Filing your taxes? Be aware that in 2021 the IRS now requires you to disclose any cryptocurrency purchases made as part of a 1040 filing. Therefore you must learn how to calculate your crypto taxes!
If you did make a crypto purchase during 2021, make sure to answer yes to the following question on your 1040 form: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Note that holding or moving cryptocurrency between wallets does not count as acquiring. For a more detailed explanation of the changes and general filing best practices, see our 2021 Guide to Cryptocurrency & Bitcoin Taxes.
What Is A Crypto Tax Calculator?
Cryptocurrency represents a great opportunity to diversify your investment portfolio, maximize your profits, and… save on your taxes. Yes, you read it right: you must pay taxes on cryptocurrency. And yes, the IRS has the means to control that.
Paying crypto taxes is not easy though. Taxes are already a very complicated and confusing topic, but in the world of crypto, with so many different exchanges, wallets, and transactions, it’s impossible to manually calculate all gains and losses. That’s why you need to know how to calculate taxes on crypto by using a cryptocurrency tax calculator.
Let’s explore how to calculate your crypto taxes and also see how ZenLedger’s cryptocurrency calculator can help simplify the process.
IRS Rules On How to Calculate Cryptocurrency Taxes using a Crypto Tax Calculator
In the United States, any person or entity that owns or trades cryptocurrency is subject to taxation by the Internal Revenue Service (IRS). This includes individuals, businesses, and other types of organizations.
The IRS considers cryptocurrency to be property for tax purposes, which means that gains and losses from the sale or exchange of cryptocurrency are subject to capital gains taxes. In addition, transactions involving cryptocurrency may also be subject to other taxes, such as self-employment taxes for individuals who earn income from cryptocurrency-related activities.
Businesses that accept cryptocurrency as payment are also subject to taxation and are required to report such transactions to the IRS. In addition, businesses that pay their employees in cryptocurrency must report such payments on Form W-2, and may also be required to withhold taxes from the employee's payment.
Overall, it is important for anyone who owns or trades cryptocurrency to be aware of their tax obligations and to report their transactions accurately to the IRS to avoid potential penalties and fines. It is recommended to consult with a tax professional or use tax software to ensure that all transactions are properly reported and taxes are paid on time.
Example Of Crypto Tax Calculation
It’ll be easier to calculate your capital gains and losses if you have your transaction history altogether in one place.
Let’s suppose that you’ve bought BTC, traded short-term LTC, and then sold the latter long-term for fiat currency. Accordingly, your short-term and long-term trades will amount to your capital gains tax for less than a year and more than a year, respectively.
- BTC bought worth $10,000 (cost basis)
- The next day, BTC sold for $12,000 worth of LTC (proceeds)
- Proceeds - Cost Basis = $2,000 Profit
This is the amount you are liable for on your short-term gains tax.
- Sold LTC worth $12,000 for $13,000 after more than a year.
- Current proceeds are $13,000
- Proceeds - Cost Basis = $1,000 Profit
This is the amount you are liable for on your long-term gains tax.
Crypto Tax Reports: Who Needs to Report Crypto Taxes to the IRS?
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.
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 obligations.
When Do I Need to File a Crypto Tax Report?
April 15th is typically known as “Tax Day” because US returns are typically 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.
Crypto Tax: What Is Considered A Taxable Event?
When you know how to calculate crypto taxes you might have some questions, such as: do I pay taxes on crypto transfers? What about hard forks?
In general terms, crypto activity can include:
- Trading (buying one Bitcoin with another cryptocurrency type)
- Buying goods or services with crypto
- Selling your cryptocurrency
However, there are some nuances. To make it easier to understand, we break down what is considered a crypto-taxable event below.
A taxable event 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 recent updates.
- If you trade cryptocurrency for a fiat currency like the US dollar, you create a taxable event.
- If you trade virtual currency for virtual currency, it is also considered a taxable event. You also have to work on your crypto tax reporting and file your gains or losses to the IRS by using a fair market value in US dollars at the moment when the trade took place.
- If you accept cryptocurrency as a form of payment for goods or services, you create a taxable event. Just like with trading, you must use the fair market value in USD at the moment of the transaction and the appropriate crypto tax rate on your 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 have gross income, and thus there is a taxable event. So, moving forward you have to report this information to the IRS.
The good news is that by using a cryptocurrency tax calculator like ZenLedger, you can run an automated crypto tax report for all years you owned crypto. There is a good chance that you had capital losses, and you can claim them and save on your taxes.
How To Avoid Crypto Taxes: What Is Not A Taxable Crypto Event?
Here are some situations that don’t create a taxable event, so you don’t have to report them to the IRS:
- Buying and holding cryptocurrency: Simply buying and holding cryptocurrency is not a taxable event. Taxes are only triggered when you sell or exchange your crypto for another asset or currency.
- Transferring cryptocurrency between wallets: Transferring cryptocurrency from one wallet to another does not trigger a taxable event. However, if you transfer cryptocurrency to a third party in exchange for goods or services, that is considered a taxable event.
- Donating cryptocurrency to a qualified charity: Donating cryptocurrency to a qualified charity is not a taxable event, and you may be able to deduct the value of the donation from your taxes.
- Receiving cryptocurrency as a gift: If you receive cryptocurrency as a gift, it is not taxable income. However, if you later sell or exchange the cryptocurrency, you will owe taxes on any gains.
- Hard forks: if as a result of an airdrop following a hard fork, you didn’t receive crypto units of the new cryptocurrency, you don’t have gross income, and you don’t have to report it.
It's worth noting that these rules can vary by jurisdiction and the specifics of each situation, so it's always best to consult with a tax professional for advice on your particular circumstances. Additionally, while these events may not trigger a taxable event, you may still need to report them to the IRS or other tax authorities.
How To Calculate Crypto Taxes With A Crypto Tax Calculator
Several factors must be considered when calculating your cryptocurrency taxes:
- Capital gains and losses
- Owner’s capital gain tax rate
- Cost basis
- Accounting method
- Harvesting losses
- Foreign currency reporting
Let’s look at each of them to understand how to calculate cryptocurrency taxes using a crypto tax calculator.
How to Calculate Crypto Capital Gains And Losses
- 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 held for business purposes (like running a crypto ATM) will record ordinary income gain/loss upon disposal.
- This capital gain/loss should be measured by subtracting the cost to purchase cryptocurrency from the price at the time of disposition (trade or sell).
Crypto Capital Gains Tax Rate
The amount you have to pay in taxes will depend on the duration you hold your crypto. 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.
Is it Permissible to Make Like-Kind Exchanges?
Before the Tax Cuts and Jobs Act (TCJA) of 2017, cryptocurrency traders could use a tax loophole known as a "like-kind exchange" to defer paying taxes on their trades. Like-kind exchanges allow traders to exchange one asset for a similar one without triggering a taxable event. However, the TCJA removed cryptocurrency from eligibility for like-kind exchanges, meaning that all cryptocurrency trades are now subject to taxation.
Therefore, it is no longer permissible to make like-kind exchanges with cryptocurrencies, and all trades must be reported to the IRS for tax purposes. Failing to report cryptocurrency trades can result in penalties, fines, and potential legal consequences. It is always advisable to consult with a tax professional or accountant for guidance on cryptocurrency taxation.
Figuring Out Your Crypto Cost Basis
The basis of an asset is its cost to you (the amount you paid for it or the sale price at the time of purchase). 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 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 bitcoins consulting, and at the time you were paid the BTC was worth $4000, that is your basis. Thus, your 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 basis, so if a recipient receives a batch of crypto that was purchased for $1, and sells for $7000 upon receipt, the recipient has a $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.
Choosing An Accounting Method
When investors sell multiple assets with different bases, they can either choose to sell the crypto they’ve held the longest first (FIFO), or sell the newest ones first (LIFO). In theory, you can choose which method you would like to apply, however, many in the crypto-tax industry believe FIFO is the only appropriate treatment unless you can specifically identify which coin you are selling. Contact a tax professional if you don't know how to calculate crypto taxes or for any other questions.
Keeping a Record of Your Crypto Transactions
You must keep track of your transactions and the corresponding tax lots to figure out your cryptocurrency gains for taxes. The list of tokens that were bought or otherwise obtained in a single trade is known as a tax lot.
You must include the following transaction details in a tax lot:
- Crypto assets sold or purchased
- Fiat price and the date of purchase
- Fiat price and the date of selling
Maintain a thorough record of all of your trades since it might be challenging to go back and connect the dots that may have contributed to overstated profits. The easiest answer to this problem is cryptocurrency tax software, which takes account of your activities seamlessly.
Cryptocurrency Tax Calculator: Tax-Loss Harvesting With A Crypto Tax Calculator
In general terms, 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 long-term losses are applied 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.
Foreign Currency Reporting
Do you own $10k worth of cryptocurrency in one of the most popular foreign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong, China), Jaxx (Canada), and Huobi (Korea) are widely used crypto investors in the US and abroad. If you do have (or had through the course of the year) $10,000 or more, you need to report that to the IRS.
According to the so-called “The Paul Manifort Rule,” holding over $10,000 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/directly with FinCEN.
For crypto traders, this means that if your holdings at a non-US-based exchange exceed $10,000 at any given point of the year, you will need to file Form 114 with FinCEN. Further, 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.
As you can see, taxes on crypto are not an easy topic, and after reading this you probably don’t want to do it alone. Especially with the potential risk of being investigated by the IRS if something is not reported correctly.
This is where ZenLedger helps you calculate your crypto taxes: every transaction inside of every exchange and every wallet is evaluated and calculated accurately within minutes.
So now you understand why you need a software solution to calculate your taxes. But what makes ZenLedger the best cryptocurrency tax software? Let’s talk about some of the features that make us the best crypto tax calculator.
How ZenLedger’s Crypto Tax Calculator Works
ZenLedger's Crypto Tax Calculator is a sophisticated tool designed to assist both individuals and businesses in the complex task of calculating their tax liability on cryptocurrency transactions.
The first step in using ZenLedger's Crypto Tax Calculator is to import your cryptocurrency transactions from various exchanges and wallets into the platform. This is a simple process, as ZenLedger supports over 350 different exchanges and wallets, making it easier for you to consolidate all of your data in one place.
Once the data is imported, the platform identifies the type of cryptocurrency and the type of transaction, whether it be buying, selling, or trading. ZenLedger then identifies the tax jurisdiction based on your location, which is crucial since tax laws can vary greatly between different countries, states, and even municipalities.
Using various accounting methods such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Highest-In, First-Out (HIFO), ZenLedger calculates the cost basis of the assets and the tax liability. This process can be complex, especially for those who are new to cryptocurrency investing, but the platform's intuitive user interface and thorough documentation make it straightforward to understand.
The platform generates tax forms such as 8949, Schedule D, and Form 1040, which you can use to file your taxes. It also generates reports that provide additional details about your tax liability and asset positions, making it easier to understand and keep track of your investments.
Finally, ZenLedger's Crypto Tax Calculator provides an optional Certified Public Accountant (CPA) review service, where a licensed CPA will review your tax forms and answer any tax-related questions you may have. This service is particularly useful for those who have complex tax situations, as the CPA can provide personalized guidance on how to best minimize your tax liability.
Grand Unified Accounting: Your Crypto Tax Review
ZenLedger provides the most accounting transparency of any cryptocurrency tax calculator. You don’t have to wonder how to calculate crypto taxes, the tax review provided to you in a separate spreadsheet goes over every single 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 the ongoing IRS campaign to enforce crypto tax control, you must stay compliant. 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 to ensure our solution keeps your taxes accurate. Does that mean we can help you save money on your taxes with a tax-loss harvesting tool on coins when you’ve lost money, or explain the basics of how to calculate crypto taxes?
We are also here to help you get the data out of your exchanges and wallets. With over 300 integrations, we know how to get your data out, formatted, and into ZenLedger. We have more than 70 support articles published and chat support available online during business hours to answer any questions you have.
We support these features for every client, no matter the volume of transactions you have for a tax year.
The bitcoin tax rate is based on an IRS judgment from 2014 that said that all cryptocurrencies should be regarded as stocks or bonds (also known as capital assets) rather than fiat money (like Euros or dollars).
When you sell your capital assets for a profit, you must pay taxes. As a result, if you buy goods or services using digital currency and the quantity of crypto you spend has grown in value above what you bought for it, you will be subject to capital gains taxes.
ZenLedger can help you easily calculate your crypto taxes, and also find opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
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.