Why do you need a crypto tax calculator?

Bitcoin and other crypto currencies are viewed differently depending on how they are used. Here are some scenarios:

1. You paid in bitcoin when you bought your computer from Newegg

   Here you are using bitcoin as a currency and you don't need to worry about tax implications as long as the currency is considered legal tender in the jurisdiction you are in. Just like you don't worry about tax implications when your US dollar rises or falls against another currency when purchasing goods or services.

2. You converted some US dollars for bitcoin some a few years ago and held on to it hoping that it would rise.

   Your Bitcoin is classified as a long term investment and therefore will attract a long term capital gains tax depending on your yearly income bracket and region. In the US you wont pay any tax if you are single and earn below $40,000 per year. But if you earn over that you will either pay 15% or 20% (at the time of writing) depending on your income. See a recent Forbes artice for more information.

3. You buy and sell Bitcoin and other coins on a regular basis.

   You would most likely be considered an investor or a trader. This becomes tricky in some cases and you would need the help of an accountant to work out. Traders with trading profits or losses count against their income.

Once you work out your tax position, then you can determine which type of reporting you need to prepare for you tax return. See an example of the Capital Gains Report.

Your tax return just needs to show your overall trading activities from all your exchanges. The tax department doesn't necessarily care where you bought or sold your coins, just how much you made or lost from each of your coins overall in the relevant period.

For example, you have bought and sold bitcoin from Binance, Kraken and Coinbase. You just need to show how much you've made or lost from bitcoin over the tax period (regardless of where it was bought or sold).

You will also need to show any outstanding balances at the end of the period (stuff you haven't sold yet).

Gather data from all these exchanges into one place so that you can calculate your overall position.

When my friend was confused about his position in Cardano and Ripple he was confused because his hard earned Australian dollars went through several currency conversions (first to bitcoin then to Cardano, Ripple). To work out his starting point he needs to wind back the movement to Australian dollars.

But he owns Cardano and Ripple now and who cares how he got there? And what does it even mean to OWN Cardano or Ripple? Would you say that you own US dollars when you got paid last week? No, you don't own US dollars, you HAVE US dollars. And here lies the problem. My friend's coins are both a currency and asset. They are viewed as an asset when sold but as a currency when used to purchase another coin. And each time they are used as a currency the asset that was purchased needs to be valued in time against that currency (confused yet?).

Let's clarify this a little. When you eventually sell your coin you are both selling your asset and buying another asset. In other words, you are both SELLING out of your position in that coin (e.g Cardano) AND at the same time BUYING another coin (e.g Bitcoin). Even though it is recorded as one transaction on the exchange. Once more, you may hold Bitcoin for a few months before selling out into Australian dollars. So the transformation from Ripple or Cardano back to Bitcoin, back to Australian dollars may happen over a few months. Each step has to be valued in time to correctly determine the realisation over the lifecyle of the trade.