Guide for calculating crypto trading tax

Cryptocurrency has been brought under taxation. It’s no longer a tax-free handy avenue for side income. But, the taxation system has long been needed to introduce the first layer of regulation in the wildly volatile crypto zone. It is believed that taxation will help to bring basic stability in the crypto zone, reducing fraudulent traders from the trading scene to some extent. You won’t have to pay taxes just for purchasing crypto. Rather, you are obliged to pay cryptocurrency trade tax if you trade or sell off your holdings. It’s because, when you are selling the asset you are earning something – and that comes under the purview of capital gains crypto tax. Visit mex

So, how would you calculate the tax incurred from cryptocurrency trade? Well, there are certain things to consider here that will be discussed below. But, prior to getting into that discussion, it’s to note that you must keep track of every single transaction you perform in regard to cryptocurrency trade.

Accounting method

Your tax calculation will be influenced or determined by your chosen accounting method for cryptocurrency trade tax.

The IRS permits crypto traders to choose from as many as 3 types of accounting methods, based on their buying as well as selling timespan. The most common methods used here are – HIFO, LIFO, and FIFO.

HIFO

HIFO (Highest In and First Out)- this accounting method is suitable if you have first sold the highest priced crypto holdings.

LIFO

LIFO (Last In and First Out) represents the accounting method that will be handy if you first sell off the crypto assets that were bought last.

FIFO

FIFO (First In and First Out) is the simplest of all. It refers to the accounting method that you will use if you first sell the first-bought assets.

Transaction fees

You must also keep in mind the transaction fees while taking into account the taxation of cryptocurrency trade. These are either Ether gas fees or the fees that you pay to crypto exchanges for crypto trade. These fees could be conjoined with a trader’s asset cost basis that will help to increase his capital loss or reduce capital gains. This way, you will have to pay less tax to the government for cryptocurrency trade.

Timespan of holding

The interval between buying as well as selling and the timespan of holding the crypto asset are determining factors for your cryptocurrency trade taxation. So, if you have been holding the crypto for say 12 months, or less, it will be a short-term transaction. But, it will be considered as a long-term transaction, if you hold it for over a year.

There is a varied range of tax rates for long-term gains, based on your specific cryptocurrency trade tax bracket. In regard to short-term gains, the rate will be the same as the rate of regular income tax.

If you have got both long-term and short-term crypto trades on your crypto trading portfolio, you must report each separately.

Calculating the tax

Gather the entire transaction history (regarding cryptocurrency trade), segregate the long-term as well as short-term gains, and start the calculation.

Let’s start with Bitcoin cryptocurrency trade. So, you have purchased 1 BTC at the price of $30,000. The amount is inclusive of transaction fees. Based on this particular example, cost basis of your BTC holding is around $30,000. Now, in that same year, you have performed another cryptocurrency trade where you had $50,000-worth long-term gain.

Now, you have sold the lot out for purchasing LTC at $32,000. Now, your proceeds are around $32,000. If you subtract the above-mentioned cost-basis  from proceeds, you will end up with a gain of around $2,000. This calculation is specifically for capital gains on short-term trade. This cryptocurrency trade tax must be filed in the same year when you make the trade.

Now, look at the bigger picture. Let’s say that you were not finding the right price immediately and you waited for more than a year to make the right move. After a year or so, you have finally found the right and now you are willing to make the cryptocurrency trade. So, you sell the asset at $35,000. In this case, the gain will be $3,000. The long-term gain tax would be calculated on this amount.

However, if you sell off that $32,000-worth LTC to another trader at $25,000, your proceeds will come at $25,000. So, it would be a loss for you. If you want the net loss, subtract $25,000 from $32,000- it will come down to $7,000.

Then, if you subtract $7,000 from $50,000, the total taxable gain (long-term) would be $43,000.

Use calculator

You can simplify the entire process of calculating cryptocurrency trade tax through a crypto tax gains calculator. These calculators are specifically designed for calculating taxes for cryptocurrency trade.

These calculators will aggregate all needed figures and link up the cost bases right to sales automatically through needed accounting methods – LIFO or HIFO or FIFO. Then, the calculator itself will calculate the losses or gains and generate a taxation report on the basis of that calculation.

Wrapping up

Do not ever try to skip out on cryptocurrency trade tax. The government is more serious now than ever regarding the taxation part in the crypto world. The crypto scene had stayed excessively unregulated for far too long. It has been the need of the hour for the national governments to impose some basic degree of regulation initiative – and taxation is the first step towards the achievement of that mission.

If you skip out on the cryptocurrency trade tax or commit any unethical steps to, say, reduce tax rate, you will have to face serious penalty charges. So, be careful and oblige to the taxation rules as required by your State and the Federal government.

Also be careful about the frequency of trading when you are looking forward to reducing the taxation rate. It’s because you will be taxed every single time you proceed to trade. Thus, it’s better not to engage in frequent scalping. Just make sure to perform trading at an affordable range. 

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