- 1 The IRS Rules around Calculating Crypto Taxes
- 2 Calculating Crypto Taxes
- 2.1 Calculating Capital Gain/Loss
- 2.2 Crypto Capital Gains Tax Rate
- 2.3 Figuring Out the Cost Basis on your Cryptocurrency
- 2.4 Accounting Method
- 2.5 Tax Loss Harvesting with ZenLedger’s Crypto Tax Calculator
- 2.6 Foreign Currency Reporting
- 3 How ZenLedger’s Crypto Tax Calculator works
Cryptocurrency is an exciting and innovative asset class. It represents a great opportunity to diversify your investment portfolio, maximize your profits and… save on your taxes. Yes, you read it right: you must pay taxes on cryptocurrency. And yes, now the IRS has means to control that. But the good news is that by paying taxes on your crypto, you are not only finding peace of mind and staying compliant. You can save a lot on your taxes.
On a sad note though, paying crypto taxes is not an easy and stress-free task. Taxes themselves are already a very complicated and confusing topic. But in the world of crypto, with so many different exchanges, wallets and transactions, it’s impossible to manually calculate all gains and losses.
That’s why you need a cryptocurrency tax calculator.
ZenLedger is much more than just a free crypto tax calculator. We handle the tedious, confusing work of calculating taxes on crypto, from beginning-to-end, providing you with money-saving tips and tools along the way. The results are auto-completed tax forms and audit reports to check with your CPA. Let’s see how to calculate your crypto taxes, and how ZenLedger’s free cryptocurrency calculator can help you.
The IRS Rules around Calculating Crypto Taxes
Let’s start with how crypto taxes are calculated.
The IRS qualifies cryptocurrency as an asset, comparable to a stock, not a fiat currency (like euro, USD or yen). That means that when you sell or trade crypto, you have to report your capital gains or losses to the IRS.
Capital gain is the difference between the price at which you sold your crypto and the price at which you bought it. Thus, when calculating your capital gains from crypto, you should aggregate all your cryptos bought or sold over the course of the year minus the cost basis (price at which you bought or received the property) of each respective property. Note that if you held your crypto for less than a year (short term capital gains), it is subject to a higher tax bracket than property held for more than one year (long-term capital gains).
Who needs to report crypto taxes to the IRS?
All US citizens who are required to file a US income tax return need to report the results of their crypto activity to the IRS.
In addition, anyone who has income from US sources may be obligated to pay US taxes. As a result, foreign nationals who transact on any of the US-based exchanges (Coinbase, Bittrex, Gemini, Kraken, Bitstamp, etc.) may also have tax obligations.
When do I need to file a crypto tax report?
April 15 is typically known as “Tax Day” because US returns are typically due on this day (or following Tuesday if the 15th falls on a weekend). With that said, US citizens living outside the US receive an automatic 2-month extension and anyone can get a 6 month extension (to file, but not to pay) by requesting via the IRS’ e-file service or by filing a paper form 4868.
Those running a business and those with capital gains of more than $1000 are expected to file quarterly.
What is considered a taxable event?
While calculating your crypto taxes you might have some questions, such as: do I pay taxes on crypto transfers? What about “hard forks”? In general terms, crypto activity can include:
- trading (buying one Bitcoin with another cryptocurrency type)
- Buying goods or services with crypto
- Selling your cryptocurrency
However, there are some nuances. To make it easier to understand, we broke down for you what is considered a taxable event in crypto world.
IS a Taxable Event
A taxable event for the IRS is a situation where you have to report to the IRS your capital gains and capital losses related to crypto transactions. The following points summarize the official IRS guidance from 2014, as well as the recent update released in October 2019:
- If you trade cryptocurrency to fiat currency like the US dollar, you create a taxable event.
- If you trade virtual currency to virtual currency, it is also considered as a taxable event, and you have to work on your crypto tax reporting to file your gains or losses to the IRS using fair market value in the US dollars at the moment when the trade took place.
- If you accepted cryptocurrency as a way of payment for goods or services, you created a taxable event. Just like with trading, you must use the fair market value in USD at the moment of the transaction and your appropriate crypto tax rate for your cryptocurrency tax reporting.
- Crypto mining creates a taxable event.
- According to the IRS Revenue Ruling 2019 – 24, if you receive crypto units as a result of a hard fork , you do have gross income, and thus there is a taxable event. So, moving forward you will have to report this information to the IRS. The good news is that using a cryptocurrency tax calculator like ZenLedger, you can run an automated crypto tax reporting for all years you owned crypto. There are good chances that you had capital losses, and in this case, you can claim them and save on your taxes.
IS NOT a taxable event:
Here are some situations that don’t create a taxable event, so you don’t have to report them to the IRS:
- Giving virtual currency as a gift doesn’t create a taxable event (though the gift tax will still apply if you exceed the gift tax exemption amount).
- Transfers are not taxable events. In its new guidance, the IRS reconfirmed that “If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you” the transfer is not considered as a taxable event. This is great news for crypto investors because some exchanges, such as Coinbase count withdrawals as taxable events, which means that now you can use a crypto tax calculator software like ZenLedger to refile your taxes for the previous years and hopefully save on your crypto taxes.
- Buying digital currency with US dollars doesn’t create a taxable event. You don’t realize gains until you sell.
- Hard forks: if as a result of an airdrop following a hard fork you didn’t receive crypto units of the new cryptocurrency, you don’t have gross income, and you don’t have to report it.
Calculating Crypto Taxes
There are several factors that must be considered when calculating your cryptocurrency taxes:
- Capital Gains and Losses
- Owner’s capital gain tax rate
- Cost basis
- Accounting method
- Harvesting losses
- Foreign Currency reporting
Let’s look at each of them to understand how crypto currency calculator works.
Calculating Capital Gain/Loss
- Selling and exchanging (but not buying itself) is a taxable event. This includes crypto to crypto trades (i.e. selling BTC for ETH) in addition to crypto to fiat trades.
- Those holding cryptocurrency for investment purposes (i.e. in anticipation of it gaining/losing value and selling to capture the change in value) will realize a capital gain/loss on sale. No taxable events are triggered until the sale!
- Those holding for business purposes (like running a crypto ATM) will record ordinary income gain/loss upon disposal.
- This capital gain/loss should be measured by subtracting the cost to purchase cryptocurrency from the price at time of disposition (trade or sell).
Crypto Capital Gains Tax Rate
The amount you will have to pay in taxes will depend on how long you hold your crypto. Depending on your tax bracket for ordinary income tax purposes, long-term capital gains, which are recognized when an asset is held for at least one year & one day, are taxed at a rate of 0%, 15%, or 20%. Short-term capital gains are recognized when Bitcoin is held for one year or less, are taxed at your ordinary income tax rates.
Figuring Out the Cost Basis on your Cryptocurrency
The basis of an asset is its cost to you (the amount you paid for it). Note this includes transaction costs, meaning exchange fees should be included when determining the basis.
Bitcoin as Income
The basis of cryptocurrency received as income is a bit different. Since you didn’t actually pay anything, the initial basis is 0, however, you must declare the USD value of the amount received as ordinary income. For example, if you earned some bitcoins consulting, and at the time you were paid the BTC was worth $4000, that is your basis. Thus, your basis in cryptocurrency that was received (and reported) as income is the Fair Market Value (FMV) when you were paid.
As gifts or Inheritance
Gift recipients receive the giftor’s basis, so if a recipient receives a batch of crypto that was purchased for $1, and sells for $7000 upon receipt, the recipient has a $6999 gain per coin (which would likely be a capital gain). For inheritances, the recipient can elect to have a “step-up” in basis to the FMV at the time of inheritance, rather than the decedent’s purchase price.
When investors sell multiple assets with differing basis, they can either choose to sell the crypto they’ve held the longest first (first-in, first-out – FIFO), or sell the newest ones first (last-in, first-out – LIFO). In theory you can choose which method you would like to apply, however, many in the crypto-tax industry believe FIFO is the only appropriate treatment unless you can specifically identify which coin you are selling. Contact a tax professional if you have further questions.
Let’s look at an example of how these would work:
|Lot Date||BTC||Price||Basis||Current Price||Gain (loss)|
|May 1 2013||10||127.13||1271.3||6263.98||61368|
|Sept 1 2016||5||582.23||2911.15||6263.98||28408.75|
|Nov 1 2017||1||5300.75||5300.75||6263.98||963.23|
Assume on Aug. 13, 2018, we want to sell 8 BTC @$6263.98 per BTC.
FIFO – Applying first-in, first-out, we would sell in the order we purchased; thus we sell:
8 of the 10 BTC purchased on May 1, 2013:
- Our sale would net us $50,111.84. This sale would be offset by the 1017.04 purchase cost of those 8 BTC.
- for a total capital gain of $49049.8
Now, because we held these BTC for longer than 1 year and 1 day, we would apply the 15% long-term capital gains rate for a total tax liability of $7516.78.
LIFO – If we apply LIFO, we sell in the reverse order of purchase. In this case, we sell:
The BTC bought in 2017:
- Total gain – 963.23
- Note – this would be taxed as a short-term capital gain because we have held it for less than a full year (plus a day)
all 5 BTC bought in 2016:
- Total gain – $28408.75
- This will be subject to long-term capital gains because the BTC was bought more than one year ago.
2 of the 10 BTC bought in 2013.
- Total gain – 12273.7. Calculated by taking the sale price of the 2 BTC, 12527.96, and subtracting the cost of 2 coins purchased in 2013 – 254.26
- This will also be subject to long-term capital gains.
Here, it would make more sense to apply LIFO to save on taxes. ZenLedger’s crypto tax calculator allows you to easily see the implications of applying either strategy, so you can pick the one that works for you.
Tax Loss Harvesting with ZenLedger’s Crypto Tax Calculator
In general terms, losses resulting from cryptocurrency trades are tallied against any gains made in the current year. Note, however, that first short-term losses are applied against short-term gains and long-term losses are applied against long-term gains. The net loss of either type can then be deducted against the other type of gain (ie. Short term against long term).
For example, if you have:
- $5000 of short-term loss,
- $2500 of short-term gain,
- $3000 of long-term loss and
- $6000 of long-term gain
You sum the losses from the gains
- Short term: $2500 – $5000 = – 2500
- Long term: $6000 – $3000 = 3000
Resulting in a $500 total long-term gain.
Foreign Currency Reporting
Do you own $10k worth cryptocurrency in one of the most popular foreign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong, China), Jaxx (Canada) and Huobi (Korea) are widely used crypto investors in the US and abroad. If you do have (or had through the course of the year) $10,000 USD or more, you need to report that to the US Government.
According to so called “The Paul Manifort Rule,” holding over $10,000 USD in a foreign account or accounts at any point during the taxable year triggers a requirement to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). Note that although the filing deadline is the same as the tax return, the FBAR filing is not part of the tax return and is filed separately/directly with FinCEN. For crypto traders, this means that if your holdings at a non-US based exchange exceeded $10,000 at any given point of the year, you will need to file Form 114 with FinCEN. Further, if you have two foreign exchange accounts that each had a maximum of $5,001, then you still need to file an FBAR, since the aggregate is over $10,000.
As you can see, taxes on crypto are not an easy topic, and after reading this you probably don’t want to do it alone. Especially with the risk of being investigated by the IRS if something is not reported correctly.
This is where ZenLedger’s cryptocurrency tax calculator comes to help you: every transaction inside of every exchange and every wallet is evaluated and calculated accurately within minutes.
So now you understand why you need a software solution to calculate your taxes. But what makes ZenLedger the best cryptocurrency tax software? Let’s talk about some of our features that make us the best crypto tax calculator.
How ZenLedger’s Crypto Tax Calculator works
Grand Unified Accounting: Your Tax Review
ZenLedger provides the most accounting transparency of any cryptocurrency tax calculators. You don’t have to wonder about how we calculated taxes on your crypto, the tax review provided to you in a separate spreadsheet goes over every single transaction, so you and your CPA can see precisely how we calculate your tax estimate.
The logic behind each calculation is spelled out on your Grand Unified Accounting (GUA) output. Accountants and CPAs love this feature because it means every transaction can be adjusted or tailored to fit the investor’s best possible tax outcome.
Superior Customer Support
With the ongoing IRS campaign to enforce crypto tax control, it’s very important that you stay compliant. You don’t want to be caught unprepared or end up owing more taxes than you were expecting.
ZenLedger’s customer support can help you with more than just navigating our software. While we don’t give tax advice (you need to speak to your CPA or tax professional for that) we do know the current crypto tax laws and we have CPA partners to ensure our solution keeps your taxes accurate. That means we can help you save money on your taxes by providing tools to harvest a tax asset on coins when you’ve lost money, or explain the basics of how and why crypto taxes function the way they do.
We are also here to help you get your data out of your exchanges and wallets. With over two dozen integrations, we know how to get your data out, formatted and easily uploaded. We have more than 70 support articles published and chat support availability online during business hours to answer any questions you have.
We support these features for every client, no matter the volume of transactions you have for a tax year.
Now that you know about ZenLedger’s crypto tax calculator, and the complexity it solves for you, sign up for an account today in order to see your tax estimate for free and stay compliant!