How is the capital gain calculated on Bitcoin?

The so-called “capital gain” is no more than the eventual profit gained from buying and selling, but many people struggle to juggle its calculation when it comes to Bitcoin or cryptocurrencies. 

From a strictly technical point of view, capital gain is the amount earned on capital. However, said like this may be difficult for many to understand, so it is best to explain it in detail because it is relevant for tax purposes. 

Bitcoin: the sale and calculation of capital gain

First of all, it should be emphasized that capital gain occurs only at the time of selling. 

Therefore as long as you hold an asset in your portfolio without selling it, you have no real gain. 

In other words, the capital gain on Bitcoin can only be had at the time of selling BTC. 

However, the proceeds from the sale are not the same as the capital gain. 

In fact, the proceeds are the earnings from the sale, but not the gain. Instead, the gain is obtained by subtracting the purchase cost from the proceeds. 

The purchase cost

The real problem in these cases is precisely determining the purchase cost. 

First of all, it is often the case that one has no memory of it, especially if the purchase was made many years earlier and perhaps one can no longer retrieve it. 

Sometimes it’s impossible to even remember where to go to look for it, because you can’t always remember where the purchase was made. Especially in the case where the purchased BTC was later moved to a non-custodial wallet. 

In theory, the calculation of the gain, or capital gain, is simple: given a certain number of Bitcoin or Satoshi sold, you multiply them by the purchase price so that you get the total purchase cost of all BTC or Sats sold. 

Then simply subtract the total sale proceeds from the total purchase cost, and you get the gain. 

The problems of calculating capital gains on Bitcoin

As simple as this procedure may seem in theory, in practice it is often much more complex. 

First, it is not always easy to remember the purchase price. 

Moreover, the purchase price is not always the same for all Bitcoin sold. 

For example, if a person first buys 0.1 BTC and then buys another 0.2, but then sells them all together at one price, the calculation becomes complicated. 

In fact, in such cases, in order to calculate the total cost of purchase, to be subtracted from the proceeds from the sale of the 0.3 BTC, it is necessary to do two multiplications, one relating to the first 0.1 BTC purchased at a certain price, and a second relating to the 0.2 BTC purchased later probably at a different price. 

Adding up the two products of those multiplications will give the total cost of buying all the 0.3 BTC then sold. 

But there is an even bigger problem. 

FIFO or LIFO?

If a person does not sell all the Bitcoin purchased, but only a portion, what should be the purchase price used to make the calculations. 

For example, if a person first buys 0.1 BTC and then buys another 0.2, but later sells only 0.05, should they consider the purchase price of the first 0.2 BTC, or that of the second 0.2? 

Logically one would think that the price of the first BTC purchased should be taken as the reference, but in reality the opposite is often done. 

A lot depends on the regulations in place from country to country, but since the purchase price of Bitcoin often increases over time, it is generally preferred to take the last one, so you get a lower gain for tax purposes. 

However, once one of the two modes has been chosen, it is necessary to continue to follow that one, until eventual exhaustion of funds, i.e., the sale of all BTC held. 

The first mode is called FIFO, or First In First Out, and it requires that when you make a sale you take as your reference price that of the oldest BTC still held. 

Obviously, as they are sold, one must then take the purchase price of the oldest BTC still held by the seller at the time of the sale, so the calculation is not particularly easy. 

For example, with this technique a person who first bought 0.1 BTC and then bought another 0.2 BTC, if they sell only 0.05 BTC they will have to take as the purchase price that of the first 0.05 BTC bought. 

However, if he then later sells another 0.1 he will have to take half the purchase price of the first BTC bought, but the other half the purchase price of the second ones. As can be easily guessed, this greatly complicates the capital gain calculation. 

The second mode, the one most in use, is called LIFO, or Last In First Out, and it requires that we always use the purchase prices of the last purchased BTC still held at the time of the sale. 

So, for instance, the person from the same example as before will have to use as the purchase price for the first 0.05 BTC sold those of the 0.2 BTC purchased at a later time, and even when they were to sell another 0.1 BTC they will continue to use that price because the 0.2 BTC purchased covers both the first and second sale. 

However, if they then were to sell more than 0.05 a third time, then the excess should go to “offload” the first 0.1 BTC purchased. 

How to make capital gains calculations on Bitcoin

Generally, for purely tax issues, it is advisable to have these calculations done by a professional who is experienced in such things and who will help to avoid making mistakes. 

It is indeed quite easy to make mistakes, especially if you are not familiar with LIFO, or FIFO mode. 

In addition, things get enormously complicated for those who do a lot of buying and selling, so much so that it is almost impossible to handle these calculations without special software. 

Finally, it is worth mentioning that taxes are generally paid on capital gains but these vary from country to country. 

The rate is often the same as that used for traditional financial markets, and is generally about 26%. 

In addition, in many countries there are minimum thresholds of gain below which no taxes are paid, and in some it is also possible to deduct past capital losses from any capital gains.