Before we get to talking about our Bitcoin tax calculator and how it simplifies the crypto tax calculation process, for those new to the space, it must be noted that the IRS has officially issued revised instructions for 1040 forms. As of December 31st, 2020, cryptocurrencies are considered “virtual currency” and must be disclosed as part of a 1040 filing.
Any US tax filers who purchased Bitcoin or other cryptocurrencies must now indicate their purchase on their 1040 filing when answering the question, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
If you did not purchase any crypto in 2021, you can answer no to this question. Holding or transferring between wallets does not count. For more information, make sure to read our 2021 Guide to Cryptocurrency & Bitcoin Taxes.
What Is A Bitcoin Tax Calculator?
Cryptocurrency is an exciting and cutting-edge asset class. It appeals to our sense of cultural evolution, our infatuation with new tech, and our ambitions for personal wealth. While Bitcoin and other cryptocurrencies are an exciting opportunity for investors and technophiles alike, the legal ramifications of trading and owning cryptocurrency remain convoluted for most of us.
If you are a citizen of the US and own any cryptocurrency including Bitcoin, you are automatically subjected to certain taxes per the law. However, since crypto in itself is a rather novel concept, the calculation of its taxes still remains trouble for most and this is where a Bitcoin tax calculator comes into the picture. A Bitcoin tax calculator is a tool that helps Bitcoin owners automate the calculator of short-term capital gains tax and the long-term capital gains tax on profit from bitcoins. Just by entering a few basic details on the calculator, one can ascertain the short or long-term capital gains tax, depending on the holding period.
There are several steps and methods to calculating and using a cryptocurrency tax calculator or a crypto tax calculator. They include:
- Capital gains and losses
- Owner’s capital gain tax rate
- Cost basis
- Accounting method
- Harvesting losses
- Foreign currency reporting
IRS tax law considers Bitcoin and other cryptos an asset, comparable to stock, NOT a fiat currency (like the Euro, USD, or Yen). That means that when you sell or trade Bitcoin, you have to recognize capital gains or losses.
Capital gains are calculated by finding the difference between the price at which you sold the crypto asset and the price at which you bought it. Thus, capital gains calculations are the aggregation of all crypto assets bought or sold over the course of the year minus the cost basis (price at which you bought or received the asset). Note that the tax liability is calculated based on how long the asset was held for; assets held for less than a year (short-term capital gains) is subject to a higher tax bracket than assets held for a year plus one day (long-term capital gains).
Conceptually, it’s not tricky. But when you start to understand the record-keeping necessary for each transaction, and that the rules for calculating bitcoin taxes change depending on a handful of factors, you want an automated solution. This is the power of ZenLedger’s bitcoin tax calculator: every transaction inside of every exchange and every wallet are evaluated and calculated accurately in a matter of minutes.
So now you understand why you want to get bitcoin taxes off your plate and into an automated software solution. But what about ZenLedger makes us the best Bitcoin tax calculator?
Let’s talk about a couple of ZenLedger's features that make us unique from our competitors!
Grand Unified Accounting Report: Your Bitcoin Tax Review
ZenLedger provides the most accounting transparency of any Bitcoin tax software. You don’t have to wonder how we calculated the taxes on your Bitcoin, the tax review provided to you in a separate spreadsheet goes over every transaction so you and your CPA can see precisely how we calculated your tax estimate.
The logic behind each calculation is spelled out on your Grand Unified Accounting (GUA) output. Accountants and CPAs love this feature because it means every transaction can be adjusted or tailored to fit the investor’s best possible tax outcome.
Superior Customer Support with ZenLedger
So, you’ve likely got questions about how to stay on the right side of Uncle Sam when it comes to your Bitcoin taxes. You don’t want to be caught unprepared, or end up owing more taxes than you were expecting.
ZenLedger’s customer support can help you with more than just navigating our software. While we don’t give tax advice (you need to speak to your CPA or tax professional for that) we do know the current crypto tax laws and have CPA partners that ensure our solution keeps your taxes accurate. That means we can help you save money on your taxes by providing tools to harvest a tax loss on coins or explain the basics of how and why crypto taxes function the way they do.
We are also experts at helping you get your data out of your exchanges and wallets! With over 400+ native integrations, we know how to get your data out, formatted, and easily uploaded. We also have more than 70 crypto tax support articles published and chat support available online 7 days a week from 9am - 9pm EST.
No matter the volume of transactions you have for a tax year, our customer support team can help!
In case you were wondering what this would look like to do by hand, or what ZenLedger evaluates for each transaction, we review the legal considerations for each crypto transaction in order to calculate bitcoin taxes correctly in the next section.
How Are Bitcoin Taxes Calculated?
Now that you understand some of what makes ZenLedger the best bitcoin tax software, let’s cover the actual laws and tax rules that ZenLedger handles. Given the IRS guidance and what we generally know about the tax code, we can lay out the following basic tenets.
Who needs to file an IRS report?
All US citizens who are required to file a US income tax return need to report the results of their crypto activity to the IRS. Crypto activity can include:
- Trading (buying one Bitcoin with another cryptocurrency type)
- Buying goods or services with crypto
- Selling your cryptocurrency
In addition, anyone who has income from US sources may be obligated to pay US taxes. As a result, foreign nationals who transact on any of the US-based exchanges (Coinbase, Bittrex, Gemini, Kraken, Bitstamp, etc.) may also have tax requirements.
When do I need to file a tax report?
April 15th is typically known as “tax-day” because US returns are due on this day (or the following Tuesday if the 15th falls on a weekend). With that said, US citizens living outside the US receive an automatic 2-month extension and anyone can get a 6-month extension (to file, but not to pay) by requesting it via the IRS’ e-file service or by filing a paper form 4868. Those running a business and those with capital gains of more than $1000 are expected to file quarterly.
Calculating Capital Gains/Losses With A Bitcoin Tax Calculator
- Selling and exchanging (but not buying itself) is a taxable event. This includes crypto to crypto trades (i.e. selling BTC for ETH) in addition to crypto to fiat trades.
- Those holding cryptocurrency for investment purposes (i.e. in anticipation of it gaining/losing value and selling to capture the change in value) will realize a capital gain/loss on the sale. No taxable events are triggered until the sale!
- Those holding cryptocurrency for business purposes (like running a crypto ATM) will record ordinary income gain/loss upon disposal.
- This capital gain/loss shall be measured by subtracting the cost to purchase the Bitcoin from the price at the time of disposition (a fancy way to say trade or sell, primarily).
What is a taxable event?
A taxable event for the IRS is a situation where you have to report to the IRS your capital gains and capital losses related to crypto transactions.
The following points summarize the official IRS guidance from 2014, as well as the recent update released:
- If you trade cryptocurrency to a fiat currency like the US dollar, you create a taxable event.
- If you trade virtual currency to virtual currency, it is also a taxable event, and you have to work on your bitcoin tax reporting to file your gains or losses to the IRS using the fair market value in US dollars at the moment when the trade took place.
- If you accepted cryptocurrency as a way of payment for goods or services, you created a taxable event. Just like with trading, you must use the fair market value in USD at the moment of the transaction and your appropriate bitcoin tax rate for your bitcoin tax reporting.
- Crypto mining creates a taxable event.
- According to the IRS Revenue Ruling 2019 – 24, if you receive crypto units as a result of a hard fork, you do have gross income, and thus there is a taxable event. So moving forward you will have to report this information to the IRS.
The good news is that using a crypto tax calculator like ZenLedger, you can run an automated bitcoin tax reporting for all years you owned crypto. There are good chances that you had capital losses, and in this case, you can claim them and save on your taxes.
What is not a taxable event?
Here are some situations that don’t create a taxable event:
- Giving virtual currency as a gift doesn’t create a taxable event (though the gift tax will still apply if you exceed the gift tax exemption amount of $15,000).
- Transfers are not taxable events. In its new guidance, the IRS reconfirmed that “If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you” the transfer is not considered as a taxable event. This is great news for crypto investors because some exchanges, such as Coinbase, previously counted withdrawals as taxable events, which means that now you can use a bitcoin tax software like ZenLedger to refile your taxes for the previous years and hopefully save money.
- Buying digital currency with US dollars doesn’t create a taxable event. You don’t realize gains until you sell.
- Hard forks: if as a result of an airdrop following a hard fork and you didn’t receive crypto units of the new cryptocurrency, you don’t have gross income, and you don’t have to report it.
Zen Ledger's Bitcoin & Crypto Tax Calculator
How much tax you pay will depend on how long you hold your Bitcoin. Depending on your tax bracket for ordinary income tax purposes, long-term capital gains, which are recognized when an asset is held for at least one year & one day, are taxed at a rate of 0%, 15%, or 20%. Short-term capital gains are recognized when Bitcoin is held for one year or less, and are taxed at your ordinary-income tax rates.
Figuring Out Your Bitcoin Cost Basis
The cost basis of an asset is its cost to you (i.e. the amount you pay for it). Note this includes transaction costs, meaning exchange fees should be included when determining the basis.
Bitcoin as Income
The basis of a cryptocurrency received as income is a bit different. Since you didn’t actually pay anything, the initial basis is 0, however, you must declare the USD value of the amount received as ordinary income. For example, if you earned some BTC consulting, and at the time you were paid the BTC was worth $4000, that is your cost basis. Thus, your cost basis in cryptocurrency that was received (and reported) as income is the Fair Market Value (FMV) when you were paid.
As Gifts or Inheritance
Gift recipients receive the gifter's cost basis, so if a recipient receives a batch of Bitcoin that was purchased for $1, and sells for $7000 upon receipt, the recipient is on the hook for the $6999 gain per coin (which would likely be a capital gain). For inheritances, the recipient can elect to have a “step-up” in basis to the FMV at the time of inheritance, rather than the decedent’s purchase price.
Tax Lots: Choose which Units of Crypto Were Involved in Transactions
The new guidance that the IRS released in October 2019 describes the situation where you own multiple units of the same virtual currency that you purchased at different times with different basis amounts. The IRS confirms that in this situation “You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.”
The best way to choose them and save on your taxes is to use a free crypto tax calculator like ZenLedger. With our bitcoin tax reporting tool, you can identify the cost basis of your crypto when purchased and sold, and thus choose the best option taking into account your bitcoin tax rate. Without bitcoin tax software, this task would be impossible to manage.
Can A Crypto Tax Calculator Help Me Claim Losses?
Generally speaking, losses resulting from cryptocurrency trades are tallied against any gains made in the current year. Note, however, that first short-term losses are applied against short-term gains and then long-term losses against long-term gains. The net loss of either type can then be deducted against the other type of gain (ie. Short term against long-term).
For example, if you have:
- $5000 of short-term loss
- $2500 of short-term gain
- $3000 of long-term loss and
- $6000 of long-term gain
You sum the losses from the gains:
- Short term: $2500 – $5000 = – 2500
- Long term: $6000 – $3000 = 3000
Resulting in a $500 total long-term gain.
Don’t Forget About Foreign Exchanges!
Do you own $10k worth of Bitcoin or other cryptocurrencies in one of the most popular foreign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong, China), Jaxx (Canada), and Huobi (Korea) are widely used bitcoin investors in the US and abroad. If you do have (or had through the course of the year) $10,000 USD or more, you need to report that to the US Government.
Called “The Paul Manafort Rule,” holding over $10,000 USD in a foreign account or accounts at any point during the taxable year triggers a requirement to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN).
Note that although the filing deadline is the same as the tax return, the FBAR filing is not part of the tax return and is filed separately and directly with FinCEN. For crypto traders, this means those holdings at a non-US-based exchange that exceed $10,000 at any given point of the year will need to file Form 114 with FinCEN. And, if you have two foreign exchange accounts that each have a maximum of $5,001, then you still need to file an FBAR, since the aggregate is over $10,000.
Leave it to Us!
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Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.