How to Calculate Crypto Gains and Losses

If you've been trading cryptocurrencies, then at some point you will experience crypto gains and losses. When this occurs, many would like to know exactly how much they’ve profited (or lost) — especially come tax time. But considering cryptocurrencies are shifting in value compared to the fiat currencies they’re often bought with, it can be difficult to nail down the exact gain and loss figures.

These are the basic steps involved in calculating crypto profits and losses:

1. Find out capital gains requirements. Tax requirements can vary for individuals and within each country. Determine what activities are considered taxable and consult a tax advisor.
2. Gather trading activity statements. Most crypto exchanges allow transaction history to be exported. Information required includes purchase and sale dates, type of crypto sold and the buy price.
3. Determine the cost basis. Use an accounting method such as first-in, last-out or last-in, first-out that is approved for use in your country to determine the cost basis.
4. Calculate the capital gain or loss. Use a manual spreadsheet or automatic crypto tax reporting software to subtract the sale price from the buy price. Minus fees, the difference in value is the capital gain or loss.

Is It Mandatory To Calculate Gains And Losses?

Calculating gains and losses is an important part of investing in any asset. For the most part, it is necessary to calculate gains and losses to comply with taxation laws and legal requirements. Cryptocurrency has exploded in popularity over the past half-decade, and as a result, government tax agencies have been left scrambling to figure out the best way to regulate profits. To compensate, tax bodies are cracking down on the asset class and coming after even small-time investors.

However, tax obligation is not the only reason that someone might want to calculate their gains. Some platforms have an in-built crypto portfolio tracker app, or, investors may have their assets spread across multiple exchanges and wallets. In addition, investing is a lifelong game for many who get involved — and understanding where mistakes (losses) have been made will help avoid repeating them.

Why Calculate Crypto Profits and Losses?

1. Tax reporting obligations

The most reason for investors to want to calculate their crypto gains and losses is to meet their taxation obligations. Although advice will vary from country to country, ultimately, most will likely have to pay crypto taxes on any “realized” profits from their crypto investments. This form of taxation is typically known as the “Capital Gains Tax”. Capital Gains Tax (CGT) obligations are only incurred during a “taxable event”. In general, any time an investor disposes of a cryptocurrency, it is considered a taxable event. Examples might include:

• Selling a cryptocurrency token/coin for a fiat currency such as USD
• Selling a cryptocurrency token coin for a different cryptocurrency (eg. trading BTC to ETH)
• Spending cryptocurrency on goods and services (eg. spending BTC on airline tickets)
• Gifting cryptocurrency to someone

In any of these instances, the crypto holder will pay tax on the difference between the value at purchase versus disposal. For example, say someone purchased USD $1,000 of SOL in March. In September, the value of that SOL jumps to $1,800 and the balance is used to purchase a new TV. This is a taxable event and the seller would have to pay CGT of USD $800 in their next tax report.

However, CGT only applies to taxable events. Bitcoin or other cryptos held in a wallet, even if they balloon in value, will not be subject to tax until they’re disposed of. So, if someone purchased $2,000 worth of Bitcoin in 2015 and it's now worth $50,000, there would be no tax requirements as long as it’s kept in a wallet. In some nations like the United States and Australia, those who have held an asset for over 12 months before the sale will receive a discount on their CGT obligations.

Capital Gains Tax is the most simple tax outcome from calculating crypto gains and losses. It can get a little more complicated when looking at high-volume, high-net-worth traders. Generally speaking, traders that move more than a certain amount of crypto will have their profits (and losses) taxed as income, rather than pay capital gains tax. The exact thresholds and criteria will be different depending on the relevant tax agency.

Other forms of crypto earning such as mining, staking, liquidity mining, yield farming, and airdrops are similarly taxed as income, rather than capital gains.

It is important to remember that cryptocurrency is a very new asset class. Governments and tax agencies are still figuring out the best way to tax profits from cryptocurrency and decentralized finance. In general, different countries will have slightly different laws regarding crypto taxation. This article does not constitute tax advice, and all information provided is subject to change. Whenever in doubt, always consult with a registered accountant.

2. To track a crypto investment portfolio

As long as a taxable event doesn’t occur, crypto balances can just sit in a wallet for years. However, most investors will generally want to know how their money is doing, even if it is only once or twice a year. It’s generally prudent to keep an eye on how well a portfolio is tracking. This allows investors to make informed trades and tailor their assets to best fit their investment philosophy. If the purpose of calculating gains and losses is solely for tracking a portfolio, a great option is to use a crypto portfolio tracker.

These exist as smartphone applications, desktop software, browser extensions, and websites. Using one is simple — every time a crypto trade is made, investors update the details in the tracker. By including information such as fiat currency spent, fees paid and so on, investors can view an accurate picture of their portfolio’s performance.

In a fast-moving, evolving market like cryptocurrency, being able to react quickly is of paramount importance. A portfolio tracker allows investors to do this, even if their assets are scattered across the blockchain ecosystem. Moreover, the majority of the top cryptocurrency exchanges include an innate portfolio tracker. This might take the shape of an actual graph demonstrating growth (or loss), or simply a visual next to an asset that shows how much it's gone up or down in value since purchase.

3. To improve trading skills

Without being able to recognize the outcome of crypto trades, it can be difficult to self-reflect and understand where mistakes have been made. This is particularly relevant for high-frequency traders, who may not always immediately know which assets have caused them profits or losses.

Calculating overall gains and losses may not be a significant learning experience for improving a trader’s strategy and skills. However, assessing performance in the context of single trades or trends can help identify when trading mistakes have occurred or excessive trading due to FOMO.

How Are Cryptocurrency Gains and Losses Calculated?

In simple terms, calculating crypto gains and losses involves working out the difference between the selling price of a crypto asset and the average cost price it was purchased for (minus fees). The process involves gathering transaction reports to confirm the cost basis which can include the purchase/sale date, fiat value at the time of purchase, transaction fees and sale price (in fiat).

Calculating Crypto Gains And Losses – Full Guide

For tax purposes, this guide will only consider calculating crypto gains and losses for CGT. The below guide is operating under the assumption investors are looking to figure out their tax requirements. Active participants in earning programs, as well as those with very high trading volume, will need to calculate their tax obligations differently.

Small-time crypto investors can likely figure out their gains, losses and CGT obligations on their own. However, if they encounter any doubt at all, it is highly recommended to consult a tax professional. Improper reporting of crypto taxes can result in hefty fines, and at worst, jail time. Those confident with their accounting abilities can apply the following methods to their crypto transactions to calculate their gains and losses.

Step 1: Determine your capital gains requirements

Individual tax agencies will tend to have different taxation rates for capital gains. In addition, certain nations may exempt or discount the tax if certain requirements are met. For the purpose of this guide, let’s use the Australian Tax Office (ATO) as an example. The ATO, and most other nations, will tax CGT at the person’s marginal tax rate — the highest rate of tax they will pay on their income. Let’s say this is 32.5% of John’s financial situation. In this instance, they will have to pay $455 on their crypto gains for this financial year.

However, the ATO and some other tax agencies (such as the IRS) treat longer-term capital gains favorably. There is usually some form of time threshold that can help reduce CGT obligations. In Australia, if crypto is held for 12 months before it’s disposed of, the tax rate will be reduced by 50%.

Related: Is crypto taxed in Australia?

For example, Suppose John had held his Ether and Solana for more than a year prior to the taxable event. In that case, the taxable gains would halve to $150 and $500 respectively. Overall, John would only have to pay capital gains of $750, instead of $1400.

Several tax agencies will have online portals that will walk people through the tax requirements for any capital gains. Many of them come equipped with a calculator to make the process simpler. Once again, whenever there is any doubt about the CGT obligations for your specific country and tax agency, it is always worth double-checking with a professional accountant.

Step 2: Gather crypto transaction activity reports

It is extremely important to keep tidy, organized records of all crypto transactions when possible. This makes working out crypto gains and losses, for tax time or other reasons, a much smoother process. The information required is known as a tax lot. A tax lot includes:

• Purchase/sale date
• Cost basis (fiat value at the time of purchase, including transaction fees)
• Sale price (in fiat)
• Amount of cryptocurrency sold (in tokens/coins)
• Type of cryptocurrency sold

Keeping a basic spreadsheet of the above data can really help investors out if they are using multiple platforms to exchange cryptocurrencies. Alternatively, there’s plenty of crypto tax software out there that can automatically track trades. However, such software isn’t always perfect, and more obscure DeFi transactions, rug pulls, etc. might require investors to jot down the information anyway.

The details outlined are only relevant for calculating capital gains and losses. If a crypto investor has participated in DeFi earning protocols (like staking or liquidity mining), they will need to keep track of that information too. Some crypto tax calculators are able to extract this information.

Step 3: Determine the cost basis

Once all crypto transactions made in the past financial year have been obtained, the next step is for the individual to determine the “cost basis”. This is the original value of a cryptocurrency at the time of purchase, inclusive of transaction and gas fees. Let’s say an investor purchased $5,000 of Bitcoin in May. The exchange transaction fee was $80, while the BTC gas fee was $20. Therefore, the cost basis could be rounded up to $5,100 — ultimately reducing the investor’s CGT obligations.

When multiple purchases have been made at different price points, figuring out the cost basis can get a little trickier. Investors can use a variety of methods depending on what their local tax agency allows. Several nations support “average cost basis” (ACB), which is the easiest to use. Australia, UK, Sweden, France and Japan all accept ACB as an accounting method – however, it appears the IRS (United States) does not. Additionally, some of these countries have very strict rules attached to using the ACB method, in particular the UK.

Working out an ACB is simple. Basically, add the purchase price of all cryptocurrencies together, and divide by the number of tokens held. For example, say someone purchases 0.25 ETH for $200 in September. In December, they purchase another 0.25 ETH, but this time for $300. 0.25 ETH is then sold a few months later for $500. As the average purchase price is $250, the gains on this trade could also be considered $250. (Note, this example does not account for Bitcoin transaction costs or gas fees).

Other methods include:

Accounting method	Method Description	Countries Supported	Example	Example Gains
First in, first out (FIFO)	The crypto purchased first are sold first	USA, Australia, Germany, Austria, Norway, Canada	As the first unit of ETH was purchased for $200, this will be the cost basis	$300
Last in, first out (LIFO)	The crypto purchased last are sold first	USA, Australia	As the last unit of ETH was purchased for $300, this will be the cost basis	$200
Highest in, first out (HIFO)	The crypto worth the most at time of purchase are sold first	USA, Australia	As the most expensive unit of ETH was $300, this is the cost basis	$200
Specific Identification	Find the specific token that is bought and sold. Easy to track with crypto due to TXN numbers	USA, Austria	As the ETH sale was only an example, there is no specific token sold. It could be either of the transactions.	$200 or 300

Each investor will need to ensure which accounting method they are allowed to use when calculating cost basis. The easiest way to ensure no mistakes are made is to consult a professional accountant. They will be able to select the method that best suits any given trading strategy and minimize tax obligations.

Step 4: Determine capital gains (or losses)

Once the cost basis of all transactions has been determined, figuring out capital gains and losses is the final step. Let’s use a very simple example to walk through the calculations. In this example, the investor (named John) has used the FIFO method to calculate their cost basis, and sold everything they bought within the financial year.

Cryptocurrency	Amount of coin/token purchased	Cost basis (including transaction fees)	Fiat value of crypto at sale	Capital gain
Ethereum	0.5	$1,200	$1,500	$300
Bitcoin	0.1	$3,100	$3,000	-$100
Solana	50	$2,500	$3,500	$1,000
Dogecoin	10,000	$1,050	$750	-$300
Ripple	500	$500	$1,000	$500

John’s portfolio has seen losses of $400 and gains of $1,800. Capital losses have no tax requirement, however, can be used to offset overall gains. Certain investors will deliberately trade off some of their assets at a loss to reduce their tax obligations — although this strategy should only be done in accordance with an experienced accountant. Therefore, the capital gains requirement for John’s crypto trading activity is $1,400.

Ways To Reduce Crypto Taxes

When calculating gains and losses, many investors will wonder if they can reduce the amount of tax they have to pay. The answer will nearly always depend on their personal financial circumstances. Some nations’ tax agencies may have multiple ways to reduce a CGT burden, whereas others may have none. In general, a professional tax advisor is going to accomplish the best results for minimizing crypto taxes. If an investor has particularly hefty gains to pay tax on, consulting an accountant should be the first port of call.

The methods that can be considered to reduce capital gains tax:

• Sell during a low-income year. Planning a sale event years in advance can be difficult, given the volatile nature of the crypto market. However, capital gains are typically taxed at the same rate as that financial year’s income. So, if crypto is sold during a year when an investor falls into a lower tax bracket, they may save on CGT.
• Long-term investment. Cryptocurrencies (and other assets) held for a longer duration are occasionally subject to tax discounts. This incentive is available in the United States and Australia. Some countries waive tax fees completely for longer-term investments (such as Slovenia and Turkey).
• Loss harvesting. Loss harvesting is a strategy where investors sell off poorly-performing cryptocurrencies at a loss prior to tax time. It is particularly effective in years with high capital gains, as losses can be offset.
• Invest via a retirement account. The majority of superannuation and retirement funds are yet to support cryptocurrency as part of their portfolio. That said, there are still a few available depending on your country’s regulations. Generally, investing and trading in crypto with a retirement account will come with all types of tax benefits, such as a much lower marginal rate or delayed payments.

Can You Use Crypto Tax Software?

The use case for crypto tax software varies somewhat. The most streamlined method of using a crypto tax application is by linking it with a supported exchange. The best software will integrate with the majority of popular exchanges, such as Binance, Kraken and so on. The benefit of using tax software is to automatically find all transactions made, calculate their cost basis’ and quickly generate an accurate tax return. Alternatively, if the software does not support a specific exchange, investors can export their trading data over a certain timeframe as a spreadsheet. These documents can then be fed into the software to create a crypto tax report.

Of course, there are certain downsides to crypto tax calculator software. For one thing, not all of them can follow earnings from crypto staking or Bitcoin mining. Some exchanges, particularly in the DeFi sector, won’t be supported. If an investor relies too heavily on the software doing everything, a few transactions may fall through the cracks.

However, the best crypto tax software in the industry will have a wide web of linkable trading platforms and functions, including support for DeFi transactions. Using crypto tax software will remove some potential for human error when calculating CGT obligations by hand. Some of the most popular crypto tax calculator software include Koinly, Crypto.com Tax and CoinTracker.

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