Most people don't associate taxes with cutting-edge technology, but tax preparation is becoming increasingly high-tech. Given the complex and constantly evolving nature of crypto taxation, crypto tax software is becoming a must-have to match transactions, compute capital gains or losses, and ensure accurate tax preparation.
Since most crypto traders and investors use exchanges, exchanges must make it easy to access tax-related data. In particular, they should make it easy for customers to export tax data and provide ways for third-party tax solutions to access data on their behalf. Otherwise, they risk a poor customer experience and losing customers to another exchange.
Let's take a look at seven best practices that crypto exchanges should employ to ensure customers can access tax data.
The complex and constantly evolving nature of crypto taxation makes it imperative for exchanges to provide customers with easy access to tax data.
A Brief Crypto Tax Primer
The tax guidance around cryptocurrencies continues to evolve, but there are some widely accepted rules. According to Notice 2014-21, the IRS treats cryptocurrencies as property rather than currency, meaning they're subject to general tax principles that apply to property transactions. In particular, investors must pay tax on any income and/or realized gains.
Crypto exchanges may send various tax forms to their users:
- Form 1099-K - An informational form to report credit card transactions and third-party network payments.
- Form 1099-B - An informational form that itemizes and reports all exchange transactions and their gains or losses.
- Form 1099-MISC - An informational form that reports interest, referral, and staking income.
Taxpayers must disclose any cryptocurrency holdings on Form 1040 and detail them in Form 1040 Schedule D and Form 8949. In addition, taxpayers that generate income from crypto rewards, staking, or other activities must report that income on Form 1040. Exchanges can simplify the process by providing 1099s or easy access to transaction data.
#1. Offer CSV & API Exports
Customers have many different requirements, so crypto exchanges should offer both CSV and API options to access data.
Comma-separated values, or CSV, is one of the most popular data formats in the world. In essence, the format makes it easy to transform a text file into a spreadsheet or import data into a database. CSV is a universally-accepted format, making it compatible with nearly any tool that customers may use to parse their transaction data.
Application programming interfaces, or APIs, make it even easier to integrate with third-party software. Rather than requiring users to upload new CSV files periodically, APIs provide an always-up-to-date single source of truth for transaction data. Third-party applications can authenticate and request data in a standardized format.
#2. Offer a Direct API Endpoint
Customers preparing taxes need direct API endpoints that provide the capital gain or loss data they need.
Unfortunately, many crypto exchange APIs only provide access to raw transaction data. As a result, customers must manually match up buy and sell transactions to compute the capital gain or loss. Of course, these processes are highly error-prone and can lead to inaccurate tax calculations—and eventually over or underpayment of taxes.
#3. Include All Possible Transactions
Customers should have access to every transaction to compute their tax liabilities accurately.
Crypto exchanges should provide all buy/sell types, trades, margin-related transactions, rewards, airdrops, and other transactions. After all, each of these transactions has potential tax implications. It's equally critical to show transactions even if the crypto exchange no longer supports the underlying cryptocurrencies.
#4. Remove Limits on Data Exports
Customers should have access to their entire transaction history without rate limits or timeframe limits.
Crypto exchanges should default to providing unlimited access to CSV and APIs. While rate-limiting helps prevent abusive behavior, it's often unnecessary for authenticated requests. At the same time, concerns about large data sets can be alleviated by paginating data or using compression algorithms to limit payload size.
#5. Ensure APIs and CSV Consistency
Customers should have access to consistent data whether they choose to use CSV or API formats.
Crypto exchanges should ensure that all data they provide use the same labels, categories, and formats when possible to avoid confusion. For instance, the column names in a CSV file should match the object properties in a JSON API response. That way, customers can use either data format interchangeably when needed.
#6. Stick to Standard Symbols
Customers should be able to correlate transactional data with cryptocurrency prices easily.
Crypto exchanges should use standard cryptocurrency symbols in their transaction data, such as those appearing on CoinMarketCap. That way, customers can use other data providers to access pricing data and compute their holdings' fair market value (FMV). The more standardized the data, the better for the customer.
#7. Provide Clear Documentation
Customers should understand what every column in a CSV or property in an API means and how they can use it.
Crypto exchanges should provide public documentation for their CSV files and APIs to help customers find what they need. In particular, API documentation is essential to understand how to properly authenticate and access the data, various queries that customers can use to filter data, and what the response looks like from each request.
Working with Tax Providers
Many tax prep software providers enable customers to import cryptocurrency transactions via CSV files. For example, TurboTax lets you upload a CSV file of crypto transactions and then define the columns to match the data with TurboTax’s records. These capabilities are much better than manually inputting each transaction.
With a growing number of crypto tax solutions, like ZenLedger, crypto exchanges can also promote their tax API to simplify integrations. ZenLedger, for example, uses crypto exchange APIs to access customer tax data, match transactions across wallets and exchanges, and simplify the entire tax reporting process from start to finish.
The Bottom Line
Crypto taxes are a complex and evolving problem for traders and investors. Fortunately, crypto tax software is making it easier for them to aggregate transaction data, compute capital gains or losses, and even populate IRS tax forms. However, many exchanges still lack the proper data export tools and APIs to facilitate these automations.
By following the best practices covered above, crypto exchanges can ensure that they're providing the highest level of service to their customers while making it easy to automate the tax prep process.
If you trade cryptocurrencies, ZenLedger can help you automatically aggregate transactions, compute capital gains and losses, and accurately prepare your taxes. Sign up for free today!