If you've bought crypto, HODLed, and sold it later, your tax liability should be fairly easy to calculate. Let's look at a simplified, US-based example. First of all, we need to figure out our capital gains or losses in US dollars. Here's the formula:
Fair market value - Cost basis = Capital gain / Loss The fair market value is the current spot price you'd find on an exchange like Binance. Cost basis is the original price you paid for the asset plus any fees. Imagine you bought 2 BTC for $10,000 and sold them two years later for $30,000. You've now made $40,000 in capital gains:
$60,000 (fair market value) - $20,000 (cost basis) = $40,000 (capital gains) In the USA, capital gains tax depends on your total taxable income, tax-filing status, and the amount of time you've held the asset. If you've kept your crypto for over a year, you're subject to long-term capital gains tax.
The amount you pay depends on your total taxable income. This figure includes your capital gains. If you already have $50,000 of taxable income, your total taxable income will be $90,000, including your capital gains. According to the Internal Revenue Service’s chart below, you'll pay a 15% capital gains tax rate on your cryptocurrency gains.
Tax-filing status
0%
15%
20%
Single
Less than $40,400
$40,401 - $445,850
Over $445,850
Married filing jointly
Less than $80,800
$80,801 - $501,600
Over $501,600
Married filing separately
Less than $40,400
$40,401 - $250,800
Over $250,800
Head of household
Less than $54,100
$54,101 - $473,750
Over $473,750
If you trade regularly, your calculations will require some work. It’s easier to understand the tax consequences of fiat purchases and sales, but it gets more complicated when trading one cryptocurrency for another. Let's imagine you've been trading BNB and Ether (ETH). Here's your trading history: Date
Trading Activity
17 Feb 2021
Purchased 1 BNB for $150
21 Feb 2021
Purchased 1 BNB for $300
02 April 2021
Purchased 1 ETH for $2,000
11 April 2021
Trade 1 BNB (worth $500 on the spot market that day) for 0.24 ETH
In our example, trading your BNB for ETH counts as a taxable event, so you must calculate your capital gains and losses. Your capital gains are the fair market value ($500) minus the cost basis. But which transaction do we use as the cost basis? After purchasing BNB previously at two different prices, you need to make a decision.
Accountants use two different ways to calculate this: First-in, First-Out (FIFO) and Last-In, First-Out (LIFO). FIFO is the standard for most countries, while LIFO is typically only used as an alternative method in the U.S. With FIFO, the asset you purchased first is sold or traded first. In our case, we would first sell the 1 BNB purchased for $150.
Using FIFO, the cost basis for our taxable event is $150. This leaves us with $350 in capital gains to pay according to our formula:
$500 (fair market value) - $150 (cost basis) = $350 (capital gains) With LIFO, the most recently purchased asset is sold or traded first. LIFO would instead use the purchase of 1 BNB for $300 as the cost basis. In this case, your capital gains would be $200.
$500 (fair market value) - $300 (cost basis) = $200 (capital gains) You can deduct your capital losses from capital gains to calculate how much you owe in a tax year. In many countries, short-term capital gains and capital losses (typically holdings less than a year) are treated separately from long-term gains and losses.