As we discussed above, when any of the events triggering CGT happen, you may have either a capital gain or a loss.
If you make a capital gain, you may pay tax on it. If you make a capital loss, it can reduce your capital gains in the current tax year and you can even carry it forward to the next years.
In order to calculate the tax due, you shall start with the beginning: you need to calculate your capital gains/losses.
Basically it’s the difference between the USD equivalent of your crypto at the time you disposed of it and at the time you got it. If the result is more than zero – you have a capital gain for this asset. If it’s less than zero – you have a capital loss and you don’t need to pay the tax and can even reduce your tax due.
Capital gain/loss = your disposal price in USD – your cost basis in USD (the acquisition price + deductible fees)
Example: You acquired 1 Coin X for $1000 and paid a $100 fee. Then you sell your Coin for $2000 and paid a fee of $100. The cost basis is thus $1100. Capital gain equals to $2000 less the cost basis of $1100 + the new fee of $100.
$2000 - $100 – ($1000 + $100) = $800
If you acquired or disposed of your crypto otherwise than buying or selling for USD, you shall use the similar equation and take the data from the reputable exchange on the date of the relevant transaction (fair market value).
It’s easy if you have acquired a number of crypto items at once and have sold the same number in one take. However it’s not always the case. If you sell only part of the items you hold, you may face the following situation:
You bought 1 Coin A for $5000. Later you bought another Coin A for $10 000. Now when you decide to sell one Coin A, Coin’s A value equals to $7000. Which of the coins A shall be accounted for the tax purposes? The first one or the second one? If we take the first one – you have $2000 profit. If we take the second one, you have a loss of $3000. This makes a serious difference. In order to sort it out, you shall have a fair treatment in such situations.
IRS suggests you to choose the accounting method which shall be applicable for your whole tax year. You can not change it in between. They are:
- FIFO method (“first in – first out”). When you dispose of a part of the crypto you own, you account first items acquired.
- LIFO method (“last in – first out”). It’s vice versa: you account last acquired items when disposing of them.
- Direct identification. You name the specific item for disposal by any digital ID’s that could provide for exact identification.