Anyone that does their own taxes knows how seemingly simple instructions can turn into a complicated nightmare. If you're trading cryptocurrencies, there's an added layer of complexity and audit risk that makes your tax returns even more difficult. Fortunately, there’s crypto tax software to help you ensure a mistake-free return.
Let's take a look at how to know when you need crypto tax software, how it can help you prepare your return, and some popular software solutions to consider.
Why Use Crypto Tax Software?
The IRS classifies cryptocurrencies as "property" rather than a "currency", which means that they're subject to the same rules as stocks and other traditional investments. Most importantly, you realize a capital gain or loss with each sale (including crypto-to-crypto transactions with no cash gains) that must be reported to the IRS.
If you make a lot of transactions in a given year, it can be challenging to calculate a capital gain or loss each time, especially if they take place across different exchanges and wallets. Crypto tax software simplifies the process by automatically importing historical transactions, matching them up with each other, and calculating your capital gains and losses.
Crypto tax software is a necessity for high-volume traders and sophisticated investors, but it can also be helpful for smaller scale crypto enthusiasts. While Coinbase and other platforms provide some data, they cannot see all of your transactions across exchanges and wallets. You may also need to account for ICOs, mining or other crypto transactions.
The Risk of an IRS Audit
The IRS has made it clear that it plans to crack down on crypto traders and investors that aren't reporting transactions. Last year, the agency sent out several batches of warning letters notifying some individuals that they failed to report income and others that they should be sure to report their 2019 transactions to avoid any penalties.
If the IRS decides to audit your tax return, you may need to prove that you've paid taxes on all of your crypto transactions. This involves furnishing a complete record of transactions and showing how you arrived at your end of year capital gain or loss. By keeping an audit trail, you can ensure that you have this evidence on-hand if you need it.
Crypto tax software can help you automatically build an audit trail to support your tax decisions in the event of an audit. For example, ZenLedger provides clear and defensible audit reports that show exactly how they calculated your taxes to support you during an IRS audit, so you don’t have to worry about your methodologies or arithmetic.
How to Choose the Best Crypto Tax Software
There are many different factors to consider when choosing the right crypto tax software. While most solutions provide the same basic functionality that calculates your capital gains or losses, they have varying levels of support for different cryptocurrencies—and you should never underestimate the importance of good customer service!
Some important questions to ask yourself include:
- Does the software support all of the exchanges and blockchains that you need?
- How easy is it to import your data from these sources?
- Does the software provide all tax forms that you need?
- Does the software provide you with a full audit report?
- Do you have access to quality customer service?
Suppose that you have a total of 300 transactions across three exchanges, own a few different wallets, and have a total of $24,000 worth of cryptocurrency—a fairly typical sophisticated investor or crypto trader.
Here's a price and feature breakdown for some of the most popular services with data as of April 2020:
The table shows how important it is to factor in both the features and the pricing tier that you’d require in order to access those features. Many software solutions include a free tier for basic tax returns, but quickly scale up to expensive tiers for complex scenarios. The right decision depends on your specific requirements.
Popular Crypto Tax Software
There are many different crypto tax software solutions, so it's important to do your due diligence and select the best option for your requirements.
ZenLedger provides one of the industry's most comprehensive crypto tax software solutions for professionals, as well as a free tier for individuals. In addition to calculating capital gains and losses, you can pre-fill popular IRS forms, like Form 1040 Schedule D and Form 8949, and easily access an audit trail in the event of any IRS issues.
You can even use the tax loss harvesting solution to identify opportunities to realize losses to offset your capital gains taxes and a portion of income. Unlike equities, you aren't subject to wash sales rules, which makes it a no-brainer for everyone to use to lower their tax burden.
If you have fewer than 25 transactions, you can use ZenLedger’s new Free Plan with all of the great features of the paid plans. You can even use the platform’s integration with TurboTax to simplify your crypto tax filings without spending a dime!
The Bottom Line
Crypto tax software is essential for active traders and investors that want to minimize their taxes while meeting all of the IRS' requirements. With many different options out there, it's important to do your due diligence to select the right option that meets your requirements. Keep in mind that different features may involve different pricing tiers.
ZenLedger is well-known for its professional tier serving investors and active traders, but with a new free tier targeting individuals, anyone can use the platform to ensure that they’re accurately filing their taxes and avoiding any issues with the IRS.