A large part of calculating your cryptocurrency taxes is calculating your capital gains and loss totals, or the difference in value between your acquisition price of your asset and the sale price. This is actually the same way that taxable profits would be calculated on stock trades or the sale of property.
Tracking your tax lots
To compute your tax liability, you will need to track your tax lots. A tax lot is basically the record of tokens purchased or otherwise acquired in one transaction.
A tax lot includes the following information from your transaction history:
Amount and currency of the coin or token sold
Fiat value at time of acquisition
Date of acquisition
Fiat value at time of trade or sale
Date of sale
It is very important to keep detailed records of your trades, since it is often very difficult to retroactively find and fill in missing data-and any missing cost basis increases your tax liability.
If you do find you have missing data, it can frequently be seen in receipts and exchange transaction confirmation emails, but this is often a gargantuan task. Crypto tax software automatically tracks your tax lots, letting you largely stay away from the hassle of missing trade data.
Even if you are using a crypto tax calculator, it’s a good idea to keep notes on special situations, such as lost coins and ICOs.
Tax considerations – Calculating your crypto capital gains and losses
An important term in tax is cost basis. It identifies the original value of an asset for tax purposes. At its core, calculating crypto capital gains and losses is easy: proceeds – cost basis = capital gain or loss.
Both gains and losses should be reported, because capital losses can offset capital gains. However, a few variables may affect how you determine your cost basis, and thus affect your totals.
Crypto tax accounting methods
The IRS allows taxpayers to choose which accounting method they’ll use annually. Among the most popular allowed options are FIFO, LIFO, and HIFO. These procedures match up acquisitions and dispositions of tax lots of the same asset differently. In other words, each methods could produce a different tax basis, and so different gains and losses.
First in, first out (FIFO): Assets acquired first can be purchased first
Last in, first out (LIFO): Assets acquired last can be purchased first
Highest in, first out (HIFO): Highest price assets can be purchased first
For example, imagine you sold 1 BTC in 2021 for $35,000 but had purchased 1 BTC in 2018 for $8,000, 1 BTC in 2019 for $4,000, and 1 BTC in 2020 for $25,000. Whichever tax lot you select as the price tag basis for your 2021 sale will have a big impact on your taxable capital gains amount ($27,000 of gains, $31,000 of gains, or $10,000 of gains respectively).
For more on this topic, read our blog post on crypto accounting methods.
Many crypto transactions involve fees: to exchanges, to protocols, and/or Ethereum gas fees. In many cases, these fees can be put into your asset’s cost basis to decrease your capital gains or boost your capital losses.
For example, let’s say that to swap 3,000 USDC for 1 ETH on Uniswap, you had to pay $100 in fees. You can include that $100 to the ETH’s cost basis, making it $3,100.
Note that whether transaction/gas fees can be put into cost basis is determined by the sort of transaction. Take a look at this blog post for more information about how fees can affect your crypto tax calculation.
Determining your capital gains tax rate
Crypto transactions are taxed at different rates depending on if the asset was held for less than a year (short-term), or per year or more (long term). Thus, they are reported separately to the IRS, which means you should split them up when calculating your taxes.
Long-term gains are treated preferentially by the IRS, with rates of 0%, 15%, or 20% depending on your tax bracket. Short-term gains are taxed at the same rate as your earnings.