One of the most important restrictions for the development of the crypto industry and the introduction of cryptocurrency in our daily lives is the insufficient level of adoption. You will understand that the future has come when you can easily pay for your coffee, dance courses or a gift for your spouse with the help of the “magic internet money”.

But until this time has come, the main turnover of the cryptocurrency takes place in the field of exchange trading. And, for better or worse, all cryptocurrency trades and sales are taxable.

As the IRS’ Guidance on Virtual Currencies says, cryptocurrency is actually not a currency, but it is a property, so you have to report your gains and losses on every individual trade to the IRS. In particular, exchanging one cryptocurrency for another, converting it back to USD or spending cryptocurrency are taxable events.

This article will help you to understand whether it is necessary to pay taxes in cryptocurrency and what is the easiest way to calculate these sometimes difficult numbers.

Tax calculator

A cryptocurrency tax calculator is a software tool used to find out how much you owe for trading cryptocurrency at tax time — or how much you can deduct if you lost money. Using tax calculators may be very handy because the accounting involved in finding out where you stand at tax time can be pretty complicated.

Without tax software, you have to keep track of your trading activity manually. Just imagine the manual calculation of income or loss from each transaction that was made on the exchanger, and there may be a lot of them for the tax period. Cryptocurrency traders that go the manual route often use spreadsheets to keep their accounting up to date, this requires constant attention from them not to miss a single penny.

How does a crypto tax calculator work?

There are two types of tax calculator mechanisms:

Some cryptocurrency tax calculators require you to download CSV files of your trading data from the exchanger you want to analyse. Others are capable of importing your information automatically through exchanger’s APIs.

Setting up an API connection requires you to log into the exchange you want to connect and create an API key. After you’ve done this, you can copy and paste the API key and the API secret into your cryptocurrency tax calculator.

Are cryptocurrency tax calculators safe?

As long as you restrict your cryptocurrency tax software to read-only access, hackers can’t take advantage. Even if a hacker somehow gets the password to any crypto tax software you use, they can’t change your API unless they also hack into your exchanger account. Nowadays, there has never been a successful crypto hack that involved cryptocurrency tax software.

Do you have to pay taxes on Bitcoin?

The short answer is: yes. Neglecting to pay taxes on your Bitcoin gains could have many negative consequences. The US government is currently pouring millions of dollars into blockchain analysis. The top spender in this area among all the government agencies is (you guessed it) the IRS. The nature of blockchain-based cryptocurrencies means that each and every transaction that you’ve ever made using pseudo-anonymous coins like Bitcoin can be tracked and traced.

How are Cryptocurrency profits taxed?

Almost all countries treat cryptocurrency like property for tax purposes. What that means is that each time you sell or exchange cryptocurrency, you realize either a capital gain or a capital loss. Capital gains has to be added to your yearly income. On the other hand, capital losses may reduce your taxable income.

US-based crypto traders can deduct up to $3,000 in crypto losses from their day job salary income — but different countries have different rules about write-offs. In Canada, for example, capital losses can only cancel out capital gains.

Play it Safe

It is worth thinking about it in advance and protecting yourself from unwanted fines or other risks (such as centralized entities meddling with your finances). Using a cryptocurrency tax calculator is a wise investment in something no currency (digital or otherwise) can buy: peace of mind.

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