Many people now invest in cryptocurrency, hoping to grow their money quickly. And this makes a lot of sense because Crypto has shown incredible performance in 2021, which leads to potential higher gains and lower losses. But with that, comes the question “How do I calculate taxes on cryptocurrency?”

In 2021, the value of crypto had surpassed USD$2 trillion, and of course, Bitcoin—the most popular digital asset—has reached an all-time high of USD$69,000 per coin. Also, Ether—a rising digital currency—had surged to nearly USD$5,000 within the same period.

However, the aftermath of this crypto boom may not be suitable for most investors because they might face a surprising tax bill for the upside. If you’re one of the investors who experienced tremendous growth the previous year, it’s essential to be ready to pay taxes when the gains crystalize.

The thing is, calculating your crypto taxes can be tricky, especially if it’s after a year of massive trading—buying, selling, and holding. Below, you’ll discover everything you need to know to compute your taxes in cryptocurrency. 

When Should You Pay Your Taxes In Cryptocurrency?

It’s essential to understand first what are the taxable and non-taxable crypto events. To be sure, investors only have to pay taxes based on their trading activity.

So, here are the taxable crypto events investors might need to know:

• Selling Crypto: Investors need to file their taxes when selling crypto to earn a profit, whether short-term or long-term tax rate.
• Trading and Exchanging Crypto: Trading crypto for another currency will trigger a taxable event.
• Exchanging for Stablecoin: Exchanging crypto for stablecoin will trigger a taxable event.
• Paying Using Crypto: When investors purchase something with crypto, they’ll be taxed depending on the value of the crypto they use.
• Mining Crypto: Any profit made when mining crypto is income and, therefore, taxed.
• Bonuses and Rewards: Receiving bonus crypto qualifies as income and will be taxed.

On the other hand, here are the non-taxable crypto events:

• Buying Crypto: Investors won’t get taxed whenever they purchase or hold cryptocurrency.
• Swapping Coins and Tokens: Changing the name and the number of the crypto coins you own won’t make you liable for taxes.
• Crypto as a Gift: Giving your crypto to your family and friends won’t make you liable for taxes for the gift.

• Crypto as a Donation: Donating your crypto to any registered charitable foundation will not make you liable for taxes.

How To Calculate Your Cryptocurrency Taxes?

Calculating crypto taxes can be tricky. However, it shouldn’t be an overwhelming task. That said, here are some ways that may help you calculate your taxes:

Using Crypto Tax Calculator

Using a crypto or gains tax calculator is among the easiest ways to determine the taxes you need to settle when generating income or profit from cryptocurrency. It’s a software application that automatically determines the amount of taxes you have to pay. Investors fill in the necessary details, such as the purchase value, sold value, and taxable income. Once done, click the ‘calculate’ button, generating the result.

In addition, crypto tax calculators include several tax forms you might need to use when filing your taxes in cryptocurrency, such as:

• IRS Form 8949
• Schedule D
• Income Report
• Capital Gains Report
• International Tax Report
• Audit Trail Report

The forms you may receive may depend on the calculator you use. Not all calculators offer the same services. Therefore, looking for a calculator that provides various forms you can use during tax seasons might be best.

Estimate Your Taxes Manually In Three Easy Steps

If you don’t want to use calculators when computing your crypto taxes, here are some easy steps that may help you estimate your taxes manually:

Determine How Much You Earned After Selling Your Crypto 

To determine your profit from selling your crypto, subtract the purchase price from the selling price. Suppose you own two coins and you paid $10,000 for them, combined. And today, they are worth $15,000. To calculate the cyrptocurrency taxes, subtract $10,000 from $15,000 along with any fees. If you sold the coins today, your capital gain (realized) would be $5000. Fruther, you may subtract any fees you paid to sell them.

Determine If You Have Short-Term or Long-Term Gains

To find that out, identify the date you bought your crypto and take note of that. It will help you determine how long you held it and if you had a short-term or long-term gain. In the United States, short-term gains mean holding your crypto for less than a year, while long-term gains mean holding it for more than a year.

Estimate Your Taxes

The earnings you make in cryptocurrency will likely qualify as capital gains income. If you have short-term gains, taxes will be the same rate as ordinary income. For long-term gains, most people will pay between 0-15%. 

Final Words

Calculating your taxes in cryptocurrency is straightforward. It can be done in two ways: using an automated crypto tax calculator and estimating your crypto taxes manually. Using the software application will be your best option if you don’t have time. Calculating your taxes is recommended if you want to learn how your crypto taxes are computed from top to bottom.

This article How To Calculate Taxes On Cryptocurrency In 5 Easy Steps originally appeared on Rick Orford - Invest, Earn More Income & Save Money.