Paying crypto taxes is not easy though. Taxes are already a very complicated and confusing topic, but in the world of crypto, with so many different exchanges, wallets, and transactions, it's impossible to manually calculate all gains and losses. That's why you need to know how to calculate taxes on crypto. In this article, we explained "How does tax on cryptocurrency work? And How is crypto tax calculated?"
How does tax on cryptocurrency work?
When you sell an asset such as cryptocurrency, you need to calculate whether you made a capital loss (meaning you lost money on the sale) or a capital gain (meaning you made a profit), and this will determine the amount of capital gains tax to be paid.
How is crypto tax calculated?
It'll be easier to calculate your capital gains and losses if you have your transaction history altogether in one place.
If you own cryptocurrency for one year or less before selling, you'll pay the short-term capital gains tax. Short-term capital gains taxes are higher than long-term capital gains taxes.
Any profits from short-term capital gains are added to all other taxable income for the year, and you calculate your taxes on the entire amount. You'll end up paying a different tax rate for the portion of your income that falls into each tax bracket.
If you sell cryptocurrency after owning it for more than a year, you'll pay long-term capital gains. Long-term capital gains have their own system of tax brackets. While these types of gains aren't taxed as ordinary income, you still use your taxable income to determine the long-term capital gains bracket you're in. Depending on your income and filing status, you'll generally either pay 0%, 15% or 20% on your long-term gains.
Let's suppose that you've bought BTC, traded short-term LTC, and then sold the latter long-term for fiat currency. Accordingly, your short-term and long-term trades will amount to your capital gains tax for a period of less than a year and more than a year, respectively.
BTC bought worth $10,000 (cost basis)
The next day, BTC sold for $12,000 worth of LTC (proceeds)
Proceeds - Cost Basis = $2,000 Profit
This is the amount you are liable for on your short-term gains tax.
Or perhaps:
Sold LTC worth $12,000 for $13,000 after more than a year.
Current proceeds are $13,000
Proceeds - Cost Basis = $1,000 Profit
This is the amount you are liable for on your long-term gains tax.
We hope this guide "How does tax on cryptocurrency work? And How is crypto tax calculated?" helped you understand crypto tax.
