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While crypto taxes can be complicated, the key principles are not. Fix these ideas in your head:
These are taxable events:
- sell crypto.
- trade crypto.
- Buy stuff with crypto.
- Receive crypto from airdrops, hard forks, staking rewards and the like.
These are not taxable events:
- buy crypto.
- Donate crypto to a tax-exempt organization.
- Giving away cryptocurrency (although large gifts can trigger a gift tax)
- Transfer crypto from one account to another.
This means your average DeFi dagger is in for a world of pain this tax season: Between all the trading, staking, and yield farming, every transaction needs to be accounted for and reported.
Note that this is different from how regular currencies are treated: you don’t have to report every financial transaction to the IRS. That would be madness: you only report summaries.
But most governments treat crypto as property, not money, so every time you exchange tokens, it’s like selling houses or cars.
Crypto tax software tries to bring order to this madness by letting you import all your transactions and then calculating your taxes. One problem: there is no universal standard for formatting crypto transactions.
Crypto control software requires a universal file format
Thanks to Bitcoin Market Journal community member “Mr. X” who brought this problem to my attention. “How about an article on how to invest in crypto without creating a tax nightmare?” he asked.
Mr. X’s situation is common: last year he bought and sold crypto across multiple exchanges and wallets.
The problem? Combining these transactions in its crypto control software.
There are usually two ways to view your transactions: You Connect the control software to your wallet via APIor you manually import a CSV file.
And you have to do this for every single platform you bought or sold crypto on.
Stay with me. This is important.
Let’s say you buy crypto on Binance and then transfer it to Coinbase. Without both records, it looks like you sold them on Binance (which is a taxable event) rather than simply moving them to another of your accounts (which isn’t the case).
Again, there are two ways to import transactions into your crypto tax package:
1) You can connect your tax software via API to get an automatic download. This is initially too complex for many users. (Raise your hand if you know what an API is.) Also, APIs don’t always work.
2) You can download a list of transactions from your crypto exchange (e.g. Binance) or wallet (e.g. MetaMask). This transaction list is created as a CSV file, which can theoretically be uploaded to your crypto tax software.
The problem is that the data is not reported consistently.
Click here to download Koinly CSV format
There is a universal format for crypto tax CSV files: see an example here. That’s great if you’ve only made a few trades, but terrible if you’re a frequent trader, miner, lender, staker, or airdrop farmer.
Worse, the data coming from these platforms is still inconsistent, even when in the right format. For an example of Mr. X’s nightmare, check out this poorly produced video from Cointracker:
Read the comments to feel the pain of crypto investors worldwide.
“I easily spent more than two solid days on spreadsheets just learning how to do this properly,” said Mr. X.
Translation:We need uniform standards for tax reporting.
Here’s a better video from Koinly explaining how to create CSV files for crypto tax reporting, which is about as fun as dental work:
Read the comments to see the complexity of the crypto tax challenges.
Mr. X’s recommendation is for the industry to agree on a universal format for crypto tax reportingone used by every wallet and exchange.
Such a tax reporting standard would likely need to be proposed by an international standardization body.
Luckily, the Institute of Electronics and Electrical Engineers (IEEE), the global technology standardization body, has a blockchain working group. You can see a list of standards in the works, but unfortunately, no crypto tax reporting standard…yet.
I challenge the powers of the IEEE to give us tax reporting standards that export CSVs with consistent timestamps and headers that all capture identical information.
That’s the long-term solution. The short-term fix is something you can do now.
How to reduce your tax headache
In the meantime, here are some tips to help you reduce the time it takes to report and file taxes.
Stay on a single wallet or platform. If you do everything in Coinbase, stay with Coinbase. If you trade in MetaMask, stay with MetaMask. If you stick with a reputable platform, they will produce a summary that you can give to an accountant or upload to TurboTax (no crypto tax software required).
However, this approach carries risks. If your crypto wallet or exchange gets hacked, you could lose everything. There is no perfect solution here, but you could split the difference: use one wallet or exchange to hold and another to sell or trade.
Use platforms and wallets with API support. They should give you full transaction history at all times, including deposits, withdrawals and trades. (Many don’t, as well explained in Cointracker’s excellent crypto tax guide.)
If you can get the API working, it takes away the headache of messing around in CSV files. Remember that APIs are dynamic (real-time feed) while CSVs are static (a snapshot).
Sell and trade as little as possible. Remember: most governments treat crypto as property, so each sale and trade is a taxable event. This means that you either have to pay tax on the profits (capital gains) or you can possibly claim the loss (capital losses).
However, buying crypto is free.
You don’t pay taxes on purchases, which is why steady-drop investing is so powerful: you can invest in crypto for as long as you like and only pay taxes when you cash out. Traders endure a tax nightmare; Durable hodlers can sleep well at night.
In other words, KISS (Keep It Simple, Silly).
- A buy and hold approach…
- With a monthly contribution…
- on a trusted wallet or exchange…
- can reduce your tax preparation to the bare minimum.
Cash out only when you’re ready, pay taxes on the winnings and you’re done.
This is as simple as crypto taxes.
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