Last year, I used several crypto exchanges, a few crypto interest accounts, multiple DeFi
platforms and mined cryptocurrency, so as you can imagine, I’ve been absolutely dreading
the thought of tax season.
Luckily, I found a solution that automates all of my cryptocurrency taxes and offers
every document I could ever need to file my taxes properly.
I’ll start by walking you through a completely free solution called TaxBit, which should
be enough for most casual investors.
Unfortunately, I needed something a little more advanced, and found Koinly to be the
best crypto tax solution for that.
Finally, I’ll break down some basic crypto tax rules because I think there are a lot
of misconceptions out there.
This way, you’ll have a much better idea of what to expect when you file your return.
Let’s dive in.
TaxBit (FREE Crypto Taxes) Searching for crypto tax software sucks because
they usually require a costly annual fee, which is why I was really excited to come
across TaxBit.
This video isn’t sponsored by any of these programs, but as a completely free tool, I
think TaxBit deserves some attention.
When you sign up for TaxBit, you can connect your exchange accounts to the TaxBit platform.
They support these so-called “network companies” that integrate seamlessly, but you can also
connect with a variety of other exchanges and wallets.
The main reason I was not able to use this platform for my taxes is because it didn’t
support all of my crypto exchanges and wallets, but for most casual crypto investors, this
should be plenty.
For some of these network exchanges, it’s as simple as logging in through the TaxBit
portal and giving it permission to view your transaction history.
For others, you’ll need to add the API key generated by logging into the appropriate
exchange and copying it over.
For each exchange, TaxBit has a how-to guide on generating and importing this key.
Once you’ve added all your wallets and exchanges, you can head over to the dashboard to see
a summary of your balances and transactions.
You can view the coins tab to ensure all of your balances are correct, and then the taxes
tab will show all of your gains, losses and income for the year based on your connected
accounts.
I have a flag here because I couldn’t connect all my accounts, but assuming your imports
go smoothly, you’ll be able to download the necessary tax form right here to submit
everything to the IRS.
Again, this is completely free, but only if you’re using the network exchanges.
If you have any external transactions or accounts, you’ll need to upgrade to one of the paid
plans, and that’s where TaxBit falls short, because it still doesn’t support all of
the platforms out there.
But, hopefully there are some of you out there with simpler crypto activities who can make
do with the free plan.
Koinly (Best Crypto Tax Software) I am not one of those people, so I needed
something a little more advanced, and ended up at Koinly.
I tested platforms like CryptoTrader.tax and ZenLedger.io, but both of them forced me to
upgrade to a paid plan either before importing some of my transactions or previewing my tax
report.
I got to do everything but download my final report on Koinly before paying, and it also
has some other advantages that I’ll explain as we go.
Just like on TaxBit, after signing up, you’ll add your exchanges and wallets to your profile.
Some you’ll be able to log into straight from the website, others you’ll need to
sync an API key by logging into those accounts separately.
A few exchanges may require that you manually download your transaction history and upload
them to Koinly.
But, as you can see, Koinly supports a massive amount of platforms, which was exactly what
I needed.
Furthermore, Koinly allows you to add multiple accounts from the same exchange, which I needed
to do for my second Celsius account where I made some test transactions.
As I mentioned, between cryptocurrency mining, DeFI activities and referral bonuses from
apps like Celsius, I have a lot of unexplained transactions coming into my accounts.
This was further complicated by a few loans I took out at Celsius, which many other platforms
tried to identify as income, when it’s actually a non-taxable event.
So what really won me over with Koinly is the fact that I can go through all my transactions
and label them for certain categories.
I was able to filter all my mining income and label it as such.
I was able to identify the stablecoin deposits from loans as a non-taxable deposit, instead
of income.
This also made it possible to document any DeFi activities, as I could identify funds
that I sent to a liquidity pool or profit that I received from liquidity mining, again
ensuring the proper tax treatment.
Of course, it helps if you have a little bit of knowledge about the tax treatment of each
type of activity, which we’ll cover here in a minute.
Another thing I love about Koinly is that after adding all of your activities, you can
view a really clean breakdown on the dashboard tab.
It’ll show you your portfolio value over time, all of your holdings, you allocation
and what wallets you hold them in.
You’ll also get a quick look at gains and income for the set period.
It still isn’t quite perfect for crypto loans, because it shows a 90% loss on my Bitcoin,
which I really just have locked up as loan collateral.
But, since it’s set as unrealized losses, it’s not throwing off any tax figures and
will balance back out when I pay back the loans.
But this dashboard makes it really easy to track my entire crypto portfolio at a glance
instead of bouncing between apps and exchanges to add everything up.
Plus, I can track my activity throughout the year so I know exactly what I’ll owe in
taxes at any given time.
On Koinly, you can actually view your full tax report figures before purchasing and downloading
your documents, which again, was really hard to find anywhere else.
The ability to do so gave me confidence that the software was correctly calculating all
of my transactions.
If everything checks out, you can scroll down and download your reports.
You can choose between the standard IRS forms, TurboTax friendly documents, and many others,
which should be more than enough to properly file and track your cryptocurrency taxes.
The cost to access your final tax forms will vary depending on the number of transactions,
but it’s comparable to other platforms - likely cheaper if you don’t have a ton of transactions.
At the time of writing, they’re also offering a $20 discount off of each price tier, which
is awesome - and you can even pay in crypto.
There is no promo code required for this, just use the link below and you should receive
that discount after signing up.
Crypto Taxes Explained As mentioned, it’ll help to understand how
your crypto activities will be taxed so you can organize your transactions properly.
There are four broader tax treatments that every crypto activity falls under.
These are first capital gains or losses, which are further divided into short term and long
term categories.
There is also income, expenses and a non-taxable category.
I’ll break down each of these in detail, but now’s a good time to say that I am not
a tax professional and you should definitely consult with one if you need tax advice.
First up is capital gains and losses.
You realize capital gains and losses, and therefore create a taxable event, anytime
you sell cryptocurrency, buy something with cryptocurrency or trade from one cryptocurrency
asset into another.
To clarify, if you purchase Bitcoin with dollars, you will not owe taxes, but if you sell that
Bitcoin later, spend it on a product or service, or trade it into something like Ethereum,
it will become a taxable event.
Calculating the tax obligation is quite simple: it’s the difference between what you bought
it at, known as the cost basis, and what you sold or traded it at.
So if you purchased $10,000 of Bitcoin, and later sold it for $11,000, you would have
$1,000 in capital gains.
The tax rate you’ll owe on these capital gains will depend on how long you held the
asset.
If you held it for less than a year, they’re considered short term capital gains.
In this scenario, the gains you realized will be taxed at your income tax rate.
This could be as low as 10% or as high as 37% for high income individuals.
If you held the asset for longer than a year, it’s considered a long-term capital gain.
This comes with a lower tax rate, but it’s still dependent on your income level.
It could be as low as 0% or as high as 20%.
Obviously, these rates are much lower, which is why it pays to be a long-term investor
who buys and holds their assets, instead of someone who does short-term trading.
There are also a few strategies you can use to lower these taxes even further.
The first is changing your cost basis method.
If you dollar cost average into your investments, as I imagine most do, you’ll have a different
cost basis each time you purchase.
As long as your transactions are well documented, as they will be through Koinly, you can tell
it which cost basis method to use to calculate your taxes.
The default is first in, first out, which means it’ll calculate any selling transactions
using the oldest purchases available.
Unfortunately, this could come with the highest capital gains, especially if it’s an asset
you bought really cheap a long time ago.
I personally used Highest in, first out, which calculates capital gains from my highest purchase
price to produce the lowest capital gains possible.
Other options include Last in, first out, or just an average cost basis, which you can
click through on Koinly to see which gives you the lowest capital gains obligation.
The next is to offset your gains with losses.
Gains and losses cancel each other out, leaving you with a lower tax obligation.
So if you sold something for a $1,000 profit, but sold something else at a loss for a $1,000
loss, you come out with 0 taxes owed.
You can do this to offset both short term and long term capital gains, and can even
carry forward losses into future tax years if you realize more than $3,000 of net losses.
If you want to learn more about this, you can check out the video I did previously on
selling stocks at a loss, most of which still applies to crypto.
Moving on, we’ve got crypto events taxed as income.
There are no cost basis calculations for these events, the full amount will be taxed at your
income tax rate, so again between 10 and 37%.
This category includes a lot, such as coins received from airdrops, forks, mining, staking,
liquidity pools and similar sources.
It also includes any interest you earn on cryptocurrency from apps like Celsius or BlockFi,
as well as any referral bonuses.
Also, this shouldn’t be much of a surprise, but if you get paid in crypto for selling
a product or doing work online or anything, it will also be taxed as income.
The tax you owe here will be determined by the dollar value of any transaction at the
time you receive it, which will then also be considered your cost basis if you sell
or trade those funds in the future.
Next we’ve got the expense category, which won’t be taxed, and may actually be tax
deductible, meaning you can deduct it from your gains or income.
However, it should be noted that not all crypto expenses are clearly outlined by the IRS,
so you should consult a tax advisor if you want to make full use of this.
In any case, expenses can include things like trading fees, interest on margin or crypto-backed
loans, and even transfer fees such as ethereum gas fees.
Crypto mining can even have some expense deductions when operated as a business.
Finally, we’ve got the coveted non-taxable category.
My favorite here is proceeds from crypto-backed loans.
This is a really great tax strategy where you can take out a cash or stablecoin loan
by locking up your crypto as collateral.
With it, you can take some profits out of your portfolio without owing taxes on the
gains, which would happen if you sold it.
I have a full video on this topic if you want to learn more about that.
Beyond this, the category also includes any gifts, donations or cryptocurrency that you
may have lost.
Some of these can also be tax deductible, so again, if you want to take advantage of
that be sure to consult someone who can tell you how to go about it properly.
But that wraps up my crash course on crypto taxes and how to handle them with confidence.
I’m personally really excited to go into 2022 monitoring my activity on Koinly so I
know exactly how my profits and taxes stand throughout the year, and hopefully it’ll
help you guys too.
Again, be sure to check below for that link, and I’ll also leave a link to Celsius Network
if you want to start earning passive income on your crypto and get $50 in free Bitcoin.
If you want to legally avoid some taxes with crypto, watch my video on crypto backed loans
for everything you need to know.
I’ll see you next time.