Chapter 5

How Do Crypto Tax Platforms Work?

Cryptocurrency tax reporting can seem pretty daunting since tax-related policies are confusing. Cryptocurrency gains and losses are filed the same way as stocks or other forms of property. With cryptocurrencies like Bitcoin gaining significant popularity in recent years, governments have realized the need for categorizing it as an asset.

The IRS has released a guideline on paying taxes associated with cryptocurrency dealings. Several warning letters have been issued to non-compliant cryptocurrency investors. The major concern arising here is how cryptocurrency transactions and taxes can be managed.

Crypto Tax Platforms offer a better approach to manual calculations and record keeping.

Do I Need A Crypto Tax Platform?

The report generated on crypto assets must be filed to the IRS. One of the best ways of doing so is by relying on cryptocurrency tax software. It is quite convenient for a crypto trader to keep a record of all their trades without worrying of aligning all trades and transactions information per each exchange, identifying what the different columns mean and how they were determined. Paying taxes becomes more comfortable with software that records all the vital info to be furnished to the IRS.

The first step to file cryptocurrency taxes is to understand the estimation of taxes. This can be complex depending on the amount and variety of cryptocurrencies and the types and quantity of trades. Tracking this data across multiple exchanges can be a hassle if the taxpayer uses more than 1 exchange.

How Does A Cryptocurrency Tax Sorfware Work?

Cryptocurrency tax software serves as a third-party data aggregator. The users can purchase software subscriptions and link crypto exchanges into the tax platform, wallet addresses, or upload files. The software then reconciles the transactions and also produces a detailed report of gains and losses that adheres to the IRS guidelines. These reports primarily include Form 8949, Schedule D, and Schedule 1 in some instances.

Though there are several cryptocurrency tax software platforms available, not all offer the same service or features. Each platform has its strength and weakness. A few key features to consider, when choosing, are discussed ahead.

Key Features In A Crypto Tax Software

Bandwidth and integrations

The number of integrations possible is the most crucial factor to consider when looking for a crypto tax software. There are primarily two kinds of integrations: Comma Separated Values (CSV) import and Application Programming Interface (API) import. API is the most accurate and seamless way of importing wallet and exchange data into a tax platform. Though this sounds quite technical, it is pretty simple.

The API key or public address from the wallet or exchange being used must be copied and inserted into the tax software. The platform then automatically downloads all the transactions carried out and reconciles them. CSV imports are more time consuming and inconvenient. It requires downloading the transaction history report in CSV format and then integrates it by uploading it on the software platform. Editing the report manually may be required in some instances, creating a gateway for errors.

Bandwidth is also another crucial parameter to consider. This is essential for an active cryptocurrency trader who makes thousands of transactions in different wallets and exchanges.

Legitimacy & credibility

As cryptocurrency tax software is still in its evolving phase, it is paramount to question the credibility of the software. This is because, ultimately, the taxpayer would be liable for the amounts reported on the tax return. Hence, knowing who is behind the platform and if the team complies with the corresponding regulations is fundamental. For instance, a team with just technologists and no tax experience may not be able to adhere to IRS regulations.

Does the software help taxpayers in defending amounts reported by their platform? The security of user data on the platform is another important concern here. Do they have any media presence? What kind of organizations is the developer affiliated with? Doing this will help understand if the software can be trusted or not!

Other perks

Any other perks being supplemented with the subscription are a bonus. Apart from loss/gain reconciliations, some crypto tax software platforms offer features such as tax planning tools, portfolio tracking, educational webinars, and a lot more. Another option offered is to invite an accountant to access the account, without sharing credentials username or password. This is a convenient way to have extra supervision while retaining privacy.

Crypto is certainly becoming mainstream. It is essential to calculate crypto gains and losses accurately. To comply with filing requirements, the best thing to do is to leverage on a good crypto tax software.