How to Calculate Cryptocurrency Taxes Yourself If You Don’t Want to Hire a CPA

How to Calculate Cryptocurrency Taxes Yourself If You Don’t Want to Hire a CPA

Figuring out how to do your own crypto taxes can seem really confusing and intimidating at first. There’s a lot of complex rules and regulations around cryptocurrency taxation that most average folks don’t totally understand. But don’t worry! With a little bit of effort, you can totally handle calculating your own crypto taxes without needing to shell out for an expensive CPA.

In this article, I’ll walk you through the basics of crypto tax calculations in an easy-to-understand way. I’m not a tax professional or anything, just a regular person who has learned how to do my own crypto taxes. So I’ll explain things in simple terms that anyone can grasp.

Do You Even Owe Crypto Taxes?

First things first – do you even need to pay taxes on your crypto transactions? The short answer is yes, in most cases. The IRS treats cryptocurrency as property, not currency. So that means any time you sell or trade crypto, it’s considered a taxable event. You owe capital gains taxes any time you have a gain.

There are some exceptions though. You don’t owe taxes if you just buy crypto and hold it without selling. You also don’t owe taxes if you only use crypto to pay for goods or services (no capital gain). But basically anytime you convert crypto back into fiat currency like dollars, it’s taxable.

Calculating Your Crypto Gains and Losses

The amount of taxes you’ll owe depends on how much your crypto has gained or lost in value since you acquired it. You need to calculate these gains and losses for each taxable transaction.

It’s based on the cost basis – how much you originally paid for the crypto. If you sell at a higher price than your basis, that’s a taxable gain. If you sell at a lower price, that’s a deductible loss.

Here’s an example:

• You bought 1 BTC for $10,000
• Later you sold 0.5 BTC for $7,500

Your cost basis is $10,000 for the full 1 BTC = $10,000 per BTC.
You sold 0.5 BTC for $7,500.
So your capital gain is $7,500 – (0.5 * $10,000) = $2,500

That $2,500 is a taxable capital gain that you’ll need to report on your tax return.

Short-term vs Long-term Gains

How much tax you’ll owe on your gains depends on whether they are short-term or long-term gains. Short-term gains (for assets held 1 year or less) are taxed at your ordinary income tax rate. Long-term gains (for assets held over 1 year) have lower tax rates.

So you’ll want to calculate your short-term and long-term gains separately. Holding crypto longer than a year before selling can really reduce your tax bill!

Tracking Your Crypto Transactions

In order to calculate your gains and losses accurately, you need to track details on all your crypto transactions. Every trade, sale, purchase, mining reward, airdrop, etc. You need the date, amount, and value in USD at that date.

The best way to track this is to use crypto tax software that connects to your wallets and exchanges to automatically import your full transaction history. But you can also do it manually by exporting data from platforms you use.

Using Crypto Tax Software

I highly recommend using tax software like CoinTracking or CryptoTrader.Tax to calculate your crypto taxes. They make the entire process so much easier. The software imports all your transaction data, calculates your gains/losses, and generates the required tax forms.

Most of the crypto tax platforms let you connect to all your exchanges and wallets to automatically import your full transaction history. This saves a ton of time and ensures you don’t miss anything. You can also import CSV files from exchanges as needed.

The tax calculators handle everything – short vs long term gains, cost basis, and more. Some software even optimizes your taxes by finding more deductions. And then they give you reports and forms like the 8949 and Schedule D for filing your taxes.

This takes all the complexity out of crypto tax preparation. You just sign up, connect your data, and download your tax forms. Easy!

Doing It Manually with Spreadsheets

If you don’t want to spring for tax software, it is possible to calculate your crypto taxes manually. It just takes more time and effort on your part.

You’ll need to export all your transaction data from the platforms you use into CSV or Excel files. Compile this into a master spreadsheet with one row per transaction. Include columns for date acquired, date sold, purchase price, sale price, fees, type of coin, etc.

Then insert formulas to calculate the cost basis, proceeds, and gain/loss for each row. Filter the data to separate short and long term transactions. Add up the net gains and losses.

There are some good Excel templates out there that can help structure your calculations. But overall, this method is more tedious and error-prone than using crypto tax software.

Tips for Reducing Your Crypto Tax Bill

Here are some tips to reduce the taxes you’ll owe on your crypto gains:

• Hold your crypto for over a year before selling to qualify for long-term capital gains tax rates
• Sell crypto that has trading losses to offset your gains
• Donate crypto directly to charities to avoid capital gains tax
• Contribute to a retirement account like an IRA with crypto to defer taxes

Maximizing your deductions can also help reduce your taxable income. You can deduct expenses like trading fees, hardware wallets, and even the cost of tax prep services.

When Crypto Taxes Are Due

You need to report your crypto transactions on your annual income tax return. Gains and losses from crypto are reported on Form 8949 and Schedule D. The due dates are:

• April 15 if you only file a federal return
• April 18 if you also file a state tax return

You can file for an extension if you need more time. But any taxes owed are still due on April 15 to avoid penalties and interest.

Penalties for Not Reporting Crypto Taxes

What happens if you don’t report your crypto transactions? The IRS treats cryptocurrency no differently than stocks or other investments. Not reporting is tax fraud and can lead to serious consequences if caught.

Penalties include:

• Up to 5% penalty for underpayment of owed taxes
• 20% penalty for substantial understatement of income
• Up to 75% civil fraud penalty
• Jail time for criminal tax evasion

The IRS is ramping up efforts to catch unreported crypto income. They are sending thousands of warning letters to crypto holders and using software to track transactions on public blockchains. Don’t take the risk – report your crypto taxes properly!

Get Help from a Tax Professional

I hope this guide gives you a good starting point for tackling your own crypto taxes. But if you need more help, don’t hesitate to work with a crypto tax professional.

A knowledgeable CPA or tax attorney can guide you through the complexities, review your tax calculations, and help you minimize your liability. Some may even offer fixed-fee packages for crypto tax prep so you know your costs upfront.

Even with DIY tax software, having an expert look over your crypto taxes can provide peace of mind. Taxes aren’t something you want to mess around with. Consider professional help if you have a lot of complex crypto transactions or just want to be sure you get it right.

With the right tools and understanding, you can totally handle calculating your own cryptocurrency taxes. Just take it step-by-step and don’t be afraid to ask for help when you need it. You’ve got this!

References

Here are some references I used in researching this article:

IRS Cryptocurrency FAQs – Covers crypto tax basics from the IRS perspective.

Forbes Crypto Tax Guide – Great overview of crypto taxation rules.

Koinly Crypto Taxes 2022 – Explains different aspects of crypto taxes.

CryptoTrader.Tax Guide – Helpful guide for crypto investors and traders.

CoinTracker Tax Guide – Comprehensive overview of US crypto tax rules.