- >How to Prepare for Crypto Tax Season
How to Prepare for Crypto Tax Season
Tax season is not for another couple of months. However, here at CryptoVantage, we promote an ethos of proactiveness when it comes to crypto taxes. When it comes to paying taxes on your cryptocurrency, there are a number of things you need to know. This article aims to help you prepare for crypto tax season without telling you how to do it. We’re not tax consultants, and none of this content should be taken as tax advice. We are however, experts on cryptocurrency, and so we can recommend things that will help you organize your wallets for tax season.
Keegan Francis | Dec 4, 2020
How to Collect Your Crypto Transaction History
Most people use both non-custodial wallets, as well as exchanges on a year to year basis. You need to keep track of all of the wallet addresses, as well as exchanges that you use. When it comes time to report your taxes, you will need to export history from both your wallets, and the exchanges you’ve used. You have a couple of options when it comes to collecting and reporting you taxes. Of course, everything can be done manually, but this is a very difficult, and time consuming process. Instead, we recommend that you use an automated cryptocurrency tax software like Koinly.
Koinly is very useful as it automates much of the retrieval, and data crunching to get that final set of numbers you need to report. For example, you are able to simply import your wallet public addresses into the interface, and Koinly will take care of the rest. Any time a new transaction is detected on that wallet (deposits, withdrawals, etc), Koinly will re-process your tax information.
Most exchanges will give you a .csv file that contains a complete export of your transaction history. This .csv file can then be uploaded to a service like Koinly, and processed by their systems. There is a more efficient way to do this, albeit a little more technical. Some exchanges will allow you to create an API key for your account. An API key allows Koinly to query your account, and automatically retrieve your complete account history. Any new transactions that take place on that exchange will be sent to Koinly, and included in your tax information.
If you have more than 100 transactions in a given year, then you’re probably better off using an automated cryptocurrency tax software like Koinly. If you have less than that, then the average tax accountant that is familiar with cryptocurrency should be able to figure out how to report your taxes. An automated software is ideal for individuals that have hundreds, if not thousands of transactions spread across a variety of platforms. The other recommendations we have for you, are to make your life less stressful when it comes around to tax reasons.
The Four Pieces of Info for Every Crypto Transaction
In order to report your crypto taxes correctly, you need to have at least four pieces of information for each transaction.
- A timestamp of the transaction
- The asset(s) that is/are being deposited, withdrawn, or traded
- The amount(s) that is/are being deposited, withdrawn, or traded
- The type of transaction (interest, rewards, income, deposit, withdrawal, trade, etc)
When you are interacting with the world of cryptocurrency, it is useful to ask yourself the question. “How would I report taxes on this transaction?”. Thinking ahead is a great way to know whether or not you want to be diving into the latest and greatest the world of crypto has to offer. Regardless of what you are doing, you want to make sure that the exchange, wallet, blockchain, or service you are interacting with gives you those four pieces of information.
Use Reputable Exchanges
One of the ways you can make your life easier come tax season, is for you to use reputable cryptocurrency exchanges. The reason why this is important, is because they will be giving you an export of your transaction history. If their export is not complete, or is missing important information, this is not good.
It is still up to you to report your taxes correctly, and you cannot blame the exchange. Most exchanges will give you a complete export of all the transactions you have ever done on their platform. The majority of these reputable exchanges will give you exports containing each of those four pieces of information. If you’re using a third party crypto tax software like Koinly, then you can create an API key to automate the retrieval of your transitions.
Keep Good Records
This recommendation is admittedly vague. Let us clarify. You should be keeping track of which exchanges, wallets, and services you use. This is just generally a good practice to get into, as you don’t really want to be forgetting about where you have allocated your crypto assets.
You don’t want to be losing, or forgetting about your money! At the very least, keep a list or a google sheet of all the exchanges, wallets, and services you used. If you want to step up your record keeping, add to that list, all of the assets you have on the various platforms.
Which Transactions are Taxable?
This question will vary from region to region. You need to check with your local tax authorities in order to properly answer this question. In the meantime, we can give a partial answer. Most, if not all transactions are taxable in some way shape or form.
Furthermore, there are a lot of grey areas when it comes to reporting your crypto taxes. For example, are bitcoin transaction fees considered an expense? The answer will likely vary, depending on where you are, and who you ask. When we say all transactions are taxable, we mean each and every interaction you do on exchange, wallets, and blockchains. This includes transfers, deposits, withdrawals, interest payments, loans, purchases, investments, airdrops, and more.
The Bottom Line
At the end of the day we can draw a couple conclusions about how to proceed with crypto tax season. The first thing to remember to do, is keep up to date records. Don’t forget to add that new exchange or services to your google doc when you create a new account. Second, use reputable services that you know will provide you with complete transaction history exports. The less you have to go digging for additional information later, then easier it will be to report your taxes. The third, and last bottom line, keep track of EVERYTHING. If you happen to be audited down the road, you want to demonstrate that you tried your best to keep good records, and report your crypto taxes as honestly as you could. If you have clean records that were regularly updated, then the whole process of reporting your crypto taxes, will go much smoother.