When it comes to knowing how to calculate cryptocurrency taxes, there are a few things you should look out for. After all, cryptocurrency is a digital currency that deals with a person’s money and property. It’s also a digital asset that’s been growing popular steadily over the years. People’s coin ownership records are protected within a computerized database that uses strong cryptography and an encrypted blockchain network to ensure their transactions are secure and well-protected. But recently, cryptocurrency isn’t exempt from taxes. If you want to calculate the taxes included in cryptocurrency to know what to expect, you might want to check out tax software tools.
How Cryptocurrency is Taxed
When you hear the word cryptocurrency or how to calculate cryptocurrency taxes, the first thing that pops to mind is Bitcoin, Ethereum, and many others. They’re not treated as currencies like some people might think. Instead, they are treated as property for tax purposes. This means that dealing with cryptocurrency is similar to trading or investing in stocks.
Because cryptocurrency is property instead of currency, it is treated similarly to other property forms such as stocks, bonds, and real estate. When that sort of property is disposed of, you experience capital gains and capital losses. When you earn capital gains, you owe a percentage of it to the government. The question is, how can you calculate that percentage? It depends entirely on several factors, most specifically, if the gain is short-term or long-term.
Short-Term Capital Gains
Short-term capital gains refer to you holding your investments for less than 12 months or a year. When this happens, you’re only taxed at your marginal tax bracket.
Long-Term Capital Gains
If you’ve held your investments for more than a year, then you’re taxed at the long-term capital gains rate. This depends primarily on the amount of income you make per year.
What Is a Taxable Event?
Capital gains and capital losses can be difficult to discern at first. But it’s important to know what triggers them in the first place. A taxable event triggers these gains and losses, which is defined as any event or transaction that can result in a tax consequence for the one executing the transaction. Depending on the taxable event, you can experience a capital gain or a capital loss reporting requirement. If you want to know how to calculate cryptocurrency taxes, then you should know what triggers capital gains and capital losses in the first place.
Examples of Taxable Events in Cryptocurrency
- Selling cryptocurrency
- Trading crypt-to-crypto
- Using crypto for goods and services
Examples of Non-Taxable Events in Cryptocurrency
- Buying and holding crypto
- Sending cryptocurrency from one wallet to another
How to File Your Cryptocurrency Taxes
Since you already know how crypto taxes are calculated, you can also know how to file them afterward. To do so, an IRS form 8949 is required. You have to fill this form to report both capital losses and gains for all kinds of property.
When it comes to reporting your cryptocurrency taxes and knowing how to calculate cryptocurrency taxes, you have to take note of the following: cost basis in USD, fair market value in USD, and lastly, the gains and losses in USD. When you’ve taken note of those factors, you can use them to fill out your IRS form 8949.
Why Cryptocurrency Taxes Can Be Difficult
Understandably, some people might not be able to calculate crypto taxes. It can be challenging and difficult, depending on several factors. The first factor is that you might not know your crypto transactions’ US value dollar. This is because transactions and exchanges are quoted in other cryptocurrencies. Therefore, it’s important to track down the exact US dollar value.
Moreover, these exchanges and transactions, such as Coinbase, Bittrex, Binance, and Poloniex, don’t necessarily provide the best and accurate tax reports. The idea of cryptocurrency relies on it being so transferable from one wallet to another. Each time it gets transferred, it loses accurate cost basis information. This makes it difficult to get the right value of information to file your taxes.
This is what you’d call the cryptocurrency tax problem.
Crypto Tax Software Tools
If you want to know how to calculate cryptocurrency taxes, your best option would be to check out crypto tax software tools. These are tools that will help you automate the entire process. A good example would be CryptoTrader.Tax.
At CryptoTrader.Tax, you don’t have to worry about learning how to calculate cryptocurrency taxes, especially since it does it for you. The first thing you need to do with this app after signing up is to select all your exchanges and cryptocurrency platforms. Then you should import your trades automatically. Once these have been imported, the US dollar value will be associated with it each time you make a transaction.
This is such a useful application because it automatically and quickly creates your tax report, even picking up all the years you’ve been transacting in cryptocurrency. The report itself talks about the amount, the currency, the date you acquired it, the date you sold it, the cost basis, the proceeds, and if it’s a gain or a loss to you. It’s easy to tax report, all with a few clicks!
Overall, if you’re not well-versed regarding your finances, you’re going to have difficulty tracking and calculating your taxes and cryptocurrency exchanges. But with the new age of technology and the creation of several crypto tax software tools like CrytoTrader.Tax, you don’t have to do everything yourself manually. Suppose you want to know how to calculate cryptocurrency taxes. In that case, you can always study taxable events, capital gains, and losses and even track the exact cost basis for your exchanges. But if you don’t have the time or resources, you can always use crypto tax software tools. Discover more about cryptocurrencies here!