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Understanding Crypto Tax Calculation
What is Crypto Tax?
Cryptocurrency tax is calculated on capital gains when you sell, trade, or spend your digital assets. The IRS treats cryptocurrency as property, meaning every taxable event requires calculating the difference between your cost basis and the fair market value at the time of the transaction.
Cost Basis Methods Explained
FIFO (First In, First Out)
The oldest cryptocurrency you purchased is sold first. This is the default method for most taxpayers and often results in long-term capital gains for assets held over a year.
LIFO (Last In, First Out)
The most recently purchased cryptocurrency is sold first. This can be beneficial during market downturns as it may realize short-term losses that can offset other gains.
Average Cost
Calculates an average purchase price across all holdings. This method simplifies tracking and can smooth out tax impacts over time.
Tax Calculation Formula
Tax Liability = Capital Gain × Tax Rate
Net Proceeds = Sale Price - Tax - Fees
Common Use Cases
- Trading cryptocurrencies on exchanges
- Selling crypto for fiat currency
- Using cryptocurrency to purchase goods or services
- Converting one cryptocurrency to another
- Earning cryptocurrency as income
Tips for Accurate Tax Reporting
- Keep detailed records of all transactions including dates, amounts, and fees
- Track your cost basis for each cryptocurrency purchase
- Consider the holding period for short-term vs long-term tax rates
- Document any crypto-to-crypto trades as taxable events
- Consult with a tax professional for complex situations
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Frequently Asked Questions
Do I have to pay taxes on cryptocurrency?
Yes, in most countries including the US, cryptocurrency is subject to capital gains tax when you sell, trade, or spend it. However, simply holding cryptocurrency or transferring between your own wallets is generally not a taxable event.
What's the difference between short-term and long-term capital gains?
Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate. Long-term capital gains apply to assets held for more than one year and receive preferential tax rates (0%, 15%, or 20% depending on your income).
How do I calculate cost basis for cryptocurrency?
Cost basis is the original purchase price of your cryptocurrency plus any transaction fees. Our calculator supports FIFO, LIFO, and Average Cost methods to help you choose the most advantageous approach for your tax situation.
Are crypto-to-crypto trades taxable?
Yes, trading one cryptocurrency for another is considered a taxable event. You must calculate the capital gain based on the fair market value of the crypto you received at the time of the trade.
What records should I keep for crypto taxes?
Keep records of all transactions including dates, amounts, prices, fees, and the fair market value at the time of each transaction. Exchange statements, wallet addresses, and any documentation of lost or stolen crypto should also be preserved.