All people who deal in cryptocurrency activities have to now file and report their crypto earnings. The Internal Revenue Service (IRS) has declared that all crypto traders need to maintain an immaculate record for each of their Bitcoin transactions. The main factors they need to note down are listed below.
- The cost basis (plus fees) of any Bitcoin that was purchased.
- The purchase date when the Bitcoin was purchased.
- If the Bitcoin was sold, the date it was sold on.
- When the Bitcoin was sold, the price that it was sold for.
If you are a crypto trader or someone who has done only a handful of crypto trades, keeping good records of these transactions is extremely essential. If you have been using only one cryptocurrency exchange to carry out all your crypto trades, the crypto records will be much easier to dig up. Once all your crypto data has been collected, you are required to calculate exactly how much you need to pay as taxes.
Before going forward, let’s clarify that even though Bitcoin does receive the most amount of attention online, it is not the only type of cryptocurrency. Everything discussed in this article relating to Bitcoin taxation also applies to all types of cryptocurrencies.
- 1 Important Factors to Consider When Calculating Bitcoin
- 2 Is Crypto Mining Considered to be a Taxable Event?
- 3 What is the Process to Use a Bitcoin Tax Calculator?
- 4 Some of the Most Popular Bitcoin Tax Calculators
- 5 Zenledger
Important Factors to Consider When Calculating Bitcoin
When it comes to trading cryptocurrencies, any transaction can either produce a capital gain or loss. If you have incurred a capital loss, you can offset your capital gains and reduce the tax amount you owe.
Even when you exchange one crypto coin for another, let’s say you exchange Ethereum to Bitcoin. This will be a taxable event as the crypto coin is being sold and thus, creating a capital gain or loss.
If you are an individual that has received payments in cryptocurrency for a product or service or if you have received it as a source of income (salary). It is to be treated as ordinary income at the Fair Market Value (FMV) of the crypto coin.
However, if you have spent cryptocurrency to purchase a product or service, it is also considered to be a taxable event as it could generate a capital gain or loss.
When cryptocurrency is converted to fiat currency (USD), it will be considered as a taxable event as it is treated as the crypto coin being sold which in turn, will generate a capital gain.
Is Crypto Mining Considered to be a Taxable Event?
If you are a crypto trader that has obtained cryptocurrency through mining. It is to be treated as ordinary income as it is equal to the Fair Market Value of the coin. However, Initial Coin Offerings (ICO) will not fall under the IRS’s tax exemption treatment.
The IRS generally defaults to the accounting method, First In First Out (FIFO) but as of now there is no guidance stating that only this method of accounting should be used, so crypto traders can pick a different accounting method if they choose, but the method must be consistent throughout the return.
What is the Process to Use a Bitcoin Tax Calculator?
Bitcoin Tax Calculators are relatively easy to use and some of them alo come with a number of useful features. The following instructions will help you get started on the calculation process.
Part 1: Enter Your Personal Details
- Proceed to select the tax year that you are currently in the midst of filing.
- Then choose your tax filing status.
- Enter your taxable income without including the profit you gained from the sale of Bitcoins.
- Proceed to enter your state’s tax rate and select on ‘Calculate.’
Part 2: For each Bitcoin sale within a tax year
- After that, enter the purchase date and purchase price of the cryptocurrency (ensure that the purchase date is set any time before December 31st of the selected tax year).
- Proceed to enter the date of sale of the cryptocurrency and the price it was sold for. Again, ensure that the date of sale is within the selected tax year.
- Continue to follow these steps for each Bitcoin or cryptocurrency sale that you have made for the tax year selected.
Some of the Most Popular Bitcoin Tax Calculators
TokenTax is an extremely useful Bitcoin tax calculator which is used by the beginner level cryptocurrency traders as well as the novice and professional cryptocurrency veterans. The features they offer apart from their tax calculation services are listed below.
- Bitcoin tax rate calculation.
- Any proceeds acquired from Initial Coin Offerings (ICO).
- Crypto pricing in real-time.
- Accounting methods such as First In First Out (FIFO) and Last In First Out (LIFO).
- Generating Foreign Bank and Financial Accounts (FBAR) reports.
- Calculation of depreciation on mining hardware.
- CSV uploads and manual imports as well as exports for Form 8949.
- Calculation on Net Asset Value (NAV).
ZenLedger is a well known and highly established Bitcoin tax calculator. It is simple for any trader to quickly get accustomed to due to its intuitive easy to use interface. Zeneldger currently supports all the major crypto exchanges as well as fiat currencies. Apart from their Bitcoin tax calculator services, they also provide users with the option to generate accurate income reports, closing reports, donation reports and capital gains reports. They can also provide your CPA or tax preparer access to your profit/loss statements which is formatted in an IRS friendly way to make the taxation process more streamlined.