Beginner’s Guide To Cryptocurrency Tax Software

One of the best aspects of crypto tax software is that the programs are so simple they can be used by a beginner. Novice users are much more likely to find a crypto tax software program that fits their needs if they know the basic information covered in this beginner’s guide. It is important to note that we will be focusing on the basics of the US tax code regarding crypto asset income and international recommendations will be given later on.

How Bitcoin Is Taxed in the United States)

In 2014, the Internal Revenue Service ruled that Bitcoin is a capital asset and that it is considered property instead of currency for tax purposes. This small distinction means that any crypto asset income will be taxed as a capital gain much like stocks, bonds, or real estate assets.

All US taxpayers are required to report their crypto asset income using tax documents such as the IRS Form 8949. If a loss was realized, then you can write off up to $3,000 of that loss and decrease your tax liability.

Taxable events include: Crypto for Fiat Trade, Crypto for Crypto Trade, Crypto for Goods or Services Trade, Mining Income.

Cost Basis Explained

The cost basis of a crypto asset is simply the amount of money that is spent to acquire each coin. To calculate the cost basis you need to know the buying price, the amount paid in fees or commissions, and the number of coins purchased. Once you have collected this information, you can calculate the cost basis by using the following equation:

Cost Basis = (Buying Price + Fees/Commissions)/Number of Coins

The cost basis is also dependent on what accounting method is being used. For instance, the FIFO (First In First Out) accounting method sets the cost basis using the price of the earliest crypto asset you acquired while the LIFO (Last In First Out) accounting method sets the cost basis using the price of the last crypto asset you bought.

How Cryptocurrency Trades Are Taxed in the United States

When trading crypto assets to fiat currency, you are taxed on any capital gains that were earned. This profit number can be calculated by subtracting the amount of fiat currency you sold the crypto asset for by the amount of fiat currency you originally bought the crypto asset for.

Crypto to crypto trades are slightly more complicated since the cost basis is determined by the fair market value of the purchased crypto asset. Once the profit amount has been determined, taxes must be paid on any income that was made from crypto to crypto trades.

Short Term vs Long Term Capital Gains Tax

The capital gains tax rate that US citizens pay on their crypto asset income varies depending on the amount of time the crypto assets were held for. Crypto asset income from coins that are held for less than one year are considered short-term capital gains while crypto asset income from coins that are held for longer than one year are considered long-term capital gains.

Short-term capital gains are taxed just like regular income for the year and the tax rates vary from 10% to 37% according to your tax bracket. Long-term capital gains are taxed anywhere from 0% up to 20% and the rate that each taxpayer is charged is determined by their total income.

Cryptocurrency Tax Reporting Deadlines

Crypto asset income should be reported on your federal taxes each year. The filing date for federal taxes in the US each year is April 15th.

Choosing Your Cryptocurrency Tax Software

Everyone who profits from trading crypto assets must pay taxes on their earnings and there are many crypto tax software programs that will assist users in that process. Before choosing which crypto tax software to use, there are a number of various factors that should be considered which will enable you to pick the right option more efficiently.

Factors To Consider:

Budget

While some of the advanced membership plans for crypto tax software programs may be a bit expensive, many of the crypto tax software programs that we reviewed also offer affordable membership plans for novice crypto asset investors who do not have an extensive trade history.

The least expensive membership plans for each crypto tax program range in price from $40 to $65 per year. No matter which crypto tax program you sign-up for, you will need to purchase a membership plan if you want to produce a complete crypto tax form using your transaction history.

Users who already know how to complete their personal tax forms can use many of the crypto tax software programs for free to keep track of their crypto asset portfolio and calculate their capital gains or losses. Below we have listed the top three free crypto tax software options that are available, in our opinion.

Number Of Crypto Asset Trades & Transactions

One of the main differences between the various membership plans that crypto tax programs offer is the number of crypto asset transactions that are supported. Knowing the total number of crypto asset transactions that you have completed will make it a lot easier to analyze and compare what each crypto tax program has to offer you.

Casual or beginner crypto asset investors will usually find cost-effective membership plans under $100 a year that will enable them to account for a small number of crypto asset transactions on their tax reports. More experienced traders with thousands of transactions to account for will need to pay a little extra to receive the services they need. A few crypto tax

programs also offer an Unlimited membership plan which enables professional traders to produce tax forms for an unlimited number of crypto asset transactions.

Country Of Residence & Citizenship

Every country has different tax codes and reporting requirements for crypto asset income. It is important to research whether or not a crypto tax software program is compatible with the tax codes for where you live before you purchase a membership plan. Otherwise, you will end up creating a tax form that is not usable when filing taxes in your country which defeats the whole purpose of using a crypto tax software program.

Exchanges Used

Filing taxes for your crypto asset income requires all crypto asset transactions from every crypto exchange or wallet you used to be accounted for on your tax forms. Missing transaction information would result in calculating an incorrect amount of taxes owed on your crypto asset income which makes it very important to find a crypto tax program that supports all of the relevant exchanges and wallets.

Many crypto tax programs list all of the exchanges that they support on the front page of their website. If an exchange you used is not listed, some crypto tax programs also offer the option of uploading a custom CSV file to account for the transactions from that missing exchange.

Trading History (Transaction Types)

There are many different ways to acquire crypto assets but you still owe taxes on that income regardless of what type of transaction it was. Some of the transaction types that many crypto tax programs support include margin trading, DeFi, airdrops, staking, and mining. Finding a crypto tax software program that supports all of the various types of trades you completed will allow you to create a complete and accurate crypto tax form.

Crypto Portfolio Complexity

Users with a low level of crypto portfolio complexity will find whatever they need with most crypto tax programs by simply using the free version of the software or purchasing the least expensive membership plan. Those with a high level of crypto portfolio complexity should research whether a specific crypto tax program is compatible with their unique needs because the advanced features vary widely from program to program.

Those who have complex investments for both crypto and non-crypto income should find a crypto tax program that offers a full filing service. These services will connect users with a licensed tax professional who can assist with data imports, handle complicated situations, and file your taxes for crypto and non-crypto income.

Top Crypto Tax Software Programs By Country Or Region

Cryptocurrency Tax Software Pros

Saves Valuable Time

Keeping track of all crypto asset transactions manually can be a daunting task for high volume traders and is not recommended. It can be easy to forget to manually input data whenever a transaction occurs and the odds of making a mistake are quite high which could waste even more time when corrections are needed. Crypto tax software programs can track all of your investments automatically across multiple exchanges and wallets which is a big time-saver.

Taking the time to calculate your crypto asset capital gains and losses each year is also a very time-consuming activity. With the assistance of a crypto tax software program, the entire process can be done in under 15 minutes assuming you already have the transaction history files from your various exchanges and wallets on hand.

Tax Loss Harvesting Tools & Resources

Using a crypto tax software program that offers a tax loss harvesting tool is a great way to minimize the amount of taxes owed on your crypto asset income. These tools assist users in selling crypto assets that they hold at a loss in order to lower their taxable capital gains.

Tax loss harvesting is usually performed one time for each taxpayer at the end of each year. Many crypto tax software programs offer additional services from a licensed professional to assist in tax loss harvesting for difficult crypto asset accounting situations.

Tax Return Amendments

The IRS has just recently become very serious about making all US citizens who earn crypto asset income pay their taxes on those coins. This means that in the past few years many Americans did not file taxes for their crypto asset income correctly, if at all.

Numerous crypto tax software programs aim to correct these situations by offering a tax return amendment service The number of past years’ tax returns that can be amended ranges anywhere from three years to ten years depending on which software you are using.

Ease of Use

All of the crypto tax software programs provide users with detailed instructions during the process of uploading an exchange or wallet’s crypto asset transaction history file. The only challenging task for advanced or professional crypto asset investors will be to make sure all of the different transaction types from all of the various exchanges and wallets they used are included in the final tax form.

Users who are not computer proficient should consider joining a crypto tax software program that offers a data processing service, such as Bitcoin.Tax. This service will assist in uploading users' crypto transaction data, calculating capital gains and losses, and solving any issues that arise during the data collection process.

Exchanges & Wallets Supported

Many of the crypto tax software programs support importing transaction data from hundreds of different crypto exchanges and wallets. It is important to include the data from every exchange or wallet that you used so that your tax forms are accurate and will not need to be amended in the future.

If a crypto tax software program does not support a crypto exchange or wallet that you use, there will sometimes be the option to import your own custom-made CSV transaction history file. It is common for crypto tax software programs to support transaction history file uploads from exchanges and wallets using both CSV files and API keys.

Decentralized Finance (DEFI) Transactions Supported

DeFi transactions are supported by all of the crypto tax software programs we reviewed. Some of the DeFi protocols that these crypto tax software programs support include UniSwap V1, UniSwap V2, Compound, Curve Finance, and Aave. This integration allows users to automatically import their DeFi transaction information into their crypto tax program account once they have connected their ETH address.

Personalized Accounting Services

Crypto asset investors who have a high trade volume may find themselves in need of assistance from a crypto tax professional due to the complicated nature of crypto tax laws. Those who need CPA assistance with filing taxes for both their crypto and non-crypto income should use one of the many crypto tax software programs that offer a full filing service.

Customer Service

Many crypto tax software programs employ a customer service department that can be contacted by either email, telephone, social media, or live chat. You should contact this department whenever you have a specific account issue or any advanced questions that cannot be answered by their user forum or FAQ page.

To contact the customer service department of any crypto tax software as quickly as possible, we recommend using the live chat feature if they have one. Most live chat features can be accessed by clicking on the chat bubble in the lower right-hand corner of the crypto tax software’s webpage. The average response time when using the live chat feature is usually around 1 hour while email response times are usually between 24-48 hours.

TurboTax Integrations

Users who file their taxes online each year using TurboTax will be able to upload any crypto tax forms that are created using most crypto tax software programs to their TurboTax account. This integration makes it very easy for users who do not want to pay for the assistance of a tax professional to file their taxes for both crypto and non-crypto income.

Cryptocurrency Tax Software Cons

Expensive/Pricing

The only major downside to crypto tax software programs is that all users are required to purchase a membership plan if they want to create an accurate downloadable tax form using their crypto asset transaction history. Users who do not purchase a membership plan will still have access to many of the other features that the crypto tax software has to offer.

While some of the membership plans may seem a bit expensive, it is important to keep in mind that these crypto tax software programs save users from many hours of manual and tedious labor. As the IRS is becoming increasingly more strict on enforcing the tax codes regarding crypto asset income, the importance of finding a high-quality crypto tax software to use also increases.

Summary: Best Cryptocurrency Tax Software Programs In 2021

Platform	Overall Rating	Best For	Pricing Plans	Learn More
TokenTax	9	Professional DeFi Traders	$65 - $1,999 Annually	Get Started
LukkaTax	9	Accountants and Organizations	$39.95 Annually	Get Started
CoinTracking	8	Casual and Intermediate Crypto Asset Investors	$0 - $49.99 Monthly	Get Started
CoinTracker	8	DeFi Heavy Traders	$0-$199 Annually	Get Started
CryptoTrader.Tax	9	Casual and Intermediate Crypto Asset Investors.	$49-$299 Annually	Get Started