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How to Make the Most of Crypto Tax Services

WikiBit 2022-04-15 03:10

Abstract:With so much talk of prices rising to the moon, it might feel like crypto is a world apart, especially if you've been fortunate enough to watch your stack appreciate in value.

  •   Software as a Service (SaaS) for Taxes

  •   Importing data in various methods

  •   Getting a good start on your cryptocurrency taxes

  •   How much do cryptocurrency tax services cost?

  With so much talk of prices rising to the moon, it might feel like crypto is a world apart, especially if you've been fortunate enough to watch your stack appreciate in value. The realization that you may have to split your riches with the taxman, on the other hand, can bring you crashing back down to earth. A increasing number of internet businesses are assisting hodlers with their tax duties, but how do crypto tax services work?

  Please keep in mind that this is not tax advice. For clarification on how crypto taxation rules may apply to you, consult a trained tax accountant/professional or contact your local tax authorities.

  If you're getting a shiver down your spine as you read this post since you had no concept that crypto profits could be taxed, read the prior article in our knowledge base area, which is a primer on crypto taxation.

  Each jurisdiction will view cryptocurrency differently from a tax standpoint, and regulations are still evolving because it is such a new asset.

  It's possible that you live in a nation with a progressive approach to crypto taxation, such as Portugal or Singapore, or that your crypto activities aren't high enough to require reporting.

  What matters is that you familiarize yourself with the relevant legislation in your area and grasp the distinction between personal taxation and what can be considered professional or company activity.

  First and foremost, some critical clarifications. This is not tax advice; you should seek it from qualified professionals and your local tax office.

  After you've summoned the confidence to grasp your crypto tax obligations, you might be faced with a new fear: how the heck can you make sense of exchange transactions, wallet activity, airdrops, and staking income in order to fill out the tax form?

  It doesn't take much to rack up a few hundred exchange transactions, and if you're utilizing DEFI and/or CEFI, things get even more complicated.

  The effort of sorting through rows of transactions is so overwhelming for many crypto enthusiasts that they simply bury their head in the sand. Fortunately, assistance is available.

  There is an opportunity where there is a need, and a rising number of online crypto tax firms have emerged to provide solutions. This is how they function.

  Software-as-a-Service (SaaS) tax services

  You may have heard the word SaaS before and dismissed it as marketing speak. It stands for Software As A Service and refers to the delivery of services solely through software over the internet, such as crypto tax reporting. This is how a lot of important services in our life are now offered.

  Tax accounting used to entail bringing a ring binder or shoe box full of documentation to an accountant's office, where it would be painstakingly combed through by your accountant with a critical scowl.

  Many (but not all) of the heavy job is done for you by SaaS crypto tax services. You begin by filling out a simple online registration form that only asks for your username, password, and country. Because the accounting reports generated will be adapted to the specific requirements in that country, it is critical that you be honest about where you live.

  Once you've registered, you'll need to provide the service digital access to all of your crypto transactions, not just for the current tax year, but for as far back as possible.

  Because of the advantages of API access, if you have a very light crypto footprint - confined to one exchange, for example - this procedure can literally take minutes, which is how many crypto tax firms pitch their service. If your business includes self-custody, CEFI, DEFI, NFTs, and other services, be aware that, despite the marketing hype, it will take much longer.

  One of the most pressing questions you'll want answered right away is if crypto tax services share information with tax authorities. No, they merely provide a service to assist you in calculating your crypto tax liability. It is entirely up to you what you do with that information.

  Access to Exchange APIs

  When you open an account with a cryptocurrency exchange, you'll often have access to it via desktop, mobile, and app. What the common user isn't aware of is that you also have access to APIs.

  An API is a data feed that allows a third-party service to access your account. For example, you may use a bot to actively handle your trading while benefiting from the speed and logic stated in code.

  This API access allows crypto tax providers to automatically pull your historical trading data into their accounting system. The procedure is simple to follow.

  Click/tap a button in your exchange account's settings to establish a new API key, designate it for the crypto tax service, and take note of the API secret it creates.

  The Exchange is then added to the crypto tax service by selecting it from a dropdown list, giving it a name, and entering both the API key and secret. Your trading action will then be digested.

  Tax services, unlike trading bots, just require Read access. Because granting an external service the ability to deposit, trade, or withdraw is plainly exceedingly hazardous, most exchange API options are set to Read Only by default.

  You'll have to go through the process again for each exchange where you have an account and have made a purchase.

  In a couple of minutes, the service will calculate your tax liabilities based on the data in the API feed.

  We stressed 'inside the API stream' since there are exceptions, as with most things in life. Certain forms of transactions, including as deposits, withdrawals, and derivatives, are not permitted on some exchanges. So, when you choose the exchange in issue from the crypto tax service's list, read the specifics carefully for any potential exceptions. We'll go through how to deal with them further down.

  Transactions in the Wallet

  The API approach makes processing your exchange transaction data reasonably easy, but it isn't available for wallets, and because cryptocurrencies work in different ways, there's no way to absorb all wallet transactions at once.

  You'll need to approach wallets on a case-by-case basis, and your options will likely fall into one of the following categories, depending on the crypto tax service you choose:

  •   xpub addresses and HD wallets

  •   Adding public addresses to the system

  •   CSVs: Exporting, Importing, and Generating

  •   Inputting Transactions by Hand

  xpub Addresses & HD Wallets

  The process is rather simple for HD wallets and coins that employ Bitcoin's UTXO approach to transactions because they are designed to nest all addresses you've ever used into something called your xpub address. Bitcoin, Bitcoin Cash, Dash, Dogecoin, Litecoin, and Zcash are all examples of this.

  An xpub address is a long public address that can be used to generate all child addresses.

  Because the crypto tax service may see all of the connected addresses and transactions by revealing just one address, this isn't information you'd give out on a frequent basis for privacy concerns.

  If you've had Bitcoin since before the Segwit upgrade, you'll need to import the Legacy xpub file, else your previous transactions will be lost.

  Importing Addresses from the Internet

  Though Bitcoin is the most popular cryptocurrency, there are many more transactions that need you to publish your public address on other blockchains.

  It's as simple as submitting your Ethereum address to Ethereum-based wallets like Meta Mask, and the software takes care of the rest for all supported ERC20 tokens.

  In fact, for most wallets, all you have to do is add the addresses for each coin you want to use.

  Using a decent naming convention is a crucial recommendation. The number of imported wallets might soon reach double digits, and identifying them without a clear name is impossible.

  The same is true for the main Ethereum-based DEFI services like Compound or Uniswap; you provide your Ethereum address and the software takes care of the rest. However, given the explosion in DEFI, NFTs, CEFI, and beyond, there's a good chance that a service you've used isn't supported, which means you'll have to do it yourself.

  Manual transaction entry and CSV import

  So far, everything we've heard regarding crypto tax services has been positive.

  They can help you with a lot of the heavy lifting, which will be a tremendous help, but they can't help you with everything. There's no way to quantify it, but a reasonable estimate is that crypto tax services can process 70% of the average crypto user's transactions automatically, leaving 30% in the dark.

  Providing public addresses won't work if you're using a service that does more than just send/receive but also adds value. You may be able to download transactions as a CSV and import them into the software, which is fine as long as the formatting matches that of the crypto tax provider you've chosen.

  If it doesn't, you'll have to get your hands dirty and try to change the data so that it can be displayed in the proper format. Anyone who has attempted handling complex date/time formats knows how irritating and time-consuming it can be.

  Some wallet or DEFI services don't even provide downloaded transactions, so you'll have to rely on block explorer services to provide a JSON output, which you can then convert to CSV and format as needed.

  If none of the aforementioned options work, your only other option is to manually enter the transactions, which is not only time-consuming but also necessitates a thorough understanding of the differences between a trade, transfer, send, and receive transaction, as well as any appropriate tags.

  Making a mistake here can have a significant impact on the final result, so make full use of any instructions, knowledge base resources, or community forums available. Expect a lack of prompt customer service. All of the popular suppliers are flooded as a result of the 2021 bull run and increased scrutiny of tax officials.

  Getting a good start on your cryptocurrency taxes

  You might think that burying your head in the sand is the best option at this point, but you risk the taxman catching up with you, which might be far worse.

  What matters is that you get ahead of the problem. The longer you wait, the more difficult it will be to recall all of the wallets you've established, phones you've misplaced, and transactions you've made.

  You must understand that taxation is not a discrete process, with each year consisting of a separate block unrelated to the previous. If you've been involved in cryptocurrency for a while, what you did a few years ago may have an impact on your current taxation.

  Because transfers aren't taxed, only disposals are, leaving out one address, wallet, or exchange can have a significant impact on your potential liabilities. Getting a complete picture is essential. Realizing that losses can potentially count against your tax liability can help improve your spirits, and if you're clever enough, you can use tax harvesting tactics to realize trading losses to reduce any prospective penalty.

  Even when you believe you've nailed it and have accounted for all of your crypto transactions and synced your crypto tax account, you'll almost certainly be confronted with the horrors of 'Need Review' transactions.

  This necessitates a lengthy Sherlock Holmes-style investigation into your transactions to see how you've enraged the crypto tax gods.

  The truth is that no crypto tax service, no matter how good they claim to be, will ever be 100 percent failsafe, nor will they give a concierge service unless you pay top bucks, because crypto tax services aren't cheap.

  How much does it cost?

  The majority of crypto tax services on the market include a free portfolio tracker as well as tax accounting.

  That is useful, but not unique, as there are a plethora of free Portfolio Tracking Apps available.

  When transactions fall below a certain level (e.g., $50), some providers will provide free tax reporting in the hopes of converting you into a paying user in the future.

  Others will compute your taxes but only provide you a glimmer of your liabilities; obtaining the entire report will necessitate a membership, which is paid for each tax year for which data is required.

  The reality is that the vast majority of crypto users will conduct more than 50 transactions in a calendar year, necessitating the payment of a subscription to receive crypto tax reporting.

  This usually starts at roughly $/€50 and gradually increases as transaction thresholds rise.

  You'll have full access to the applicable tax reports for that year once you've paid for a subscription. This usually refers to summary reports, as well as transaction information and calculating logic.

  If you're filing your own taxes, you'll need to use this information, which should be prepared to reflect your tax authority's requirements based on the country of residency you specified at registration.

  We won't endorse any one service; instead, we'll encourage you to conduct your own research and read consumer evaluations. The majority of services operate in a similar manner, with the exception of user experience and the length of time they have been in operation.

  Crypto.com, a multi-product marketplace, is a great place to start.

  have lately launched a completely free tax service, ostensibly to attract new consumers. It's too early to tell how their free service compares to paid services or what they do with your information. It is currently only available in the United Kingdom, the United States, Canada, and Australia.

  Pay attention to security because, while these services don't have access to your assets, hackers may try to identify users and the value of their portfolios through them.

  If your experience is positive, you can offset some of the cost by recommending friends to receive a referral fee, but the cost of having an accurate and painless assessment of your crypto tax responsibilities is peace of mind, which is priceless.

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