Knowing your cryptocurrency profit and loss is crucial whether you’re a casual trader or a professional investor. Why? to improve trading judgments, to understand when to sell, and to understand how to effectively use losses for tax purposes. How does it affect your bitcoin investments?
Profit and loss, also referred to as P&L or PNL for short, is rather self-explanatory at first appearance. A profit or loss, also known as a capital gain or capital loss, results whenever you “dispose” of an asset, such as a rental property or cryptocurrencies. You made money if you were able to sell your cryptocurrency for more than you paid for it. A loss would result from selling your cryptocurrency for less than you paid for it.
Since cryptocurrencies are viewed as assets rather than money, any profit made from selling one is subject to capital gains tax in the category of crypto exchange tax and needs to be reported on your annual profit and loss statement.
How are cryptocurrency profits and losses determined?
Cryptocurrency profit and loss are often determined transaction by transaction. You must be aware of each asset’s cost base in order to complete this.
Your cost basis for an asset is the sum of the price paid for the asset plus any expenses incurred during the asset’s acquisition. For instance, if you paid $40,000 for 1 BTC and the transaction charge was a flat 2.5%, your cost basis would be $41,000 because it would be $41,000 + $1000 for the 2.5% transaction fee.
Once you are aware of your cost basis, deduct it from the asset’s value at the time of disposal. Then you’ll be able to determine if you have a capital gain or loss.
If you’re simply considering one asset, like in the examples we discussed before, it’s simple to determine what your cost basis is. For investors who are simultaneously trading various assets, the cost basis might become difficult.
Imagine you paid $3,000 for 3 ETH a few years ago. You spent $5,000 the following year to purchase one more. For $4,000 this year, you sold one Ethereum.You made a $3,000 profit if you calculate the cost basis based on your initial investment. However, if you calculate it based on your most recent ETH investment, you lost $1,000. How therefore do you determine which cost basis to employ?
Let’s start by saying that you might not have a choice. Nations provide detailed instructions on the accounting procedures you should apply to determine your cost basis for capital gains. This comprises:
· First In, First Out (FIFO)
· Average Cost Basis (ACB)
· Share Pooling
· Using Last In First Out (LIFO)
· Spec ID
Secondly, your choice depends on your trading and tax strategy in nations where different cost basis methodologies are permitted. Our tutorial on computing cryptocurrency taxes contains more information on each of these cost basis techniques.Binocs is a platform that does its best at providing crypto portfolio management, tax management and crypto portfolio tracking with great ease and safety.