Taxes are decided by a variety of variables. Among them are capital gains. You must undoubtedly be aware of cryptocurrency-related tax calculations if you have a cryptocurrency investment portfolio. The IRS is always changing its rules and regulations. Because these calculations use big numbers, it may be a challenge to keep track of all the details. But astute investors are now heavily depending on the cryptocurrency tax calculator, which has simplified tax life!

You might be asking “How is my bitcoin taxed?”, if cryptocurrency is a whole new world for you. Or “How is my income taxed? What is the tax rate on the sales of my cryptocurrencies?” Surprisingly, it’s still unclear how tax laws apply to cryptocurrencies. Almost everyone lists it as mining income. But some people think that taxes are only applied to cash when it is sold, not when it is earned.

However, there are several websites that have you covered, so don’t worry. Software and tools for tax preparation are expanding, just as cryptocurrency trading and investment. In fact, people require more resources to keep up with trends. Numerous websites also feature the free Crypto Tax Calculator, which will answer all of your most pressing inquiries about cryptocurrency sales and give you an idea of how much tax will be levied on them.

Using this crypto tax calculator, you can find out if you have a capital gain or a loss and know what it means for you tax-wise with short-term and long-term gains during this tax year.

You can get a lot of tax assistance with your tax planning, whether you have already sold or are thinking about selling. Whether you receive your bitcoin as money for goods or as payment for services, cryptocurrency tax tools can help you estimate your taxes on your sales.

How long you had the assets before selling them and your tax bracket both affect how much cryptocurrency tax you must pay.

Since income from crypto investments are considered self-employed income, you will also need to pay your taxes self-employment tax using a tax calculator, and your quarterly estimated tax using a tax estimator. With freelance income, you’ll need to fill out several tax forms, such as the Schedule C.

This is divided into two parts:

Gains from short-term investments in capital

Profits from a bitcoin asset are taxed at the same rate as your income tax bracket if they are kept for less than a year. Up to $3,000 in losses may be utilized to reduce income taxes. The next set of losses will be carried over. You just need to enter the necessary data if you’re utilizing a cutting-edge application like a crypto tax calculator, and you’ll be good to go!

Capital gains in the long term depend on the size of the individual’s or couple’s income, as well as the capital gains tax on the crypto assets they are keeping for more than one year, which is significantly lower at 0, 15 or 20%.

When is crypto taxed?

Only around 800 Americans paid taxes on crypto assets that were “possibly tied to bitcoin” in the years 2013, 2014 and 2015, according to the IRS. The government now has formal cryptocurrency tax regulations, though, as a result of the changes in the times. You can decide whether or not you’re going to owe crypto taxes by knowing what kinds of occurrences are taxable.

What Are the Different Taxation Methods for Cryptocurrencies?

Since 2019, cost-based methodologies for calculating capital gains on cryptocurrencies have been made apparent. Prior to the development of the “First in, First out” (FIFO) calculation method, traders frequently utilized it to estimate their tax liability. Now calculating LIFO (Last in, First Out) and HIFO (Highest in, First Out) is possible. For bitcoin traders, this is fantastic news because it enables them to benefit from tax benefits.

FIFO (stands for First In, First Out)

As the name suggests, the first cryptocurrency coin purchased is the first thing that is taken into account for sale in this calculation approach.

Contrary to popular belief, the LIFO method takes into account the most recently purchased units, making them the first for sale. With Last in, First Out, the most recent cryptocurrency purchases determine both capital gains and selling prices.

HIFO (Highest in and First Out)

The HIFO method is used to calculate the biggest capital losses and the littlest capital profits to get the best results in both scenarios. This makes it perfect for tax depreciation purposes.

All techniques have advantages and disadvantages. An individual should try the calculations and compare the outcomes from all the schemes before choosing one to follow. If you anticipate that this will consume a lot of your time, rely on a cryptocurrency tax calculator that can provide results in real-time so that you can evaluate them right away.

Quick conclusions from the various computation techniques

Even though the HIFO shows the same capital gain amount as the LIFO, the number varies as volume rises. The two techniques of calculation—HIFO and LIFO—can help the taxpayer determine a smaller amount of capital gains on which bitcoin tax may be due. However, because FIFO generates the greatest quantity of losses, it is a great technique for tax-loss harvesting.

In essence, they protect you from having to pay short-term capital gains rates by increasing the duration of time you have to hold the bitcoin. Even when these gains come from cryptocurrency, capital losses from selling your cryptocurrencies could be lessened by other capital gains.

Unrealized and Realized Crypto Gains

Gains from cryptocurrencies, both realized and unrealized, are taxed differently. Remember that any capital gain or loss can only be taxed once you understand how they differ from one another. Even if the taxpayer has a loss on a cryptocurrency asset, the loss cannot be written off unless the item is sold.

Gains from bitcoin are not deemed realized unless they are sold, traded, or otherwise used. On the other side, claiming realized losses as capital losses might assist offset additional capital gains and lower taxable income.

The conclusion

It might feel like a lot of effort to prepare and file your bitcoin taxes, especially if you’ve never done it before. The first stage in the filing procedure is to assemble all of your crypto activity, which is both important and time-consuming.

Calculate any capital gains and losses after you’ve completed the first step. An efficient way to do this is with a cryptocurrency tax calculator. There are numerous platforms that may take care of this for you; some of them even provide free trials and can include all you require to proceed to the next stage.

The next step is to finish Form 8949 and connect it to Form Schedule D. Schedule 1 of Form 1040 must be filled out to disclose any cryptocurrency income, including profits from self-employment. Finally, you are now prepared to file your taxes.

Make sure to finish it prior to the due date. Happy taxing until then!