such reliable crypto tax calculation software is ZenLedger. Using the ZenLedger crypto tax calculator you can skip the complicated process of calculating your taxes and rely on its Grand Unified Accounting feature for detailed calculations of your crypto transactions. Apart from that, they have also integrated the major crypto exchanges and wallets.
The Bottom Line: How Is Crypto Tax Calculated?
With the IRS bringing in new tax regulations to the table, it becomes extremely difficult to keep track of the latest news. Using a crypto tax calculator can not only help you prepare for the tax season but also file and report your taxes.
FAQs: How Is Crypto Tax Calculated?
How is crypto tax calculated using a tax calculator?
There are a number of crypto tax software available these days that can help you calculate your crypto taxes. Using a crypto tax calculator you can skip the complicated process of calculating your taxes and rely on its advanced feature for detailed calculations of your crypto transactions.
How is the cost basis calculated?
The cost basis of crypto is the price at which the crypto has been bought or sold. But it can be categorized into a few groups to make its calculation easier:
Crypto investment, including your basic investment (cost of asset) and the transaction cost
Crypto income, where the initial basis is considered zero but the amount of the income in USD must be declared as ordinary income
Inheriting crypto, where the recipient can declare 'step up' in the fair market value (FMV)
Receiving crypto as a gift will be subjected to capital gains
Is capital gains tax depending on the holding period?
Capital gains and losses are also dependent on the holding period of the cryptocurrency. If the gains are sold at a period less than a year (365 days or less), they are subjected to short-term capital gains and if they are sold after a year (366 days or more), the gains are subjected to long-term capital gains.