How is Crypto Tax Calculated?

It’s tax season, and many wonder how to use a crypto tax calculator. It turns out that the IRS has already done the hard work for you by publishing a simple formula for calculating your taxes, which is covered below.

Gains/Losses

To determine your gain or loss, you’ll need to know the cost basis of the property you’ve sold. This is the amount paid for it, including any fees associated with purchasing it and any expenses related to owning it.

For example, if you bought 1 BTC for $100 and then later sold 1 BTC for $1,000 (gaining $900), your capital gain would be $900. You can also calculate this by subtracting your original purchase price from what you sold an asset for, in this case: 100 – 1000 = -900.

The other information required in calculating a capital gain or loss is knowing how much was received when an asset was sold.

For example: If someone sells a house worth $200k but only receives $180k after paying off their mortgage balance of $80k (which makes them eligible for tax-free treatment under IRC Section 121(b)), then their capital gains are calculated as follows: 20000 × ($180-$80)/20000 = 1000/20000 = 0.05 or 5%. In other words? They owe 5% in taxes on their profit!

Basis

The first step in calculating your crypto taxes is to determine your basis. The basis is the original price paid for an asset plus any costs and expenses associated with acquiring it.

In the case of crypto, this includes fees paid to transfer it between wallets or exchanges and any capital improvements you make to your computer hardware, such as overclocking or adding additional RAM modules.

Some things do not affect your basis:

• Personal use assets like cars and furniture do not have their own separate cost basis because they don’t generate income; instead, they are depreciated over time using MACRS (Modified Accelerated Cost Recovery System) accounting rules

How to Calculate Gains or Losses?

You need to add up all your gains and losses to know how much tax you owe. If you have a gain, you need to pay tax on it. If you have a loss, however, that loss can be deducted from your other gains for their taxable total to be zero (or at least less than what was owed).

Fair Market Value

The price at which an asset would trade hands between a willing seller and buyer, both of whom would have a proper understanding of the relevant facts and would be free to buy or sell, is known as fair market value.

Fair market value is used for real estate, securities, and intangible property. It’sIt’s also used for gifts because it’s easy to determine when you give property to someone else in exchange for nothing (other than friendship).

Cost Basis

The price you paid for the cryptocurrency asset you are selling is your cost basis. The cost basis can be adjusted for certain events, like exchanging one cryptocurrency for another (e.g., Bitcoin to Ether) or converting it into fiat currency.

When calculating gains and losses on your crypto tax calculator, The number of capital gains will be largely determined by the cost basis (or losses) you have made on selling any given coin.