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Get on top of the new tax regime and make sure to get an accurate estimate on this year's taxes by reading some advice from tax expert William D. King.

Level Up with Your Crypto Taxes, Using Smart Tools!

There are a lot of factors that determine taxes. One important aspect remains the capital gains. If you have an investment portfolio in cryptocurrency, you need to know about the crypto-related tax calculation certainly. The IRS has time and again come up with guidelines and regulations. These calculations are vast, and keeping a record of every detail might be tricky. However, savvy investors are now relying much on the crypto tax calculator that has made tax life easy! 

If you’re new to the cryptocurrency world, you might have questions like: 

  • How is my cryptocurrency taxed? 
  • How are my profits taxed? or  
  • How much is the tax on my cryptocurrency sales? 

Surprisingly, the tax laws governing cryptocurrency remain unclear. The majority of people report it as mining income. However, some believe that the currency is taxed only when sold, not when earned. 

But don’t worry, there are a lot of websites that have got you covered. Tax-related tools and software are on the rise, just like the trading and investment in crypto. Indeed, individuals need more resources to keep up with the trends. Many websites also offer the free Crypto Tax Calculator, which will answer all of your burning questions about crypto sales and provide an estimate of how much your sales will be taxed.  

This tax calculator will also assist you with your tax planning for the coming tax year, and you can also determine: 

  • whether you have a capital gain or loss  
  • compare the tax consequences of short-term and long-term capital gains. 

Whether you have already sold or are considering selling, you can get a lot of tax help with your tax planning. Cryptocurrency tax tools can also assist you in estimating your taxes on your sales, whether you receive your cryptocurrency as a payment for services or in exchange for goods. 

The amount of cryptocurrency tax you owe is determined by how long you held the assets before selling them, as well as your income tax bracket.  

This is split into two sections:

Capital gains on short-term investments

Profits from a cryptocurrency asset held for less than a year are taxed at the same rate as your income tax bracket. Any losses can be used to offset income taxes up to $3,000 in total. Any additional losses will be carried forward. If you are using an innovative tool like a crypto tax calculator, you need to fill in the required information, and you will be sorted! 

Long-term capital gains: The capital gains tax on crypto assets held for more than a year is much lower; 0%, 15%, or 20% tax depending on the individual or combined marital income. 

When do cryptocurrency taxes have to be paid 

According to the IRS, only 800 to 900 Americans filed taxes on property “likely related to bitcoin” in 2013, 2014, and 2015. However, times have changed, and the government now has official cryptocurrency tax guidelines. Understanding what events are taxable will help you determine whether or not you are likely to owe crypto taxes. 

What Are the Different Cryptocurrency Taxation Methods 

The cost-based methods for calculating cryptocurrency capital gains have been made explicit since 2019. Before this FIFO, or ‘First in, First Out’ calculation method, traders used it extensively to determine their tax liability. LIFO (Last in, First Out) and HIFO (Highest in, First Out) can now be used for calculation. This is good news for cryptocurrency traders because it allows them to take advantage of tax breaks. 

  • FIFO (stands for First In, First Out) 

As the name implies, this calculation method considers the first cryptocurrency coin purchased as the first item considered for sale. 

  • LIFO (stands for Last in, First Out) 

In contrast, the LIFO method considers the most recent units purchased as the first ones for sale. As a result, capital gains and selling prices will be calculated based on the most recent crypto purchases. 

  • HIFO (Highest in First Out) 

The HIFO method is ideal for tax depreciation because it calculates the most significant capital losses and the minor capital gains, providing the best case in both scenarios. 

Every method has its own set of pros and cons. To adopt a particular way, an individual should try the calculations and compare the results from all the plans. If you think this will take a lot of your time, rely on a crypto tax calculator that can give real-time results, and you can assess them quickly.  

Quick takeaways from the different calculation methods 

While the HIFO displays the exact capital gain figure as the LIFO, the figure changes as volumes increase. HIFO and LIFO, of the two calculation methods, can assist the taxpayer in arriving at a lower amount of capital gains on which crypto tax may be owed. On the other hand, FIFO is an excellent method for tax-loss harvesting because it generates the most significant number of losses. 

In a nutshell, they shield you from paying short-term capital gains rates by extending the overall holding period of the cryptocurrency. Furthermore, capital losses resulting from the sale of cryptocurrencies may be deducted against any other capital gains, even if these gains are not derived from cryptocurrency. 

Crypto Gains- Unrealized and Realized 

  • Unrealized and realized cryptocurrency gains are taxed differently. To understand the distinction between them, keep in mind that any capital gain or loss can only be taxed once realized. Even if the taxpayer owns a crypto asset with a loss, the loss cannot be claimed unless sold. 
  • Any cryptocurrency gains are not considered realized until they are sold, exchanged, or spent. Claiming realized losses as capital losses, on the other hand, can offset further capital gains and help reduce taxable income.

The bottom line 

Preparing and filing your cryptocurrency taxes can be time-consuming, especially if you’ve never done it before. The first step is to compile all of your crypto activity, which is an essential and time-consuming part of the filing process. 

After you’ve finished the first step, you’ll need to compute any capital gains and losses. This can be efficiently done using a crypto tax calculator. Several platforms can handle this for you, some of which offer free trials and may provide everything you need to move on to the next step. 

Following that, you must complete Form 8949 and attach it to Form Schedule D. Any crypto assets earned as income must be reported on Schedule 1 Form 1040, and self-employment earnings from crypto must be reported as well. And finally, you are now ready to submit the taxes.  

Make sure you do it before the deadline. Until then, happy taxing!

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