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. These digital assets are often classified as virtual currency by tax authorities, which affects how they are reported and taxed.
Introduction to Crypto Taxes
Cryptocurrency has rapidly evolved from a niche investment to a mainstream asset class, but with this growth comes important tax implications that every investor must understand. When it comes to crypto taxes, the IRS treats cryptocurrency as property rather than currency, which means that digital asset transactions are subject to capital gains tax, just like stocks or real estate. This classification brings a range of tax consequences, from the need to report capital gains and losses to the requirement to file specific tax forms each tax year.
A key aspect of cryptocurrency taxes is the concept of a taxable event. Any time you sell, trade, or otherwise dispose of a digital asset, you may trigger a taxable event that must be reported to the IRS. The resulting capital gain or loss from these transactions will affect your overall tax liability. Failing to understand these tax implications can lead to costly penalties, so it’s crucial to stay informed about how the IRS treats crypto and which tax forms you need to file. In the following sections, we’ll break down the essentials of crypto tax reporting, including how to identify taxable events, calculate capital gains, and ensure you’re meeting your tax obligations.
Taxable Events and Capital Gain
A fundamental part of understanding crypto taxes is knowing what constitutes a taxable event and how to calculate your capital gain or loss. A taxable event occurs whenever you sell, trade, or otherwise dispose of a cryptocurrency, resulting in a change in your financial position. This includes selling crypto for fiat currency, trading one digital asset for another, or even using crypto to purchase goods and services. Each of these actions can create a capital gain or loss that must be reported for tax purposes.
To determine your capital gain, you subtract your cost basis—the original purchase price of the cryptocurrency, including any transaction fees—from the amount you received when you sold or exchanged the asset. For example, if you purchased 1 Bitcoin for $10,000 and later sold it for $15,000, your capital gain would be $5,000. The IRS distinguishes between short-term and long-term capital gains based on how long you held the asset. If you held the crypto for one year or less, the gain is considered short-term and taxed at your ordinary income rate. If you held it for more than a year, it qualifies as a long-term capital gain, which is typically taxed at a lower rate. Accurately calculating your cost basis and understanding the difference between short-term and long-term capital gains is essential for minimizing your tax bill and staying compliant with crypto tax rules.
Crypto Tax Forms and Documents
When it comes time to report your cryptocurrency transactions, you’ll need to use specific tax forms to ensure you’re accurately reporting your capital gains and losses. The primary form for individual taxpayers is Form 1040, which is used for your annual income tax return. To report capital gains and losses from crypto transactions, you’ll also need to complete Schedule D, which summarizes your total gains and losses from all capital assets, including digital assets.
For each individual crypto transaction, you must fill out Form 8949, which details the date of acquisition, date of sale, cost basis, sale price, and resulting gain or loss for each digital asset transaction. Keeping thorough records of your cryptocurrency transactions—including dates, amounts, fair market value at the time of each transaction, and any associated fees—is crucial for accurately completing these tax forms. Proper documentation not only helps you report capital gains and losses correctly but also provides evidence in case of an IRS audit. By maintaining organized tax documents and using the correct tax forms, you can ensure your crypto tax reporting is accurate and compliant.
The Best Practices for Crypto Tax and Capital Gains 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 and report 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. Investors must report income from all crypto activity, including crypto sales, mining, staking, and airdrops, as these are considered taxable income. Failing to accurately report cryptocurrency income can result in owing taxes, penalties, or even tax evasion investigations, as the IRS actively monitors crypto activity.
On the other hand, reporting crypto losses on taxes is also a possibility since some of them can be deducted. Capital losses and capital loss from crypto transactions can be used to offset capital gains taxes and reduce your tax bill. 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 tax returns and reporting taxable transactions.
Cryptocurrency exchanges and crypto exchanges often provide tax documents and reports to help users file taxes and report taxable transactions, making it easier to comply with tax regulations.
We strongly recommend the following simple recommendations below to avoid any mistakes:
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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.
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Understand how much tax you owe on your crypto income, and the importance of knowing the applicable tax rate and tax rates for short-term and long-term gains.
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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. Tax evasion is a serious offense, and accurate reporting is essential to avoid penalties or audits.
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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. Some platforms can help with tax loss harvesting and reporting other digital assets, miscellaneous income, self employment income, and charitable contributions.
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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. Ensure all taxable income, taxable gain, and other capital gains are correctly reported.
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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. Gather information on all crypto sales, transfers (transferring crypto), and donations (donating crypto) to ensure complete tax returns.
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. You may also need to report financial interest in digital assets and file a gift tax return if you have given crypto as a gift above the exclusion limit. 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. These can help ensure compliance with income taxes and proper reporting of cryptocurrency income.
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. Not all crypto activity is taxable, and transferring crypto between your own wallets is generally not a taxable event. However, you must pay tax on taxable transactions and income, and understanding when crypto is taxed is essential to avoid owing taxes.
Some of the Most Useful Crypto Tax Software Tools
User activity in DeFi continued to surge into 2025, building on a 279% increase observed 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. Importantly, many of these tools are specifically designed to help users file crypto taxes accurately and efficiently.
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:
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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. TurboTax assists users in generating and submitting IRS forms required for crypto tax reporting, making it easier to file crypto taxes and stay compliant. The problem here is the absence of robust on-chain data analytics and the necessity to gather data manually in some cases.
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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 helps users file crypto taxes by generating the necessary IRS forms and tax reports for accurate tax filing. 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.
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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. CoinLedger also assists in generating IRS forms for crypto tax reporting, making it easier to file crypto taxes and report income accurately. US and Canadian users can directly import data to TurboTax to expedite the process.
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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. Koinly helps users generate and submit IRS forms needed to file crypto taxes, ensuring compliance with tax authorities. 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.
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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. Coinpanda assists users in generating IRS forms and helps file crypto taxes efficiently, making it a strong choice for those needing to report income from digital assets. 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.
Filing Crypto Taxes and Avoiding Penalties
Filing your crypto taxes correctly is essential to avoid penalties and ensure you’re meeting all legal requirements. The process can be complex, especially if you have a high volume of digital asset transactions or have used multiple crypto exchanges. You have the option to file your crypto taxes yourself, using tax software or crypto tax software designed to handle the unique challenges of cryptocurrency reporting. These tools can help you calculate capital gains and losses, generate the necessary tax forms, and streamline the filing process.
Alternatively, you may choose to work with a tax professional who is experienced in cryptocurrency taxes. A tax professional can provide personalized tax advice, help you navigate complicated situations, and ensure you’re taking advantage of any available deductions or strategies to minimize your tax liability. Regardless of your approach, it’s important to file your tax return on time and include all required information about your crypto activities. The IRS provides resources and instructions for reporting crypto taxes, and using crypto tax software or consulting a tax professional can help you avoid common mistakes and potential penalties.
Why Is It Important to Use Professional Services?
This particular question has two sides:
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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.
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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. If you earn crypto as an independent contractor or receive self employment income from activities like mining or running a crypto-related business, you must report income accurately, often using forms such as Schedule C (Form 1040) in the US. In these cases, specialized assistance is highly recommended to ensure compliance and avoid costly mistakes.
Common Mistakes and Resources
Many investors make avoidable mistakes when it comes to crypto taxes, which can lead to unnecessary penalties or missed opportunities to reduce their tax bill. One of the most common errors is failing to report cryptocurrency transactions on your tax return, whether due to oversight or misunderstanding of tax rules. Another frequent mistake is not keeping accurate records of your digital asset transactions, making it difficult to calculate your cost basis and report capital gains and losses accurately.
To avoid these pitfalls, it’s essential to maintain detailed transaction history and use reliable crypto tax software or consult with a tax professional if you’re unsure about any aspect of your crypto tax reporting. The IRS and other tax authorities provide resources and guidance to help you understand your obligations. Additionally, many crypto tax software platforms offer tools to generate crypto tax reports, calculate capital gains, and prepare the necessary tax documents.
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. Remember, you are obligated to pay taxes on all taxable crypto activities, including sales, exchanges, airdrops, and forks, as required by the IRS.
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 your tax returns are accurate and complete, reducing the risk of errors and penalties and ensuring you are doing everything in accordance with the law.
