www.taxprofessionals.com - TaxProfessionals.com
Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How to Calculate Cryptocurrency Gains Step by Step

How to Calculate Cryptocurrency Gains Step by Step

It's quite simple: to pay your tax bill, you need to know the number of your accumulated gains or losses. Below, we'll explain how to calculate your cryptocurrency gains, so you know what to report and pay to Uncle Sam.

1. Crypto Transaction Tracking

You need to track your transactions and associated tax batches to calculate your crypto transactions and associated tax lot. A tax lot records tokens acquired or purchased in a single transaction.

A tax lot includes the following transaction information:

  • Date of purchase

  • Date of sale

  • Fiat value at the time of purchase

  • Fiat value at the time of trade or sale

  • The value and currency of the digital asset being sold

It is very important to keep detailed records of your transactions, as it can be difficult to locate and recover missing data that could increase your gains. The easiest solution to this challenge is crypto tax software that automatically tracks your transactions.

Remember, though: if you're using a cryptocurrency tax calculator, it's a good idea to note special situations such as lost coins, cryptocurrency scams and rug pulls, and ICOs.

2. Find the cost basis

An important term in cryptocurrency tax is the cost basis. It refers to the initial value of an asset for tax purposes.

Calculating cryptocurrency gains and losses is simple: proceeds-cost basis = capital gain or loss.

However, two variables can affect your cost basis: accounting method and transaction fees.

Crypto tax accounting methods

The IRS allows taxpayers to choose a specific accounting method each year. Specific identification methods compare sales and purchases differently; using one method for business data may produce a different cost basis than using another.

Some of the most popular methods supported include FIFO, LIFO, and HIFO.

  • First in, first out (FIFO): Assets bought first are sold first

  • Last In, First Out (LIFO): Assets bought last are sold first

  • Highest In, First Out (HIFO): Highest-priced assets are sold first

Example of accounting method variation

• You have 3 BTC: 1 BTC was bought in 2018 for $8,000; 1 was purchased for $50,000 in 2021, and 1 was purchased for $19,000 in 2022.

  • In 2022, you sell 1 BTC for $23,000.

  • If you choose FIFO, your capital gain will be $15,000 ($23,000 to $8,000)

  • If you choose LIFO, your capital gain will be $4,000 ($23,000 to $19,000)

  • If you choose HIFO, you will incur a capital loss of $27,000 ($23,000 - $50,000)

Transaction Fees

Many crypto transactions involve transaction fees (paid to exchanges or protocols) or Ethereum gas fees. In many cases, these expenses can be added to the cost basis of your asset to reduce your capital gains or increase your capital losses.

Example of calculation using cost basis

  • To exchange 3000 USDC for 1 ETH on Uniswap, you have to pay a fee of $100.

  • You can add $100 to the ETH cost basis, which is $3,100.

Note that the ability to add gas/transaction fees to the cost basis depends on the type of transaction. 

3. Determining your Crypto Capital Gains Tax Rate

Crypto transactions are taxed at different rates depending on how long the assets are held. The trade is short-term if they have been held for a year or less. The transaction is long-term if the assets have been held for more than a year.

Long-term income receives preferential treatment from the IRS at rates of 0%, 15%, or 20%, depending on your tax bracket. Short-term gains are taxed at the normal rate of income tax.

Since short-term and long-term transactions are taxed at different rates, they are reported separately to the IRS. You must also divide them when calculating your crypto capital gains.

4. Calculation of your crypto gains

Once you have collected your complete transaction history, you can start calculating your profits and losses. To illustrate the specifics of the calculation, let's look at some concrete examples of how to match up cryptocurrency trades.

If you buy cryptocurrency, trade it short-term for another currency, and then sell that currency long-term for fiat currency, the capital gains tax calculation will be split between the short-term and long-term held in cryptocurrency for less than more than one year or, respectively, more than one year. Here is an example of such a set of transactions:

  • You bought 1 BTC for $30,000 (tax included), so the cost basis for this lot of 1 BTC is $30,000.

  • You sold that 1 BTC for $32,000 (tax included) worth ETH the next day, so your profit is $32,000.

  • Subtract the cost basis of $30,000 from the revenue of $32,000, and your profit is $2,000. This amount is subject to short-term capital gains tax and is declared on the tax return for the year.

  • A year later, you sold the $32,000 worth of ETH for $35,000 (tax included).

  • Subtract the cost basis of $32,000 from the revenue of $35,000, and your profit is $3,000. This amount is subject to long-term capital gains tax and appears on your tax returns in the year of sale.

Now imagine that instead of selling $32,000 worth of ETH at a profit, it was sold at a loss. During this year, you participated in other transactions, which resulted in cumulative long-term gains of $50,000.

  • You then sell the $32,000 of ETH for $25,000 (including fees); the proceed is $25,000.

  • Subtract the cost basis of $32,000 from the revenue of $25,000 for a net loss of $7,000.

  • Subtract the long-term capital loss of $7,000 from the long-term capital gain of $50,000. The new long-term taxable income is $43,000.

You can make this process easier by using the services of a tax professional. They will help by aggregating your data and automatically linking your cost basis to your sales using accounting methods such as FIFO or LIFO. They will calculate your profit or loss and generate tax reports with your data.



Jim McClaflin, EA, NTPI Fellow, CTRC
Contact Member