Profit and loss in cryptocurrency is similar to the stock market, but it includes some particular features. When you buy a crypto asset, its profit or loss is still limited to paper profit or loss. Whenever you sell that asset, it becomes a realized profit or loss.
Understanding the difference between these two types of profit and loss is very important for investors. Therefore, investing time in understanding your taxes and selecting the most suitable investment plan is essential.
Here, we will explain what realized gains and unrealized gains are, show examples, talk about how they are taxed, and how to calculate them.
Difference Between Realized And Unrealized Gains
What is realized gain?
The profit you get by selling a crypto asset is called realized gain. The difference between the price you paid for a cryptocurrency and the price you sold it for is your realized profit.
If you purchased Bitcoin for $30,000 and then sold it at $35,000, this is an example of a profit. Then your realized gain would be $5,000. This gain is in your hands, and you can use it.
The main point about realized gain is that you have to pay taxes on it. Most of the time, you have to pay capital gains tax on any profit you earn by selling your crypto assets. The time you hold the asset (short-term or long-term) will determine your tax rate.
What is unrealized gain?
Unrealized gain is the gain that is still only on paper. The asset hasn’t been sold yet, and its value has gone up. As an example, you paid $2,000 for 1 Ethereum (ETH) and now it has increased in value to $2,500, so it has appreciated, even though you have not sold it. Since the $500 is yet to be taken out, it is an unrealized gain.
Monitoring unrealized gains gives the correct picture of how your portfolio is doing. Understanding this information first is needed since the market can experience multiple fluctuations. It also helps to decide when to sell to realize profits or reduce losses.
How to Track and Calculate Gains?
Monitoring Your Crypto Portfolio
Prices of cryptocurrencies in the market change very rapidly. Regularly reviewing your portfolio is essential. As you monitor your account, you will see when selling will bring you the best profit. It also helps in risk management.
Currently, there are many tools and platforms, such as CoinTracking, Koinly, Phemex, etc., that help to automatically calculate the realized and unrealized gains of your portfolio.
You can easily see the updated status of your entire portfolio by simply uploading your transaction data to these tools.
Calculating Realized and Unrealized Gains
Formula for calculating realized gains:
Realized gain = Selling price – Purchase price
Example: If you buy 1 Bitcoin for $20,000 and sell it for $25,000, the realized gain = 25,000 – 20,000 = $5,000.
Formula for calculating unrealized gains:
Unrealized gain = Current market price – Purchase price
Example: If you buy 2 Ethereum (ETH) for $1,500 each, and the current price is $2,000, unrealized gain = (2 × 2,000) – (2 × 1,500) = 4,000 – 3,000 = $1,000.
Gains are affected by market changes, the desire for cryptocurrency, international developments, and your plan for investing. However, the calculation and reporting of your realized gains may change due to changes in taxation.
Some Strategies for Managing Gains
1: Time Your Crypto Trades
Realizing your profits in the cryptocurrency market at the right time matters a lot. In turn, if your gains in your portfolio have gone up a lot or there are big changes in the market, that’s a reason to sell and realize your earnings. Still, if you think the potential for development will last, it’s also fine to hold on.
You usually pay more tax on short-term capital gains, while you are taxed less for long-term capital gains. With this in mind, you need to look at the state of the market and also how taxes will affect your trades.
2: Tax Planning for Crypto Gains
Different places have their own tax rules for cryptocurrency profits. Capital gains tax is applied to gains that you receive, though, not to gains that you do not receive. Saving taxes can be done by harvesting losses, keeping investments for a long time, and reporting your income properly. However, record-keeping regularly and getting advice from a tax expert can help you avoid problems with the law down the road.
3: Reinvesting Profits in Crypto
Reinvesting unrealized gains or realized gains in crypto offers the benefit of compounding. The gains can be added to the profit and put back into trading. In the long term, this approach can raise the value of your portfolio.
Even so, reinvesting comes with a bit of danger. Market fluctuation, falling prices, or new rules may jeopardize your investment. As a result, you should first review risks and analyze the market before reinvesting.
Conclusion
Learning how realized and unrealized gains are different, choosing your trading days, handling taxes, and reusing your earnings can all play a big role in crypto investing success. Being aware of ongoing changes in the market and policies, and deciding correctly, is how to profit.
Regularly monitor your crypto earnings, ask a tax expert about the best approach, and try using the newest investment tools to achieve good results. Resources like 36crypto can help you stay updated with the latest trends and insights. With the right knowledge and planning, success in the crypto world is possible!
