Crypto tax is a hot topic for many people. There are different ways to calculate crypto tax, but which one is the best?
1: Use Software To Calculate Your Tax
Crypto tax calculators are software that allow you to calculate your taxes based on your cryptocurrency holdings. Because cryptocurrencies are not regulated by the IRS, it can be difficult to determine your taxable income and tax liabilities. Some crypto tax calculators will also allow you to account for capital gains and losses when calculating your taxes. Use Koinly to make the whole crypto tax calculation and reporting easy for you.
2: Research The Market Price Of Each Coin
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. There are over 1,500 different cryptocurrencies in existence, with a total market value of over $600 billion.
The price of a cryptocurrency is determined by supply and demand. The supply of a cryptocurrency is finite and is determined by the number of coins that have been created. The demand for a cryptocurrency is influenced by many factors, including the popularity of the coin, the security features offered, and whether or not there is an ongoing investment opportunity.
3: Consider The Cost Of Mining Your Coins
Mining cryptocurrencies is labor intensive and requires special equipment. Depending on the coin, mining can require expensive hardware like ASICs or graphics cards as well as electricity. The cost of mining a coin can be significant, and it’s important to consider the expenses before deciding whether mining is right for you.
4: Consider Gains And Losses From Buying Or Selling Cryptos
When you buy cryptocurrency, you may be eligible for capital gains tax (CGT) on the gain in value. If you sell cryptocurrency, you may be liable for CGT on any loss in value. The good news is that CGT is a relatively minor tax with limited impact on most people’s lives.
For example, if you bought $10 worth of cryptocurrency two years ago and it’s now worth $1,000, your gain would be $900 (10 times $100 = $900). If you sell the same $10 worth of cryptocurrency two years later for $1,100, your loss would be ($1,100 – $1000 =)$200 which would result in a CGT liability of ($200 x 20% =)$40.
5: Add Up All Your Gains And Losses
If you’ve been trading cryptocurrencies, you may have noticed that your profits and losses can be pretty complex. Cryptocurrencies are unique in that their value can fluctuate a lot, and so it’s important to keep track of everything you make and lose.
Here’s a simple guide to help you add up all your gains and losses:
First, figure out how much money you’ve made. This is your “gain.” Next, subtract any costs associated with making the profits (commissions, exchange fees, etc.). This is your “loss.” Finally, add up the two numbers to get your total profit or loss.
6: Report Your Income And Pay Taxes On It!
Now that you have your total profit or loss, it’s time to report it to the IRS. You’ll need to fill out Form 8949, Crypto Transaction Report, and include your name, address, and other information. Make sure you report all of your crypto gains and losses – even if they’re small!
Reporting your crypto gains and losses can help you pay taxes on them in a fair way, and it’ll help the IRS track down any tax dodgers.
Using software to calculate crypto tax can be helpful if you want to get it right the first time. However, research and understanding of the market price of each coin is also important.