In the early stages of cryptocurrency development, governments did not have access to many tools to monitor and analyze cryptocurrency markets. Only recently huge amounts of money have been invested in them.
This means that such development forces you to keep your tax reports in order to be transparent and avoid tax penalties, which in some countries can reach high amounts.
What is the Crypto Tax Calculator?
Cryptocurrency Tax Calculators – get data from cryptocurrency wallets and exchanges. Then they process this data and determine how much you have earned or lost during the year. This information is especially useful to determine how much you can deduct from your taxable income if you lost your money trading cryptocurrency in the previous year.
Basic cryptographic tax calculators require you to send commercial data CSV files. These cryptographic tax calculators are better than spreadsheets, but they are still not very convenient. They require going to each individual exchange and downloading data and then importing them. There are often errors that must be manually corrected before generating a tax report. One of the advantages of using this type of cryptographic tax calculator is that they are usually inexpensive like trading 212 review.
How to use a crypto tax calculator
Simple crypto tax calculators. To use a simple crypto tax calculator, you have to first download your trading information from all your exchanges. The process for doing this is different across different exchanges. Typically, an option to export your trading data can be found somewhere in the settings menu. After you complete the export, you have to import the data. Once this is done, the software will be able to generate your tax report.
Advanced crypto tax calculators. To set up an advanced crypto tax calculator, you have to first log into whatever exchange you want to connect and create an API key. Again, the process for creating an API key differs from one exchange to another. During the process of creating your API key, you’ll also generate an API secret. Once you have an API key and API secret, you can copy and paste this information into your cryptocurrency tax calculator to complete the connection. After you connect all your exchanges, you can import your trading data automatically and generate your tax report.
Is it Safe?
The use of tools that calculate our cryptocurrency tax is secure. No hacker has ever been able to steal any money by using these devices. This is because calculators do not require you to deposit money on them, they only import transaction data and show the associated report.
However, when deciding to use the calculator, always try to give the least possible access to your account and do not create APIs that require cryptocurrency deposits. To be 100% secure, be cautious, and remember that to get a report, you do not need to create an API that can deposit your money.
How to Calculate
At its core, calculating crypto taxes is matching sales of crypto to their respective cost basis (the price originally paid for that crypto), and then calculating the gain or loss from this sale.
However, it gets a little trickier if you have multiple cost bases for a lot of cryptos that you sell. For example, if you buy 1 BTC in 2016 for $1,000, and 1 BTC for $12,000 in 2017, and then sell 1 BTC in 2020 for $10,000 in 2020, which cost basis do you use?
Accounting methods like FIFO, LIFO, and Minimization determine which cost basis is used in the above case. FIFO (First in, first-out) for example would choose the earlier BTC to buy — 1 BTC for $1,000 in 2016 — as the cost basis for that sale in 2020, leading to a $9,000 profit.
Most of the time, an accounting method like described above will be required, as the divisible nature of crypto means that many sales will either need to choose from multiple cost bases, or a single sale can have multiple cost bases. In the case of the latter, one says it would be split out into multiple lines on the 8949, each with a different cost basis and gain/loss calculation.
If you just have a few crypto trades overall, it may be easy to manually calculate the gain and loss for each sale during the tax year and then enter those on the Form 8949. However, if you used multiple exchanges, sold coins with multiple cost bases, and held positions over multiple years, you may find it easier to use a crypto tax calculator platform.
Remember to pay your Taxes
If you forget or intentionally do not pay income tax on cryptocurrency trading, you may be punished. For example, tax fraud in the United States is punishable by up to $ 250,000. It is important to pay taxes so that you can earn money fairly and safely. In many countries, the losses we have suffered can be deducted from your tax, but in Canada, for example, we will not be able to do so. It is worth getting acquainted with all laws regarding taxes on cryptocurrencies.