GIPHY / istock / getty

How to Calculate Crypto Tax

Following cryptocurrencies’ rise in popularity (and price), the IRS is more eager than ever to take its slice. With new guidelines on taxable events, you now have the tools you need to calculate your crypto tax bill. But you’ll need detailed records to start. 

🤔 Understanding how to calculate crypto tax

Technically, crypto exchanges must provide you with a Form 1099-B to break down your annual profits and losses. But if you don’t receive one, you’ll have to track down your transactions in your wallet or exchange’s records yourself.

Then, you can calculate your crypto tax bill. Here’s how.

  1. Calculate your gains and losses 

Various trading activities can produce gains and losses in your crypto portfolio, including:

  • Buying and selling cryptocurrencies
  • Exchanging one type of coin for another
  • Spending crypto on goods and services

To calculate your gains and losses, you’ll need to figure out the difference between the purchase price of your coin and its value at the time of the exchange or sale. If you see gains, you may find yourself on the hook for paying capital gains taxes. However, you can lower your capital gains by subtracting any trading fees you incur. 

  1. Determine your capital gains tax rate

For each transaction, you’ll also have to determine your capital gains tax rate, which varies based on your income and holding period. 

If you hold your coins for at least one year before selling, you earn long-term capital gains. The IRS taxes these at more favorable rates of 0%, 15% or 20% based on your income tax bracket. 

By contrast, you incur short-term capital gains when you exchange or sell cryptos you’ve held for under a year. These are taxed at your ordinary income tax rate, which ranges from 0% to 37% based on your income. 

  1. Beware the “wash sale” rule

Some investors use tax-loss harvesting to lower their tax bills. This strategy involves selling securities at a loss to lower your taxable income. However, tax-loss harvesting comes with restrictions, one of which is the “wash sale” rule.

The wash sale rule is an IRS guideline that states if you sell a security at a loss and purchase a “substantially identical” asset within 30 days, you can’t deduct your losses. This discourages investors from harvesting losses and gaining an unfair advantage. 

Currently, the wash sale rule doesn’t apply to individual cryptocurrencies, though it does apply to crypto stocks and funds. But as the IRS and SEC turn their attention to cryptos, that’s likely to change. In other words, keep careful tabs on your trading activities, including your purchase and sale dates – or pay the price come tax time. 

  1. Estimate your tax bill

Depending on how frequently you trade, you may have to figure out your long- and short-term gains for each transaction. Once you’ve determined that, you can add your bills together and determine your total tax obligation. Note that your exact rate may depend on your federal income tax bracket and how you obtain your coins. 

For instance, regular trading activities and initial coin offerings are taxed as capital gains income. But receiving coins for mining activities or as payment for business activities may generate both income and self-employment taxes. 

What this means for you

Recently, the IRS clarified what constitutes a “taxable event” for cryptocurrencies. These events include:

  • Selling coins at a profit
  • Trading one crypto for another
  • Making a purchase using cryptocurrency
  • Receiving coins as payment for services 
  • Receiving coins as payment for mining activities
  • Cashing out crypto to U.S. dollars

If any of these events produce a gain, Uncle Sam demands a share of the profits. However, you should calculate your losses as well, as you can use those to offset your profits or engage in tax-loss harvesting

Because many crypto investors trade coins frequently, it’s easy to rack up a bunch of little taxable events without realizing it. It’s always important to keep detailed records of your crypto trades, profits and losses. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

Hands-free approach to investing

Our AI manages your money with commission-free, institutional-grade, AI-powered investment kits.