What’s the Easiest Way to Calculate Long and Short-Term Capital Gain Tax For Crypto Assets?

Contrary to popular belief, taxes must be paid on all crypto earnings. Most governments treat cryptocurrency as property, which means that it does qualify for capital gains. Whether or not that qualifies as long term capital gains or short term capital gains depends entirely on the amount of time that you have held the cryptocurrency before selling. 

Note: This article will focus on the US system. However, nothing in this article should be construed as tax advice. You should hire a trained professional to help with your specific tax needs.

Calculating Short or Long Term Capital Gains with Cryptocurrency

Calculating whether your crypto gains qualify as short term or long term capital gains is actually really easy. Just ask one question:

Did you hold the crypto for over a year before selling?

If the answer is yes, then it’s a long term capital gain. If the answer is no, then it’s a short term capital gain. 

That’s the easy part, though. Unfortunately, calculating the profit itself can prove a little more challenging. 

The Easiest Way to Determine Cryptocurrency Capital Gains

The easiest way, in our opinion, to determine cryptocurrency capital gains does not actually require any fancy software or tracking programs. Don’t get us wrong, you can use those if you like and they might make things easy if you’re a less organized person. 

They’re just entirely necessary. And the pricing can often make them a non-viable option unless you earn a lot of money from trading cryptocurrency. 

Basically, our method involves manually tracking every purchase in an Excel spreadsheet. This might sound complicated, but it’s not really that complicated. It can become rather a time intensive if you make a lot of trades each day, though. 

Anyway, simply record the day you purchased the crypto, the amount of crypto you purchased, and the price you purchased it at. You also want to use the same recordkeeping for any sales that you make. When tax time comes around you can easily determine your profit by averaging the purchase price (make sure to weight the amount!) and subtracting that amount from the average sale price (make sure to weight the amount!). 

Alternatively, you can use a program like Koinly that automatically tracks all of that for you. It’s much more convenient to use a program if you make a lot of trades per day. Again, it’s entirely unnecessary if you make a handful of crypto purchases per month. 

Do I Pay Capital Gains Taxes on Crypto I Don’t Sell?

No, you will not owe any taxes on crypto that you do not sell. Most countries do not charge taxes on property until you sell it. A tax on unrealized gains has been mentioned before in the US, so this could change in the future. But it seems unlikely at this point. 

Do I Need to Pay Capital Gains Taxes If I Sell on a Decentralized Exchange?

Yes, you still must pay all applicable taxes even if you sell on a decentralized exchange. The government mostly relies on an honor system for paying these taxes, though.

However, you must remember that cryptocurrency is immutable and on a publicly available blockchain. Just because the government can’t link your name to your wallet today does not mean they can’t do it in a few years and send you a massive tax bill. 

We strongly recommend paying taxes even if you exclusively use a decentralized exchange. 

What Happens If I Don’t Report My Earnings While Trading on a Centralized Exchange?

This mostly depends on the amount of profit that you failed to report on your taxes. If you made under $20,000, then the IRS most likely doesn’t even know about it. Cryptocurrency exchanges are only required to send tax documents to the IRS if you have over 200 trades or over $20,000 in total transaction volume. If that is the case, then you will likely receive a notice from the IRS that you must amend your return. They may also send a massive tax bill to you because the IRS only sees the sale price of the crypto and assumes you purchased it for $1. That has frightened many unaware that daytrading cryptocurrency is a taxable event!

Now, if you lost money with cryptocurrency, then you will not receive a letter telling you that you actually can write off the loss on your taxes. The IRS does not inform you when you have strategies that can make you owe less – they only notify you when you did not pay enough!

Crypto Tax Program vs Recording Yourself – Which is Better?

Again, this depends entirely on how many crypto trades you have during the year. If you aren’t a day trader and only casually purchase crypto, then you can pretty easily calculate how much you owe in capital gains yourself. There are even free calculators online that will automatically weight each purchase to determine your basis. 

On the other hand, if you enter and exit multiple positions per day, then we strongly recommend using a crypto tax tracking software like Koinly. Determining your basis can take up quite a bit of time with that many transactions. Errors are also more likely to occur when day traders try doing their taxes on their own. 

Our final recommendation is that you should simply hire an accountant familiar with filing taxes for individuals who trade cryptocurrency. Most accountants don’t know how to do this, so make sure to ask them if they’re familiar with it. 

Closing Thoughts

That covers it for the easiest way to calculate short and long term capital gains for crypto assets. If you want easy, then hire a licensed accountant familiar with cryptocurrency and give them all your information. 

That is our recommendation if you have a complicated tax return or just can’t be bothered with doing all the calculations. For the more adventurous or those that don’t have more than a position or two over the entire year, then you can easily determine your profit (or loss) and whether you owe long term or short term capital gains on your own.

Finally, those that day trade cryptocurrency would benefit from a tax tracking software like Koinly that takes all the data entry out of the equation. Just expect to pay a little for a service like that.