Crypto Taxes for Dummies
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This post explains taxes for cryptocurrencies via 3 examples, and introduces the difference between FIFO & LIFO. These are artificial examples, and not advice.
Understanding the basics of taxes is important not just for paying taxes, but also to inform your trading strategy and to avoid unpleasant surprises. I hope this post gives you some new insights into how taxation works, and the next time you’ll buy or sell crypto something will click in your head, and you’ll be thinking about taxes, too.
At the end of the post, I’m sure one of your thoughts will be “and so, how do I calculate my real taxes?” For that you probably need a tool, and I can recommend CoinTracking or ZenLedger.
So let’s get pen & paper, a calculator, and let’s get started!
Buy, sell, gain… and pay taxes.
This is a made-up example, just to warm up. Make sure you understand it well, because we’re going to build upon it, and we’ll reuse these same numbers later.
Say you bought 1BTC on Feb 1st 2017, when the price was $1,000.
On Aug 15th, the price of BTC was $4,000, and you decided to sell 0.6BTC. You then had 0.4BTC remaining, and you still have them today.
First, the good news: you don’t have to pay any taxes on your 0.4BTC.
Now let’s look at the 0.6BTC that you sold. You’ve got $4,000 x 0.6 = $2,400. Originally you paid $1,000 * 0.6 = $600. So you gained $2,400 — $600 = $1,800.
This $1,800 is your capital gain, and you have to pay taxes on it. Based on your tax bracket, this may be anything up to 35% of $1,800. Let’s use 30% for the sake of this example, so you’d have to pay $1,800 * 30% = $540.
In summary, if you bought 1BTC at $1,000, and sold 0.6BTC at $4,000, on your account you have 0.4BTC and $2,400. Because your gain is $1,902.41, you have to pay roughly $540 in taxes. In light of this example, here is a first learning.
In light of this example, here is a first learning.
Learning #1. If you sell any crypto for USD, you may want to withdraw part of your earnings, to make sure you can cover your taxes.
