While a blockchain explorer can provide a list of transactions for any wallet, most crypto traders and investors hold crypto in multiple places and transact in more exotic ecosystems, like decentralized finance (DeFi).
Let's take a look at how to track your crypto transactions across platforms and keep accurate records for tax and performance reasons.
Don't rely on your crypto exchange's Form 1099-B – here's how to keep accurate records and ensure that you're paying the right amount of tax.
Why Recordkeeping Matters
Most crypto enthusiasts have more than a Coinbase account with some Bitcoin. For example, you might keep some crypto in a secure offline wallet, like Ledger, trade on an exchange, like Binance, and have some tokens staked on a decentralized exchange (DEX), like Uniswap. And that doesn't even include non-fungible tokens (NFTs) or play-to-earn games!
Unfortunately, you may need to reconcile transactions across these different platforms. That's because the IRS treats cryptocurrencies as property, meaning you must calculate capital gains and losses. To do that, you need to know the cost basis for a token you sell. And that means you need to look at when, not where you bought a cryptocurrency.
For example, suppose that you bought Bitcoin in January using Coinbase. Then, you bought more Bitcoin in February using Binance. If you sold Bitcoin on Binance and used FIFO accounting, you'd be selling the "first-in" coin you purchased on Coinbase. So, the cost basis would be the acquisition price of the Coinbase coin, not the Binance one.
Don't Rely on a Form 1099-B
Many stock investors rely on their brokers to deal with these complexities. Even if you transfer stock, the sending broker will report the stock's cost basis to the recipient broker. As a result, a stockbroker's Form 1099-B is a reliable way to determine your capital gain or loss. Most people can simply hand the form over to their accountant at tax time.
Unfortunately, the decentralized nature of cryptocurrencies makes transactions much harder to track for crypto exchanges. New regulations require crypto exchanges to issue the same Form 1099-B as a stockbroker, but following the cost basis across cold wallets, smart contracts, and other parts of the cryptocurrency ecosystem is impossible.
Nevertheless, the IRS receives a copy of the Form 1099-B that may include an unknown or inaccurate cost basis. And in turn, they might assume that the cost basis was zero or lower than it should be if they cannot match transactions. Therefore, it's essential to keep accurate records to defend yourself in the event of an audit.
An Increasingly Aggressive Agency
Recordkeeping is becoming even more critical as the IRS ramps up its cryptocurrency enforcement activity. After sending warning letters to taxpayers since 2017, the agency's John Doe summonses to Kraken, Circle, and other cryptocurrency exchanges reflect its growing focus on collecting crypto taxes that it believes taxpayers owe.
Operation Hidden Treasure is a March 2021 initiative the agency uses to find taxpayers that aren't reporting crypto transactions and audit them. Among other things, the initiative partners the IRS Office of Fraud Enforcement with its Criminal Investigations office to investigate civil and criminal tax evasion.
New exchange requirements to submit Form 1099-Bs for clients further expand IRS powers to investigate taxpayers. Meanwhile, the agency has sought out blockchain experts to help trace transactions and identify potential liabilities. As a result, keeping accurate records to defend against an audit has never been more critical.
Aggregating Transactions Across Accounts
Aggregating transactions across wallets, exchanges, and other accounts is arduous. But, if you leave it up to your accountant, you could be on the hook for hundreds of thousands of dollars worth of billable hours. As a result, many crypto traders and investors maintain their own records using spreadsheets and tools like ZenLedger to reconcile transactions.
For example, many crypto exchanges provide an easy way to export transactions into a spreadsheet. Then, you can copy and paste transactions from multiple exchanges into a single spreadsheet and sort them by date and cryptocurrency. That way, your accountant can accurately determine the cost basis for each transaction.
And as with any critical documents, you should keep backups of these files in the cloud or a safe location. For example, you might keep a backup of records for each tax year on Dropbox or Box. These backups are especially critical because the IRS may conduct any audit up to three years following a tax return – and you may need documentation to fight it.
How ZenLedger Automates the Process
ZenLedger automatically aggregates transactions across wallets, exchanges, and other platforms, computes your capital gain or loss, and populates the IRS forms you need to file yearly taxes. All you have to do is import your exchanges and wallets via a read-only API, CSV, or public receiving address, and you'll have everything you need.
Unlike many simpler competitors, ZenLedger integrates with over 400 exchanges, 100 DeFi protocols, and more than ten NFT platforms, including Coinbase, Binance, Ledger, Uniswap, Dharma, Compound, and many others. If the platform doesn't have the necessary integration, contact our support team, and we'll help you upload your files.
In addition to tax tools, ZenLedger's Grand Unified Accounting provides a transparent look into the methodologies behind the system. That way, you can give specific information to your accountant and defend yourself in the event of an IRS audit. You can even invite your tax pro to the platform to access the information required to make any adjustments.
The Bottom Line
Crypto traders and investors should keep a detailed record of their cryptocurrency transactions for tax and performance purposes. However, keeping detailed records can be challenging, with many people using multiple exchanges, wallets, and crypto platforms. The good news is that ZenLedger and other crypto tax platforms can simplify the process.