Traders buy and sell on exchanges, miners earn coins through their work and employees are being paid in cryptos for their time.
Now the taxman has finally caught up…and he wants your money.
But how are your coins taxed? And what are they classified as? As an asset or a currency? There are many questions being asked and often only very complex answers to them.
That’s where cryptocurrency accounting software comes in.
Tax isn’t fun. We get it.
That’s why a growing number of developers have launched apps to help traders, miners, ICOs, and anyone else involved in the crypto community to figure out how to stay on the right side of the law.
You probably have a million other things you’d rather be doing than counting pennies and organizing spreadsheets. That’s why it’s a good idea to get your hands on one of the many cryptocurrency accounting apps that are on the market.
Koinly is an app that makes it easy to import your data and download capital gains tax forms like the 8949, Schedule D and export to Turbotax. It supports the US, UK, Canada, Australia and various other countries.
Price range: Depends on features needed. Free to $249 per year.
CryptoTrader offers an easy way to calculate all your crypto taxes, and has integration with TurboTax.
Price range: Free - $299 - Depends on Volume.
Accointing allows you to track your crypto portfolio while keeping a record of all your transactions in order for you to be able to print a tax report at any point in time. It exports your trades in the proper format for taxes in the USA, United Kingdom, Austria, Germany and Switzerland.
Price range: Free - $259 per year.
CoinTracking provides you will a real-time trading overview, coin value fluctuations, tax reports, and more. They are considered one of the leading cryptocurrency accounting applications.
Price range: $3494 for lifetime access.
Blox is an app that syncronises data from across all wallets and exchanges to give you a real-time report of your assets. It caters to accountants, traders, miners, funds, and VCs.
Price range: Free - $249 per month.
Unfortunately, in most countries, the laws and regulations around crypto are murky at best. This is especially true in the Unites States.
Different parts of the government disagree about what kind of asset virtual currencies like Bitcoin are. The SEC does not consider Bitcoin a security. Instead it is a commodity. The IRS considers Bitcoin property.
Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.
That means you are expected to keep track of not only every trade but every transaction. Due to Bitcoin’s usage as money, the IRS has a hard time differentiating between using Bitcoin as a speculative asset to be traded and and using Bitcoin to buy a cup of coffee. This makes trading and using Bitcoin and other coins with different legal definitions very cumbersome come tax season.
On top of that, the IRS has warned many holders of crypto that they are very serious about citizens who skirt the laws or try to use crypto to evade taxes…and they will find out.
You could spend countless hours tracking all of your trades and purchases and trying to make sense of capital gains. This is amplified by the fact that individual states have their own laws.
That’s why software like the one’s recommended above are so handy. Sure, each of them cost a few bucks, but for the time you save and the protection this software gives you if you are ever audited is worth every satoshi.
With so many options available to you, it can easily become overwhelming. That’s why it’s a good idea to first make a proper assessment of your requirements when it comes to accounting.
So who needs what?
If you’re a casual trader or only deal with cryptos on a hobby-level, then you’ll be able to get by using some of the free services out there.
If, however, you’re a power-user who deals with thousands of transactions every year, then it’s best to invest in a proper service that syncronises all your accounts into one dashboard.
Finally, if you have your finger in many crypto pies, such as stablecoins and ICOs, then it’s best to seek guidance from a certified accountant who understands each of your asset categories.
We’ve reviewed the best bitcoin and crypto tax software, now we’re going to focus on the next step of the process: getting that data into Turbotax.
Before we get started, it’s important to have a general understanding of the regulations that apply to cryptocurrency. Let’s take a quick look at the way cryptocurrency is treated and taxed by the IRS. If you’re not in the U.S., Koinly has a great list of country-specific guides, covering Canada, the UK, Australia, and Denmark.
Cryptocurrencies such as Bitcoin and Ethereum are classified as property under federal law. This means that the same tax obligations apply to crypto as do to physical property such as real estate. The main implication of this is that most cryptocurrency transactions are subject to capital gains tax.
The following are considered taxable events:
The following are not considered taxable events:
Proceeds of crypto mining are generally treated as income and taxed as such.
When a taxable event occurs, capital gains or losses are calculated by subtracting the purchase price (also known as the cost-basis) from the selling price. For example, if you bought one Bitcoin for USD$5k in 2018 and sold it for USD$10k in 2020, you would realize a capital gain of $5k, or 100%.
This capital gain would be subject to taxation at the long-term capital gains tax rate, as you held it for more than one year. This rate varies between 0% and 20%, depending on your taxable income and filing status.
Capital gains realized less than one year after purchase are added to your income and taxed at the applicable rate.
To accurately calculate the capital gains tax due on every transaction, you would need to have records of the purchase price of Asset A in USD, the conversion rate of Asset A to Asset B, the value of Asset B at the time of exchange in USD, and the amount of Asset B purchased.
These data are logged by your exchange, but sifting through them manually is a painstaking task. Let’s take a look at how to do it using crypto tax software.
Crypto tax software integrates with your exchange’s API to fetch and compile a list of all your transactions.
Exchanges such as Binance also allow you to manually export your trade history.
Once you have imported your trade history, the crypto tax software will compile this and give you a rundown of total capital gains or losses.
You can now export your data. IRS Form 8949 (Sales and Other Dispositions of Capital Assets) is the most common way to do this, and it’s always a good idea to keep a copy for your own records. You can also export directly to TurboTax’s proprietary online format.
Filing your cryptocurrency capital gains/losses with TurboTax is simple. For this tutorial, we’ll be using the online platform.
To file investment gains and/or losses, you’ll need TurboTax Premier or Self-Employed.
When filling out your financial picture, be sure to select I sold or traded cryptocurreny.
Once you have begun your return and filled out the initial prompts, navigate to the Cryptocurrency tab by choosing Federal > Wages & Income > Cryptocurrency
Here, you can link the third-party service you used to prepare your trade history, or choose to enter information manually.
Upload the .csv file that you prepared earlier.
Check the summary of your taxable transactions to ensure that everything looks right.
That’s it! You’ve successfully imported your cryptocurrency transactions into TurboTax and can rest assured that your capital gains and/or losses will be accurately reported.
Make sure to check out these other crypto tax services as well to find the right one for you!
Crypto tax software makes it easy to properly file taxes on your cryptocurrency trading and protects you in the case of an audit.
If you have ever paid taxes on real estate or any other hard asset, then crypto works the same way. Any profits are taxed as capital gains.
That means you pay taxes on the difference between the price you bought the coins and and the price you sell them at. This is true whether you live in Canada, the US, or the UK, as well as many other countries.
You must report both profits AND losses. However, if you report losses, you may actually be entitled to reduce your crypto taxes in the future so its actually in your interest to report these losses.
Yes, anytime you trade one cryptocurrency for another, you are effectively selling the first currency and buying the second one.
This creates either a profit or a loss of the first cryptocurrency and a new cost-basis for reporting the second. Make sure to keep track of all crypto to crypto trades.
If you do not own the second wallet, then yes, you must pay capital gains on the coins you transferred since you are effectively ‘selling’ them.
If you own both wallets, there is no sale, and therefore there is no tax reporting liability.
On March 20, 2020, the Treasury Secretary Steve Mnuchin announced on twitter that all 2019 income taxes would now be due no later than July 15, 2020 (as opposed to the normal April 15 due date). Bitcoin and other crypto holdings are no exception. Whatever crypto sales gains you would have reported for your 2019 taxes should have been included in your 2019 tax return due July 15, 2020.
Even in 2020, most jurisdictions will not allow you to pay any taxes in crypto of any kind. There are a few places, such as the swiss canton of Zug and the US state of Ohio, among others, to allow residents to pay their taxes directly in Bitcoin. Overstock.com became the first US company to pay all of its taxes in Bitcoin.
There used to be a service called snapcard that you could pay with Bitcoin to pay your taxes for you for .5% fee. However, they rebranded as Masscard in 2015 and then to Wyre and ceased offering this service.
No. While some exchanges do give you detailed trading reports of your year’s activity, these are not technically the same documents that you will have to turn in to the IRS. Some exchanges will not even produce documents like these at all. Don’t rely on an exchange to:
Unfortunately, it is on you to make sure your taxes are paid and properly documented on the correct forms.
In October, Paypal made it possible to buy, hold, and sell coins directly on its platform. You cannot, however, withdraw the Bitcoin from your account, leading many to wonder if it will be taxed the same way, since you are never taking control of the private keys.
Crypto on PayPal will be taxed exactly the same way it is taxed when you hold the coins yourself. Namely, a taxable event occurs everytime you sell cryptocurrency, be it for another cryptocurrency or for a cup of coffee.
Paypal also clearly states that determining your tax liability is placed firmly on you.
It is your responsibility to determine what taxes, if any, apply to transactions you make using your Cryptocurrencies Hub. You can access your transaction history and account statements through your PayPal account for purposes of determining any required tax filings or payments