Transaction-by-transaction accounting is predominantly suited for active cryptocurrency practitioners. The determination of profit and loss (P&L) on a transactional basis is typically conducted through a bifurcated process.
Step 1: Calculate the cost price and valuation of each individual transaction in the local currency.
Step 2: Ascertain the P&L by calculating the disparity between the transaction value and the cost basis.
Note: All incidental transaction fees must be integrated into the aggregate cost basis.
Formula: In the context of a single trading pair:
Cost Value = Initial acquisition cost (inclusive of transaction fees)
Transaction Value = The market value of the held assets at the time of disposal
Earnings = Transaction Value - Cost Value (inclusive of transaction fees)
For multi-pair transactions, please observe the following nuances:
The cost basis of the inaugural Transaction A differs from that of the subsequent Transaction B. Conversely, the transaction value of Transaction A constitutes the new cost basis for Transaction B.
Aggregate the earnings from all transactions and subtract the cumulative expenses incurred.
Example: Dates and prices are provided solely for illustrative purposes and do not represent historical market data.
Note: For the sake of conceptual clarity, this example omits transaction fees. However, practitioners should incorporate all such fees into the cost basis.
January 1, 2022: An acquisition of 1 BTC is made at a cost of 5,000 USD.
Cost Value = 5,000 USD
Holdings: 1 BTC
February 1, 2022: 1 BTC is disposed of at a price of 250 USD per BNB to acquire 30 BNB.
Transaction Value = 7,500 USD (30 BNB x 250 USD)
Unrealized P&L = 2,500 USD (7,500 USD Transaction Value - 5,000 USD Cost Value)
March 1, 2022: 30 BNB is sold at a price of 1.8 USD per SAND to acquire 5,000 SAND.
Note: The new cost basis for this transaction is 7,500 USD, derived from the preceding BNB valuation.
Holdings: 5,000 SAND
Transaction Value = 9,000 USD (5,000 SAND x 1.8 USD)
Unrealized P&L = 1,500 USD (9,000 USD - 7,500 USD)
The aggregate unrealized P&L for the first quarter of the fiscal year is 4,000 USD (2,500 USD gain + 1,500 USD gain). It is imperative to account for any transaction fees accrued throughout the process. It should be noted that while the unrealized gain stands at 5,000 USD, this figure is susceptible to market volatility and fluctuates in accordance with the price of the held asset (SAND, in this instance). These gains are only realized upon liquidation for cash. To mitigate volatility and secure profits, assets should be converted into stablecoins, such as BUSD, prior to final liquidation.
Year-to-Date (YTD) P&L The YTD P&L simply calculates the differential between the portfolio balance at the commencement and the conclusion of the calendar year. This specific methodology is more appropriate for long-term cryptocurrency investors.
Note: Calculations utilize the year-end exchange rate rather than the spot rates at the time of each transaction.
Example: Assuming an initial balance at the start of the year of:
5,000 USD (1 BTC)
0 USD
Assuming a closing balance at the end of the year of:
0 USD
5,000 SAND
At year-end, with SAND priced at 2 USD per unit, the aggregate portfolio valuation reaches 10,000 USD. Unrealized P&L = 5,000 USD (Year-end balance - Year-start balance)
Such unrealized gains only achieve realization once the assets are converted into stablecoins (e.g., BUSD) and subsequently liquidated for cash.
Open and Closed Positions Traders may also monitor open and closed positions to evaluate trading performance. An open position is a transaction initiated upon market entry. Engaging in a transaction of an identical volume in the opposite direction transforms it into a closed position. For example, acquiring 0.5 BTC constitutes an open position, which becomes a closed position upon its subsequent sale.
Open positions can be categorized based on diverse criteria, such as short-term, long-term, value-based, or speculative positions. Systematizing positions in this manner facilitates a clear and intuitive assessment of performance across different strategies, thereby preventing the conceptual "conflation" of distinct trading objectives