At best, crypto taxes are easier said than done, especially as the ecosystem and use cases evolve. Four years ago, decentralized finance was hardly a thing. Now experienced DeFi traders are moving their assets from layer 1 to layer 2 protocols, liquid staking, yield farming, moving assets between different blockchains and more. The DeFi ecosystem is worth about $68 billion in total.
Those who hold and average dollar costs when expanding their portfolios during times of volatility are not exempt from ridicule or non-fungible token collectors — particularly the latter. It is extremely difficult to accurately price NFTs.
Every single transaction has accounting and tax implications. Do you know how difficult it is to track the cost basis across hundreds, if not thousands, of daily transactions? And that on an individual level. I’ve seen organizations make millions of transactions per month.
If we think about the current crypto winter we’re in where prices can fluctuate by 10% or more on any given day, let’s just say I get a headache typing in all the variables being considered throughout need tax season. The good news is that with a little preparation and understanding the basics, we can do better. Let’s show our accountants a little love by making their lives easier next tax season.
Here are five crypto tax best practices to get your accountant applauding you:
1. Keep detailed records of all your transactions.
Sorry folks, but you can’t ignore the record on the blockchain. Many people think of blockchain as this all-seeing, self-documenting technology. And in some ways it is. But blockchains are not like bank statements, which clearly record detailed information such as the seller and payee, or in some cases a brief description of the item being sold.
In practice, blockchains are essentially a persistent record of letters and numbers that can be examined with a block explorer like Etherscan, but the information isn’t human-friendly.
Blindly copying and pasting this information into a spreadsheet and emailing it to your accountant is like asking them to solve a “Da Vinci Code” style puzzle.
2. Use only one exchange.
Using multiple exchanges creates unnecessary complications for your accountant during tax season. The more price sources you use, the bigger the headache for your accountant. This is for two reasons. First, each exchange outputs their data in a different format, which increases the chance of errors when your accountant combines CSVs. Second, this is an incredibly time-consuming, manual task that increases your billable hours. It’s a lose-lose situation for everyone involved.
3. Have really good wallet hygiene.
Good wallet hygiene is essential for both experienced traders and regular folks as it helps accountants understand transactions from a workflow perspective as they process them.
While it may seem like it’s best to keep all your digital assets in one place, that’s not necessarily true. Always keep transaction-specific wallets — like investments, DeFi transactions, and earnings — and use a consistent naming system. If you are a miner, keep a separate wallet to hold mining rewards. If you create NFTs, keep a separate wallet for secondary royalties and so on.
4. Talk to your accountant early and often.
When you track activity between and across different exchanges, blockchains, and wallets, and then accurately report that activity to your accountant, accounting can get complicated very quickly. Talking to your accountant early and often can help mitigate this and ensure the two of you are always on the same page.
5. Automate what you can.
We’ve all heard the saying, “The only certainties in life are death and taxes.” But that’s not really the case with crypto taxes until we finally get some clarity from regulators.
My final piece of advice would be to eliminate as much uncertainty as possible in this process by using software to automate and streamline as many of these processes as possible. Fortunately, there are many solutions that integrate directly with digital wallets and accounting software – you just need to find the solution that works best for you.
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Pat White is CEO and co-founder of Bitwave, a software platform providing cryptocurrency accounting, tax tracking, accounting, DeFi ROI monitoring, and crypto AR/` services for businesses.
CLOCK: Are you taxing your crypto and NFTs? Yes, the IRS wants his cut
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