How To Calculate Capital Gains Tax On Cryptocurrency Sales

Cryptocurrency has become a popular asset class over the past few years, and many people have benefited from the incredible price appreciation of coins like Bitcoin, Ethereum, and others. However, as crypto investors begin to sell their holdings, one critical aspect often raises questions—capital gains tax.

Understanding how to calculate and report capital gains tax on cryptocurrency sales is essential to staying compliant with tax laws and avoiding costly mistakes. The IRS, in particular, treats cryptocurrencies as property, which means that every time you sell or exchange crypto, you could trigger a taxable event.

But don’t worry, it’s not as complicated as it may sound. With the right tools and knowledge, you can easily track your crypto sales and calculate your capital gains tax.

In this article, we’ll walk you through the process of calculating capital gains tax on cryptocurrency sales and explain how CoinTracking can make this task much simpler.

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Table of Contents

What is Capital Gains Tax on Cryptocurrency?

Before diving into the details of how to calculate capital gains tax on cryptocurrency sales, let’s first review what capital gains tax is.

Capital Gains Explained

Capital gains tax is the tax you owe when you sell an asset for more than you paid for it. The gain is the difference between the selling price and your purchase price, known as your “basis.”

For example, if you bought Bitcoin for $10,000 and later sold it for $20,000, your capital gain is $10,000.

Cryptocurrency is treated as property by the IRS, meaning that each time you sell, trade, or exchange your crypto, you’re triggering a taxable event. The amount of tax you owe depends on whether the gain is classified as a short-term or long-term capital gain.

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Short-Term vs. Long-Term Capital Gains

When it comes to cryptocurrency, your capital gains can be classified into two categories:

Short-Term Capital Gains

Short-term capital gains occur when you sell or exchange cryptocurrency that you have held for one year or less. Short-term gains are taxed at your ordinary income tax rate, which can range from 10% to 37% depending on your tax bracket.

Example: You buy 1 Bitcoin for $10,000 and sell it 6 months later for $15,000. The $5,000 profit is considered a short-term capital gain and taxed at your regular income tax rate.

Long-Term Capital Gains

Long-term capital gains occur when you sell or exchange cryptocurrency that you have held for more than one year. Long-term gains benefit from lower tax rates, typically ranging from 0% to 20% depending on your income level.

Example: You buy 1 Bitcoin for $10,000 and sell it 18 months later for $20,000. The $10,000 profit is considered a long-term capital gain and taxed at the long-term capital gains tax rate.

Understanding the difference between short-term and long-term capital gains is key to minimizing your tax liability. The longer you hold your cryptocurrency, the lower your tax rate can be.

CoinTracking helps you track how long you’ve held your assets, so you never miss a long-term capital gain! Get started today! CoinTracking Sign-Up

How to Calculate Capital Gains Tax on Cryptocurrency Sales

Now that we’ve covered the basics of capital gains tax, let’s dive into the actual process of calculating your tax liability when you sell or exchange crypto.

Step 1: Determine Your Cost Basis

The first step in calculating your capital gain is determining your cost basis, which is the original amount you paid for the cryptocurrency. This includes the purchase price plus any associated fees, such as transaction fees.

Example: You bought 1 Bitcoin for $10,000 and paid a $100 transaction fee. Your total cost basis is $10,100.

It’s important to keep accurate records of your purchases, as this will help you determine the cost basis for each sale or trade.

Step 2: Calculate the Sale Price

The next step is to calculate the sale price, which is the amount you received when you sold or exchanged the cryptocurrency. This is typically the price at which you sold your crypto, minus any transaction or network fees you incurred during the sale.

Example: You sell 1 Bitcoin for $15,000, and you paid a $50 transaction fee. Your sale price would be $14,950 ($15,000 – $50).

Step 3: Determine Your Capital Gain

Once you have your cost basis and sale price, it’s time to calculate your capital gain. Subtract your cost basis from your sale price to determine how much profit you made.

Example: Your cost basis is $10,100, and your sale price is $14,950. Your capital gain would be $4,850 ($14,950 – $10,100).

Step 4: Classify Your Capital Gain

After determining your capital gain, classify it as short-term or long-term based on how long you held the cryptocurrency. This will determine the tax rate applied to your gain.

Example: If you held the Bitcoin for 6 months, your gain would be considered short-term and taxed at your regular income tax rate.
If you held it for 18 months, the gain would be long-term and taxed at the lower long-term capital gains rate.

Step 5: Calculate Your Tax Liability

Finally, apply the appropriate tax rate based on whether your gain is short-term or long-term. Use the current tax rates for short-term capital gains (your regular income tax rate) and long-term capital gains (typically 0%, 15%, or 20%).

Example (Short-Term): If your capital gain is $4,850 and your income tax rate is 24%, your tax liability would be $1,164 ($4,850 x 24%).
Example (Long-Term): If your capital gain is $4,850 and your long-term capital gains rate is 15%, your tax liability would be $727.50 ($4,850 x 15%).

Now, you know how to calculate your capital gains tax on cryptocurrency sales!

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Why CoinTracking Makes Calculating Capital Gains Tax Easy

While calculating capital gains tax on cryptocurrency can seem overwhelming at first, CoinTracking simplifies the entire process. Here’s how:

1. Automatic Transaction Importing

CoinTracking connects to over 75 exchanges and wallets, automatically importing all of your crypto transactions, including buys, sells, and trades. You don’t have to manually enter each transaction or worry about missing any. CoinTracking does the work for you!

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2. Real-Time Portfolio Tracking

CoinTracking provides real-time tracking of your portfolio, including capital gains, losses, and overall performance. This gives you an up-to-date view of your crypto holdings and helps you stay on top of your tax obligations.

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3. Automatic Tax Report Generation

CoinTracking can automatically generate tax reports for you, including capital gains calculations based on your transactions. You can download reports in various formats (CSV, PDF, Excel), making it easy to share with your tax preparer or file your taxes yourself.

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4. Support for Multiple Accounting Methods

CoinTracking supports multiple accounting methods, including FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Specific Identification, allowing you to choose the method that best fits your tax strategy.

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Conclusion: Simplifying Crypto Tax Reporting with CoinTracking

Calculating capital gains tax on cryptocurrency sales doesn’t have to be a complicated or stressful process. By understanding the basic steps—determining your cost basis, sale price, and capital gain—you can calculate your tax liability with ease. However, with so many transactions to track, it’s easy to overlook important details.

That’s where CoinTracking comes in. The platform automates the process of tracking and reporting your crypto transactions, so you can focus on your investments without worrying about tax compliance.

Get started with CoinTracking today and take the guesswork out of calculating your crypto capital gains tax!