Bitcoin and other cryptocurrency transactions are largely private and secure. That said, government tax entities are not only well aware of the crypto space but increasingly demanding transparency into it. Thus begin your problems with crypto taxes.
Bitcoin and other cryptocurrency transactions are secure and largely can’t be affected by governments due to their decentralized nature. The government can’t theoretically stop someone from using Bitcoin. But the same can’t be said when it comes to them wanting you to pay your crypto taxes.
The IRS and other governmental tax agencies around the world have already made demands of centralized cryptocurrency exchanges. Crypto exchanges such as Coinbase and Binance have been required to report on their users’ trades and transactions. Essentially the government demands to know what is happening on their platforms.
Through using a VPN religiously and/or living in the right jurisdiction, there are ways around paying taxes on cryptocurrency. However it is highly advised that you simply pay your crypto taxes, because it can alleviate a world of hurt for you later in terms of back taxes.
The reason reporting on crypto trades and transactions for tax purposes is annoying if not plain difficult is due to every transaction being a taxable event. Say you buy Bitcoin, exchange it for Ethereum, and then trade it back into dollars. Each of those transactions is a taxable transaction in crypto.
Even more frustrating, say you make a successful trade that nets you a profit. But while holding the asset you traded into, the value of that drops substantially. You still owe taxes on the profit of the first trade, even if you have now lost money due to the currency dropping.
This means that if you are a semi-active trader or investor, you will have a lot of transactions to track for your taxes. If you aren’t, you still likely have a lot of work ahead of you. This is because people often use Bitcoin or Ethereum as an onramp to other coins. If you do this, you will have a minimum of a few taxable transactions to consider.
Crypto taxes sound like a lot of work, can I make them easier?
The options come down to, 1) not paying your cryptocurrency taxes. Or 2) spending a lot of time and mental energy to do so. You will need to figure out when you bought and sold crypto on Coinbase and Binance. You will need to figure out what the value was at the time of each trade. Then you will need to succinctly organize all of this and report that through tax software.
Neither of these options are great which is why we highly recommend checking out Cryptotrader.tax. This wasn’t meant to be an advertisement but this software takes all of the effort out of filing crypto taxes. It’s affordable (something like $50 for the base package), and it saves so much time and stress.
Once you buy it, you log into your exchange accounts and let Crypto Tax Trader calculate it all for you. They work with nearly every exchange, Coinbase, Binance and others. Once you log into your accounts, the app spits out a report in CSV and you upload it to Turbotax, Taxact or whatever tax software you use. Alternatively you can just print out a crypto tax form and give it to your tax accountant. Then you’re done.
For the cost, it really can’t be recommended enough. You can also do historical trades as well to take care of any back taxes you may have neglected up until now. This may be especially useful in 2020 as you cash out of the current bull market after years of holding coins.
Check it out and save yourself time and money, and get a 10% discount if you use the code: CRYPTOTAX10.