While it may be exciting to calculate crypto earnings, remember that you have to pay taxes for each transaction. You can make what's already tricky a lot more difficult if you don't speak with a crypto tax consultant or automate the process with software. Navigating the tax liability becomes quick and easy with software. In this article, we’ll help you on your journey to choosing the top crypto tax software.
Every day, more and more people are investing in cryptocurrencies. This is partly because many think crypto and DeFi investments can make you a millionaire within a very short timeframe.
Well, you can’t say there is no truth to that statement, can you?
While it may be exciting to calculate crypto earnings, remember that you have to pay taxes for each transaction. You can make what's already tricky a lot more difficult if you don't speak with a crypto tax consultant or automate the process with software.
Navigating the tax liability becomes quick and easy with software. In this article, we’ll help you on your journey to choosing the top crypto tax software.
You may already have a basic understanding of crypto trading. But unless you’re a hobbyist trader with little earnings, that’s not enough. You'll have to ensure you're compliant with the latest crypto tax regulations as well.
Cryptocurrencies are non-traditional currencies, but they still have real value. You know how you can spend it just like cash. In addition, cryptocurrency can be held for long-term profit, just as with stocks.
Your holding period starts the day you buy crypto, according to the IRS. You've got to know when you got your crypto asset and what tax rates and guidelines apply when you exchange or sell it.
You can also mine this currency for profit.
Different countries have different tax regulations for crypto. For example, crypto is taxed according to the capital gains tax rate in the United States.
Of course, short-term and long-term capital holdings are taxed differently.
For now, let’s give you an overview of crypto taxing basics.
In addition to the $80 billion recently given to the IRS to monitor and catch tax evaders, the IRS started developing its early Cryptocurrency tax legislation back in 2014.
First things first: The Internal Revenue Service is able to track crypto assets. In other words, if you're wondering, will my crypto gains be taxed? What about my crypto investments? Does the IRS know about them?
Secondly, holding cryptocurrency is not taxable.
It is possible to incur a tax liability when you exchange virtual currencies for real currencies, goods, or services. Your liability will arise if the price you realize for your cryptocurrency - the real-world value of the goods or real currency you receive - exceeds your cost basis.
What’s the cost basis, you ask?
We will answer that question later in this blog.
For now, just know that you've got a tax liability if you get more value from your cryptocurrency than you put into it.
Remember, this isn't a transaction tax. That's a capital gains tax - a tax on the change in the cryptocurrency's value from when you bought it.
Speaking of this tax type, you should know that there are different tax types depending on how or when you’re going to file your taxes.
Considering that Bitcoin and other cryptocurrencies are viewed as assets from a tax point of view, there are two types of taxes that could be applicable.
You'll have to pay cryptocurrency taxes depending on the type of cryptocurrency trades you make.
Payments for goods or services, mining, holding, and lending are considered ordinary income and taxed at the investor's gross income rate.
So, you owe ordinary income tax if you:
A cryptocurrency trade, sale, or exchange is taxed as capital gains. The exact rate depends on the asset's duration and the owner's total income.
In other words, you owe capital gains tax if you:
You will also be taxed on long-term capital gains if you sell off your cryptocurrency after more than 12 months of holding it.
You'll have to file ordinary income tax if you sell your cryptocurrency after less than 12 months of holding it or if you earn cryptocurrency revenue.
Note: long-term gains are taxed more favorably than short-term gains.
Calculating your tax rate depends on the below variables:
However, to calculate how much you gained or lost, you must first know how much crypto you had to begin with. Typically, this is referred to as a cost basis.
A cryptocurrency's cost basis is determined by how much it cost you when you purchased it. However, if you received crypto from mining or staking, your cost basis is determined by the actual market value at the time you received it.
What if you didn't pay anything for it?
If you received cryptocurrency as a gift, you would instead use the market price of that cryptocurrency holding in USD on the day you received it.
Confused? You haven’t even seen half of it. Thankfully, Crypto tax software that fits your demands can streamline the cumbersome process of calculating taxes.
Note: If you receive crypto as a present, your cost basis will depend on the basis of the person who gave it to you and the cost basis at the time you received it.
There are likely to be many transactions every year when it comes to investing in cryptocurrencies. It isn’t practical for each individual to keep track of these transactions and manually estimate their net profit and loss.
Tax software for cryptos can help! They can:
It is easy to become overwhelmed by the software options available. Because of this, you’d do well to first determine the nature and scope of your needs before anything else.
This is especially important regarding the kind of crypto owner you are and how you need to handle your accounting.
There is little difference between crypto tax software platforms in terms of products and services. The best value for your money comes from analyzing several factors.
There are a few other things you should check too.
One essential feature that your crypto tax tool should have is compatibility with all stablecoins and widely used tokens and platforms.
After all, there are hundreds of crypto platforms available, and users should integrate with all available ones, especially since many traders use more than one platform.
If the software you choose offers a free tax report download, even for a relatively small number of transactions, go for it. By the end of the day, using a tool’s free features will ultimately determine whether you want to keep using it or not.
It's fast and simple to import your data and download capital gains tax documents using Koinly. It works with a wide range of exchanges and wallets, so you don't have to worry about your transaction record not being tracked.
It has an easy-to-use interface that makes it very convenient for novice users. The software is also capable of exporting the US and Canadian tax forms, as well as supporting more than 300 exchanges.
You can also export your transaction records to other tax software, such as TurboTax or TaxAct.
Price range: $49 to $400 per year based on features and number of crypto transactions.
CoinLedger supports a wide range of exchanges, wallets, and DeFi services. CoinLedger automatically fills out and produces tax forms for you. You can attach those forms to your tax returns later.
All of your short-term and long-term crypto investment gains are included in this report.
The CoinLedger platform supports more than 10,000 cryptocurrencies on numerous exchanges and platforms in more than 60 countries. You get tax-loss harvesting features, crypto tax advice, and a comprehensive auditing suite with the software.
Price range: $49 - $299 per year, depending on the number of transactions.
With CoinTracking analyses, you can calculate crypto tax, trade, and generate reports on your crypto coins' value, losses, and profits. You will also get up-to-date details about the realized and unrealized profits, tax statements, and other information.
This software contains some nice tax reporting and market analysis functions. Besides the paid version, a free version enables you to track 200 transactions. Moreover, it supports more than 5,000 types of coins.
Price range: $10.99 - $54.99 per month, depending on the number of transactions.
Accointing streamlines crypto tax work by automating crypto tax calculations. This is a good app for those who are just starting out with crypto and may not want or need the more advanced features of other tools.
The Accointing software is Swiss-based and has one of the most user-friendly interfaces. The API Connect and manual input options make it easy for beginners to upload all transactions.
Aside from complying with US laws, Accointing also offers Swiss, Australian, UK, German, and Austrian tax calculator options. Moreover, you can perform up to 25 free transactions per year with this tool.
Price range: $79 - $299 per year, depending on the number of transactions.
The ZenLedger crypto taxation software integrates with over 400 exchanges, as well as more than 30 DeFi standards. ZenLedger lets users keep track of their trades, profits, and losses. In addition, they can upload and check their transactions, as well as download their forms.
For additional protection and security, the platform relies on two-factor authentication. ZenLedger has the disadvantage of only offering local tax forms to US taxpayers. Compared to other platforms, the pricing seems reasonable.
A free plan allows you to make 25 transactions. Upon reaching this threshold, you will be able to choose from four paid plans.
Price range: $49 - $999 per year, depending on the number of transactions.
Crypto tax applications such as TaxBit were among the first on the market. You can use it to cover all forms of virtual assets for your economic and tax needs. The general public, government agencies, and multinational organizations can all benefit from TaxBit's crypto tax software.
There are over 500 exchanges that TaxBit integrates with, wallets that utilize DeFi protocols, and famous NFT marketplaces like OpenSea. Over five million taxpayers have used this crypto tax software so far.
TaxBit offers all users free tax reports and unlimited transactions as one of its most important features. As a result, the Free plan can be used by beginners as well as more experienced traders.
Price range: $50 - $500 per year, depending on your account type.
For power investors who deal with thousands of transactions, it’s best to consult with a crypto tax professional instead of paying top dollars to use high-end software each tax year.
You can better prepare your tax returns with the help of a tax professional who specializes in Cryptocurrency. All Lorenzo Tax CPAs are tax consultants with cryptocurrency experience and can help you efficiently take advantage of the latest rules and legal loopholes.
In light of Bitcoin's and Ethereum's recent dramatic price fluctuations, crypto traders may have pressing tax questions. There will always be tax implications associated with cryptocurrency, no matter how much the market shifts.
It seems that the IRS is stepping up its compliance programs, and individuals who own some currency — particularly market participants and traders — have to act responsibly. Yes, even if they still feel bitter about their losses.
Although, there are ways to reduce your tax liability and ever harvest your losses.
There is no Capital Gains Tax on crypto capital losses. However, you don't want to write these off as poor investments. Instead, subtract your capital losses from your capital gains to minimize your total tax bill.
You can harvest tax losses by selling your assets at a loss and deducting them from your capital gains.
It is possible to deduct capital losses from capital gains and ordinary income up to $3,000 in a tax year. You can carry over net losses of more than $3,000 into the next year.
It's imperative to keep in mind that cryptocurrency has a special tax loss harvesting advantage.
If an investor buys back their shares within 30 days of a wash sale, they cannot claim losses. In the United States, stock sales are subject to a wash sale rule. But cryptocurrencies are not currently subject to this rule.
In general, the IRS considers cryptocurrency to be the same as capital assets, but it takes a totally different strategy when it comes to washing sales.
Cryptocurrencies are not classified as securities in the US, so investors can sell them at a loss and buy them back later (or even right after).
This is quite helpful for crypto traders. As a result of this legal loophole, they are able to create artificial losses to lower their tax burden.
However, this loophole might be closed in the near future since legislators have been discussing it for a while. So, make sure you’re aware of the risks before blindly following this strategy. Speaking with a crypto-professional CPA might help.
It's a pain to file taxes. Maintaining a record of all transactions can be problematic with crypto investments, at least in the beginning. Furthermore, you'd need to manually determine the tax for that specific task. Many investors find it too burdensome, and rightly so.
It's easy to do crypto taxes with efficient software.
You might want to check out crypto tax software that provides free tax report files if you're declaring your crypto gains and losses for the first time. By doing so, you will be able to facilitate the process of tax remission while also receiving reliable results.
Even so, a trusted professional can answer important questions not only during your annual consultation but also at other times throughout the year. Schedule a call, and our crypto tax experts will get back to you as soon as possible.