How to Calculate Profit and Loss in Cryptocurrency

The cryptocurrency market has never been more volatile, but the opportunity to invest in this booming industry is better than ever.

More and more coins are becoming available for purchase or trade daily, which means that no matter what happens with any single coin’s price point, there will always be another one waiting to take its place.

Knowing how to calculate your cryptocurrency profits and losses is a crucial part of being an informed investor. Whether you’re just starting out or have been in the game for a while, there are tons of tools available that can help you track every transaction from when you bought it all the way until when it sold. However, many people don’t know that this information will be important come tax season, so make sure to keep good records!

Calculating your crypto profits and losses can be challenging even with all the tools in place.

There are several techniques that you can use to calculate the profits and losses of each coin in your portfolio easily. Here’s how!

Crypto assets can be difficult to keep track of. If you don’t know your gains and losses, it’s hard to manage a portfolio or make decisions for the future. In addition, you might not even have any idea how much crypto tax is owed at the end of the year!

Successful crypto traders rely on tracking their investments and calculating gains/losses to ensure they can maximize profits. Tracking helps you:

  • Manage your portfolio with ease
  • Reconsider your investment choices.
  • Maintain accounting records that will prove useful when it comes time to file cryptocurrency taxes.

Methods for Calculating Cryptocurrency Gains

Third-party crypto trading bots and portfolio trackers have emerged to calculate the % increase or decrease in one’s investments. However, most tools use a calculation method called Cost Basis Method, which can confuse new investors. So let’s see how this works!

The cost basis notion permits you to calculate the value of your assets based on how much they initially cost and any accompanying fees or transaction costs.

There are two main ways to use this information, which we will briefly summarize below:

1. On the basis of fiat currency

This entails determining your cryptocurrency’s cost basis in local fiat currency. For example, you may base the crypto cost on USD, GBP, EUR, or JPY, as well as other widely used fiat currencies.

For instance, consider the USD. If 1 bitcoin was worth $30,000 in 2020 and you purchased bitcoin worth $10,000, you would receive 0.33 BTC.

As an example, suppose you sold the 0.33 Bitcoin a year later when the value of Bitcoin increased by 100% to $60,000.

Additionally, the value of your 0.33 Bitcoin will increase by 100%, making it worth $20,000. This equates to a $10,000 return on your investment.

If you are required to file tax returns, you would owe taxes on the $10,000 gains, minus any fees or other transaction costs.

While it may appear straightforward to calculate your crypto gains/losses using a fiat asset, the method has a number of drawbacks.

For example, the majority of cryptocurrency exchanges still do not support fiat currencies, which means they cannot be used as a base currency on the platforms.

2. Using Bitcoin’s value

The majority of traders choose to calculate their portfolio gains with Bitcoin, as it is a popular crypto entry point. Traders will typically obtain BTC using fiat currency prior to converting it to other altcoins.

This can be accomplished quite easily on exchange services that include a cryptocurrency calculator. Simply enter the desired amount of BTC you wish to send, and the calculator will display the exact amount received in your altcoin wallet.

The opportunity cost of holding BTC and not using it to purchase other crypto assets is calculated using this cost basis method. The opportunity cost represents the value of the alternative that was not chosen by you.

Suppose you purchased 1 Bitcoin at $50,000 and then used Bitcoin as your base currency (BTC/DOGE) to buy 100,000 DOGE at a price of $0.50 each.

If DOGE doubled in value to $1.00, but BTC tripled in value to $150,000, the opportunity cost would be $50,000.

This is the variance between the new BTC value ($150,000) and the new value of your 100,000 DOGE ($100,000).

While you still earned $50,000 on the Dogecoins, you would have earned an additional $50,000 had you retained your Bitcoins.

The only disadvantage of utilizing Bitcoin as a base currency is a constant fluctuation in exchange rates between trading pairs.

Cost Basis Tools

Calculating cost basis manually can be challenging when you have a large number of transactions.

Consequently, new cryptocurrency tracking tools are employing a variety of models that combine the best-of-the-cost method while simultaneously averting its drawbacks.

When dealing with several transactions, one widely used model is to calculate the average cost of every coin before determining the actual gain or loss of every currency in fiat currency.

Additional cost basis calculation tools calculate numerous crypto transactions for traders using the First In First Out (FIFO) and Last In First Out (LIFO) approaches. LIFO calculates your latest coin transaction first. The above-mentioned are the suggested approaches for crypto tax calculation by the Internal Revenue Service (IRS).

Calculate cost basis & manage tax liabilities

If you’ve been looking for a way to calculate your cryptocurrency gains and losses, we recommend the cost basis approach. This is not an easy or quick process, but it offers more transparency than traditional methods of calculating currency value.

Tracking your crypto gains manually can be difficult. Luckily today, you may quickly receive convenient updates on your crypto profits or losses through tools such as Coin Market Manager, Lunch Money, and more!

While exchange services are supplying professional trading tools for crypto assets, they do not permit users to calculate gains with ease as one would expect it.

cryptotrader

If you are looking for a way to file your cryptocurrency taxes without too much effort, CryptoTrader.Tax is the right tool for you! This software will help walk you through each step of filing in an easy-to-follow process that also gives access to up-to-date data sources so that there won’t be any surprises when it comes time to report on what crypto trades were made during the year.

Check out our full review of how this taxation preparation service works today.

Sunny Hoi

Sunny Hoi

Sunny is an experienced content strategist. He has a deep understanding of the retail and finance industries. Sunny has written extensively about products, services, stores, stocks, cryptocurrencies, and investment strategies. Sunny's writing reflects his deep understanding of his subjects and commitment to providing clear, concise information that helps readers make informed decisions.

Wealthy Magnate
Logo
Enable registration in settings - general