Investing in cryptocurrency is one thing, but if you reinvest, it means that you’re selling one type of crypto in order to purchase another. When you swap one crypto asset for another, a crypto taxes calculator can be a valuable tool to help you keep track of your taxes owed.
Although the new cryptocurrency in which you’re reinvesting isn’t relevant, the gains or losses of what you make on the sale of the cryptocurrency are what will be taxed. This requires calculating your crypto gains or losses, or the difference between your purchase price of the sold cryptocurrency (cost basis) and the price at which you sold it (market value).
In these types of scenarios, you can use tools such as a crypto taxes calculator or get in touch with our team at Founder’s CPA who are happy to explain how taxes work for crypto.
Your Taxes Depend on How Long You Held the Crypto
Another major crypto tax consideration you should be aware of when reinvesting in cryptocurrency is how long you held onto it. Both your gains and losses are classified as either short-term or long-term. Short-term gains are assets that you held onto for a year or less while long-term gains were held for more than a year. If you held onto your crypto for one year or less before selling, you’ll be taxed at ordinary income rates; any gains will be taxed at a rate that corresponds to the rate of your individual, joint, or business income taxes.
However, if you hold onto your crypto for more than one year, you’ll benefit from the long-term capital gains tax rate. In most cases, these long-term rates are taxed lower than your individual tax rates. This means that if you’re close to the one-year holding period and you aren’t under a tight timeline to reinvest quickly, you could hold onto the asset to pay less taxes.
Here are some scenarios of reinvestments that you might encounter that a crypto taxes calculator can help with.
- Swapping one crypto for another: If you purchase one BTC for $10,000 and you decide to exchange it for ETH 6 months later when the price of BTC was $40,000, this is a taxable event. You’d need to subtract $10,000 from $40,000 for a capital gain of $30,000. In this case, you held onto your asset for less than one year so it would be a short-term capital gain; you’d have to pay taxes on your crypto at your ordinary income tax rate.
- Purchasing an NFT with cryptocurrency: If you use ETH to buy an NFT, it is considered a taxable event. You’d need to calculate and report capital gains or losses incurred at the time of sale. For example, if you had a capital gain at $5,000 and your sold crypto was held onto for longer than one year, you’d pay capital gains taxes on the applicable long-term rate which would be either 0%, 15%, or 20% depending on your income bracket.
Needed Forms for Reporting
You’ll need Form 8949 to document each transaction and include information such as date of acquisition, date of sale or exchange, cost basis, etc. Once Form 8949 is completed, you’ll transfer the total gains and losses to Schedule D. This summarizes your capital gains and losses across sources.
Get in Touch With Founder’s CPA
Using resources like a crypto taxes calculator or getting in touch with our expert team can help make this process less stressful. We can assist you with your crypto reinvestments and ensure everything is filed accurately and properly. Contact us today to see how we can help you!