How do you calculate crypto profit and loss?

Understanding Cost Basis

1. Cost basis includes the total amount paid to acquire a cryptocurrency, including purchase price and transaction fees.

2. When buying across multiple exchanges or wallets, each acquisition must be tracked separately to preserve accurate lot-level data.

3. Deposits from external sources, such as mining rewards or airdrops, establish a new cost basis equal to the fair market value at the time of receipt.

4. Receiving tokens via hard fork creates a separate position with zero initial cost basis in some jurisdictions, though valuation rules vary by tax authority.

5. Staking rewards are typically treated as ordinary income, establishing a new cost basis equal to their USD value on the day they are credited.

Realized vs. Unrealized Gains

1. A realized gain or loss occurs only when a trade, sale, or exchange converts crypto into fiat, another cryptocurrency, or goods and services.

2. Unrealized gains reflect paper profits based on current market prices but do not trigger tax events until disposition.

3. Swapping ETH for USDC on a decentralized exchange constitutes a taxable event, even if no fiat is involved.

4. Transferring BTC from one personal wallet to another does not realize gain or loss, assuming no change in beneficial ownership.

5. Using crypto to pay for coffee triggers realization — the difference between the coin’s cost basis and its USD value at the moment of payment determines profit or loss.

Accounting Methods Matter

1. FIFO (First In, First Out) assumes the oldest acquired coins are sold first, often resulting in higher gains during bull markets.

2. LIFO (Last In, First Out) uses the most recently acquired coins first, potentially lowering gains during price surges.

3. Specific Identification allows users to select exact lots for disposal, requiring detailed records like timestamps, transaction IDs, and wallet addresses.

4. HIFO (Highest In, First Out) prioritizes selling the highest-cost lots first, frequently minimizing taxable gains.

5. Not all exchanges support granular lot tracking; self-custodied wallets require manual reconciliation or third-party tools to apply these methods accurately.

Fees and Slippage Adjustments

1. Trading fees paid in native tokens, such as BNB on Binance, reduce proceeds and must be converted to USD at the time of trade.

2. Gas fees incurred when moving Ethereum-based tokens affect cost basis — they are added to acquisition cost when buying and subtracted from proceeds when selling.

3. Slippage during large swaps on AMMs alters effective execution price, directly impacting realized PnL calculations.

4. Wallet-to-wallet transfers involving bridging protocols may incur multiple fee layers — each must be assigned to either cost basis or disposal proceeds depending on direction.

5. Referral rebates or cashback rewards received in stablecoins offset trading costs but create additional taxable income positions.

Frequently Asked Questions

Q: Do I owe taxes if I lose money trading crypto?Yes. Losses are reportable and can offset capital gains or up to $3,000 of ordinary income annually in the U.S., with excess carried forward.

Q: Is converting one altcoin to another considered a taxable event?Yes. Every crypto-to-crypto trade is treated as a sale of the first asset and purchase of the second under IRS Notice 2014-21 and similar global frameworks.

Q: How do I handle lost or stolen crypto for tax purposes?Under current U.S. tax law, theft losses are generally not deductible unless tied to a federally declared disaster; lost private keys rarely qualify.

Q: Does staking interest count as income even if I haven’t sold it?Yes. Staking rewards are taxed as ordinary income upon receipt, regardless of whether they remain locked or unstaked.