The problem with crypto asset management in general is the lack of desktop applications that could be used to easily report taxes like in the case of traditional finance. Individual investors struggle to find the information, process it, and report to the government. Since the DeFi ecosystem is also a novel environment for many newcomers, it is even harder to find the right way to abide by the law.
Learning the skill of reporting crypto taxes can be quite valuable, but it is much easier to use highly specialized tools offering a wide range of different features like portfolio tracking, data aggregation, on-chain analytics, and automatic report generation. The DeFi sector has matured over the last decade and multiple companies now offer high-quality services to those who work with various digital assets recognized as securities and valuables in many countries.
The best practices for crypto tax reporting
All investors have to pay their dues to the government if they make a profit. Even if you earned just over a couple of cents, it is still necessary to show these gains. Note that individuals must disclose their income generated by liquidating holdings. The law also requires centralized exchanges to report any income over $600 made by clients. It means that the IRS will eventually know about your gains.
On the other hand, reporting crypto losses on taxes is also a possibility since some of them can be deducted. It is important to calculate these numbers correctly and use the data obtained directly from exchanges. Fortunately, CEX platforms provide the necessary functionality to download the data in CVS or a similar format and analyze it easily using platforms like TurboTax. If you are working with DEXes or use P2P marketplaces, services that have on-chain data aggregations work quite well and simplify the process of turning in forms.
We strongly recommend the following simple recommendations below to avoid any mistakes:
- Make sure to read the rules and regulations. All government authorities must publish and explain their policies. For example, the relevant information about US rules can be found on this page: https://www.irs.gov/businesses/small-businesses-self-employed/digital-assets. In the Netherlands, the process is much simpler since you can simply add any coins to Box 3 alongside other investments and securities. Go to the official website of the Customs Administration.
- If you are not sure whether you have filled forms correctly, consult with a professional. Regulation is slightly less strict in the EU, but people from the US and Canada should take the process of paying their dues to the government very seriously. In many cases, you won’t get away with just a slap on your wrist. It is important to do everything right and receiving assistance from experienced specialists is the best way to ensure that you didn’t make a mistake.
- Carefully select the service you plan to use for crypto tax filing. With the variety of options in this sector and fierce competition between international providers, it can be challenging to identify a good platform that will work well in your particular case. However, we strongly advise you to dedicate time and effort to test several services and pick the one that feels easy to use and provides everything you need to comply with local regulations.
- Don’t be lazy and verify numbers manually. if you do not plan to use paid instruments, it is a good idea to check the results offered by free instruments. It is possible that calculations were wrong or that some data was not accounted for. You won’t be able to blame a free tool for issues with your forms and incorrect numbers.
- Start preparing early. Some investors plan asset liquidations around crypto tax reporting seasons and try to calculate everything using the freshest data. You don’t have to be so meticulous. For example, the only thing the IRS is worried about is whether you made a profit. Make sure to gather the information and have the whole string of transactions ready to use as evidence that you did not make any money on asset movements.
Each country has its own codes and policies on what people owe to the government after interacting with the novel digital asset market. It is imperative for responsible investors to make sure that they operate in accordance with local rules and laws. Using official resources to learn more about the juridical frameworks and approved calculation methods is the only way to obtain correct information. Alternatively, you can use paid services that significantly simplify all processes and prevent errors.
In some cases, you will be using the best crypto analysis tools like on-chain data collection and instant aggregation with bottom lines presented in the chosen denomination. Since you often have to pay only in the event of exchanging digital assets for fiat, having a good estimate of the value of your portfolio in US dollars, Euros, or something else can be quite valuable.
Some of the most useful crypto tax tools
User activity in DeFi is up 279% in Q1 of 2024. Despite the slight reduction of actual users, the growth is apparent with many investors increasing the intensity of interactions with various protocols. It means that a lot of money is being made and investors want to use services that help them navigate complex juridical frameworks. The demand brews supply. The industry has several hundred different platforms to choose from if you want on-chain data aggregation, portfolio tracking, and other useful instruments. Many of these tools are equipped with the necessary functionality to help you automatically fill forms and export them in any form you like.
It is hugely important to use the best software to avoid mistakes. Since it can be difficult for a newcomer to find an appropriate service that suits their requirements, we decided to put together a list of excellent companies that offer a wide array of features including data aggregation, portfolio tracking, and more.
Here are some of the options you may be interested in:
- TurboTax is an application released by Intuit, a software fintech company focused on providing valuable consultation services to its clients. It is hugely important for contemporary investors to learn how to report crypto losses on TurboTax since it is, by far, the biggest such company in the market. It delivers a wholesome user experience thanks to its rich experience in the field. The service is designed to serve people from the US and Canada where regulations are quite similar. As the premiere option, it is also integrated with a variety of third-party providers. The problem here is the absence of robust on-chain data analytics and the necessity to gather data manually in some cases.
- Cointracker is among the specialized instruments built to provide solutions in the blockchain industry. It is mostly for investors from North America, but other users might find some features useful. For example, Cointracker collects data directly from centralized exchanges and can even aggregate holdings on wallets. The most popular subscription plan also includes the option to automatically form a detailed CVS table with information that can be easily used in various national frameworks including India, UK, EU member states, and more. Cointracker is certainly among the best choices for newcomers as it comes with an intuitive interface, 24/7 customer support, and a lot of other great perks that make your life easier. Paying up to $300 for a year can be quite pricey which is also a downside.
- CoinLedger is another excellent data aggregation tool that pulls information from over 20 blockchains and supports over 10,000 different digital assets including mainstream coins, NFTs, and DeFi protocols. If you are active in the market and want to work with a wide range of financial instruments, working with an aggregator like CoinLedger is a game-changer. It can bring order to the chaotic disarray of holdings spread across multiple exchanges, software wallets, and DeFi protocols. The company supports multiple national cryptocurrency tax compliance frameworks and allows users to download CVS files containing the necessary information. US and Canadian users can directly import data to TurboTax to expedite the process.
- Koinly is a good choice for people on a tight budget as it has many free options including manual reporting which can be done quickly thanks to fast data aggregation that supports multiple blockchains and a variety of wallets as well as all large centralized exchanges. The data is neatly organized and outcomes are calculated using specific requirements from various national agencies. Users can export data using guidelines that are relevant in Japan, the Netherlands, the UK, the US, and Canada. Koinly is also integrated with TurboTax allowing clients to quickly send out forms that are filled according to the IRS requirements. If you do not have sufficiently large holdings to justify a paid subscription on another platform, using Koinly for its free features is a good idea.
- Coinpanda is another great platform used by over 150,000 users from across the globe. This company also offers a suite of free features like data aggregation, portfolio tracking, and more. You can also export data in SVC files if you are tight on budget and want to save some money on cryptocurrency tax reporting tools. Coinpanda works well for international users too as it has dedicated calculators for specific guidelines and can be used to fill forms relevant in many regions including the EU, UK, US, and Canada. If you have made under 100 transactions, the basic Hodler plan is a good start as it is priced at just $79. It is one of the cheapest options available to crypto holders.
Note that most companies in this sector offer various free features and allow users to manually export data. If you don’t mind spending some time learning how to properly fill forms and send them to authorities, you can save hundreds of dollars each year. On the other hand, some official bodies can be very strict. For example, messing with the IRS is a good way to receive jail time in the worst-case scenarios. We strongly recommend considering the pros and cons of using a specialized service and doing everything manually. For small-time investors, saving money can be a higher priority than doing everything correctly.
Why is it important to use professional services?
This particular question has two sides:
- Ethical. All law-abiding citizens should contribute to the national budget and make sure that the lights are kept in organizations that provide security, social support, and other valuable services. Many crypto investors can hide their activities performed on DeFi protocols, but choose not to. They do it in good faith and want to avoid any potential issues with law enforcement. We believe that it is important for all of us to continue paying what we owe to the government and society.
- Legal. Some countries have very strict juridical frameworks that can lead to massive penalties including jail or prison time. The IRS is the most infamous authority in this regard. Indian and Australian organizations can be just as “nasty” if you fail to comply with the regulations. It is strongly important to operate in accordance with the law.
The biggest argument in favor of using these specialized tools is that contemporary investors working with digital assets can have massively diversified holdings and perform transactions across multiple blockchains. The sheer volume of data that must be organized and analyzed to calculate gains and losses can be insurmountable for manual operation.
Up to 65% of all individual retail traders use a trading bot platform to conduct their transactions. In some cases, users also engage in high-frequency trading, market making, and other investment activities that may have hundreds if not thousands of transactions that must be accounted for. The same goes for liquidity mining. While it seems like a single operation to an investor, regular ratio adjustments in pools are performed on chains since many DeFi protocols use the self-custody route preferred by many blockchain enthusiasts.
These transactions are also important for the final calculations. Without a good data aggregator that can pull information from blockchains directly and access CEX platforms, it is close to impossible to efficiently process everything and make sure that there are no mistakes in forms.
Another issue is that each country has its own approach to handling crypto trading in general. Some nations believe that the differences between tradfi and DeFi operations are negligible and allow people to simply include their holdings in forms like in the case of Box 3 in the Netherlands. Other countries like the US are stricter and require citizens to use separate forms and meticulously calculate all gains and losses resulting from digital assets.
Navigating these complex systems as an international investor can be extremely challenging and require a lot of manual work with outcomes scrutinized by official authorities that hold enough power to cause you significant problems.
The main takeaway
Contemporary investors must abide by local laws to continue trading safely. Since the DeFi sector is expanding through the use of novel instruments like staking, liquidity mining, yield farming, lending, and other novel concepts that have never been used in tradfi outside of rare promotions (i.e. airdrops, ICOs, etc.), correctly calculating gains and losses is quite challenging even for professionals with experience. Without advanced automated software capable of processing massive swaths of data, you will have trouble paying what you owe to the government.
We strongly believe that contemporary blockchain enthusiasts must try to employ sophisticated tools to minimize the chance of making a mistake and getting into trouble with official authorities. Use financial aggregators and platforms like TurboTax to ensure that you are doing everything in accordance with the law.