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January 5, 2022

Made Money on Crypto? The IRS Wants a Piece – Here's How to Calculate How Much you Might Owe

Owning and trading cryptocurrency has become commonplace in the world today. From people just buying higher profile cryptocurrencies in their investment accounts like Bitcoin or Ethereum, all the way to traders experimenting with alt-coins and NFTs, there's a looming question - what are the financial and tax implications of all of this? What's the best way to calculate crypto tax?

Well, it shouldn't come as a surprise that in the US, Uncle Sam wants a slice of whatever you've earned on cryptocurrency and associated products.

For a decent number of people, holding or owning bitcoin is seen as an investment. Like many investments, the tax rules around how owning and selling cryptocurrency is taxed stays roughly the same. If you've held a cryptocurrency for more than a year, it gets taxed as a long-term capital gain, whereas if you buy and sell crypto on a more frequent basis, you'll encounter short-term capital gains taxes which keep pace with normal income tax rates. But, these statements do not due justice to just how complicated cryptocurrency taxes can be if not managed properly. That said, for years, the IRS had a big problem though: no one was reporting their crypto.

The IRS's Big Problem

And this makes sense. Cryptocurrency started as an anti-traditional financial instrument. It was a seismic shift in the way that money moved about, specifically due to its blockchain underpinnings, but it was also an upheaval to how currencies are produced. Unlike fiat currencies, or currencies that are government-issued like the US dollar, cryptocurrency is a virtual currency. The value of which is upheld by its secure cryptographic underpinnings in the blockchain along with consumer sentiment, among other things.
Between the years 2013 to 2015, fewer than 900 people made reports to the IRS about having made bitcoin transactions each year. As the popularity of cryptocurrency grew, the IRS new their numbers were likely significantly different than reality. Since, the IRS has released updated guidelines for how to calculate cryptocurrency transactions and file taxes on them.

Understanding Crypto Taxes

On the surface, since much of how cryptocurrency is taxed aligns with the taxation of traditional financial instruments, it might seem simple on the surface. Simply calculate your gains and losses, determine the period of ownership, and report all of this to the IRS on a traditional return.

From the outside looking in, it seems like that should work. But, anyone who's involved in crypto understands that accurately calculating your gains and losses, determining your period of ownership - and documenting that at a level that satisfies the IRS - is easier said than done.

Unlike stocks and other financial instruments that have centralized pricing, the decentralized nature of cryptocurrency and the fact that it trades 24/7 means that determining exactly what price you sold at might not be the easiest. Also, due to the decentralized nature of the ecosystem around crypto and the various ways to trade, store, exchange, and leverage crypto on tens to hundreds of different platforms, it makes for quite the accounting and tax nightmare.

Calculating exactly how much Crypto Tax you Owe

So now to the actual answer you came here searching: calculating how much you (or your clients' if you're a tax pro) owe the taxman.

Thanks to industry-leading tax and accounting tools on the Ledgible platform, answering that question is quite easy. Ledgible is a cryptocurrency tax software that allows users to securely integrate their wallets, exchanges, Ledgers and crypto accounts into their secure and independently-audited system. After this, the tax software spits out necessary documentation for integration into your traditional tax software for filing.

Because of the exhaustive technical groundwork built by the Ledgible team to validate and track cryptocurrency transactions, as the taxpayer or tax professional, there's no need to manually comb through individual transactions or even accounts and add everything up. It all happens with the beauty of automation.

If you're curious what integrations are available if you choose to use Ledgible for professional or personal tax return calculation, you can find that information here.

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