6 Crypto Tax Headaches and How to Avoid Them
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An ounce of prevention is worth a pound of cure: Record your crypto tax transactions as you make them throughout the year.
This year, there was a common refrain in media coverage about crypto tax reporting: it was a headache.
At TokenTax, we’re used to helping clients through crypto tax challenges, but we also want to help you make sure you don’t experience the same ones next year. Read on for five of the most common roadblocks in crypto tax reporting and our tips on how to avoid them.
1. I can't remember all of the crypto wallets I've used.
Reporting your crypto taxes is like cleaning your kitchen: It’s best if you do the work as you go, rather than try to do it all at the end. If you don’t, you might find it hard to remember everything you did during the tax year, especially since many platforms won’t send you any crypto tax forms. If you haven’t kept track of all your trades, you may file incompletely or find that you have missing cost basis errors—the bane of every crypto tax payer’s existence.
To avoid this outcome, record transactions as they happen. If you’re using crypto tax software like TokenTax, you can sync your APIs so a large portion of your trades get documented in real time. Don’t forget about platforms without API integrations, however. You can enter data from these platforms manually or via CSV.
2. I can't access data from an exchange I used.
There are several common reasons our clients can’t access data from exchanges:
A platform has shut down permanently (QuadrigaCX)
A platform has been locked to users in certain countries (Binance)
A platform only allows a certain number of transactions to be synced or exported at once (Binance)
A platform's representatives won’t respond to requests for custom exports
Unfortunately, these problems don’t have an easy fix. The best solution is, once again, to proactively report your crypto transactions. Make it a habit to regularly record your trade history in your crypto tax software.
3. My accountant says I need to file a crypto FBAR.
Filing an FBAR isn't really a crypto tax nightmare, but it does add labor and potentially cost to your tax reporting process. Although there hasn't been definitive guidance about whether exchanges with foreign addresses count as foreign “bank accounts", your crypto tax accountant may advise you to file one if at any time you held more than $10,000 worth of assets between one or more foreign exchange accounts.
For example, if at any point in a year you had $4,500 of BTC on Binance (Malta) and $5,501 on KuCoin (Hong Kong), your accountant may recommend an FBAR.
If you don’t want to take on this extra burden, pay close attention to where the centralized exchanges you use are based. You’ll want to favor American-based platforms and be careful to keep your foreign balances under $10,000. We list where many popular exchanges are headquartered in our blog about FBARs for crypto.
4. What do you mean I can't tax loss harvest?
A common misconception is that you can harvest your tax losses when you’re preparing your crypto taxes. Unfortunately, unless you are preparing your tax returns before the end of the tax year, this isn’t the case. Crypto tax loss harvesting, or selling tokens at a loss in order to minimize your capital gains, can only be done during the tax year. Put otherwise, if you’re an American taxpayer you need to harvest your losses by EOD on December 31.
If you’re interested in tax loss harvesting, we recommend purchasing a crypto tax software plan that comes with access to our Tax Loss Harvesting Dashboard before the end of the tax year. While many harvest their losses in November and December, some choose to get a plan at the beginning of the year, so they can keep an eye on tax loss harvesting opportunities, such as market downturns, all year long.
5. My DeFi trades need tons of manual edits.
If you use any DeFi or NFT platforms that are not supported by your crypto tax calculator, your data may not be imported completely or accurately. For example, in TokenTax unsupported DeFi trades are not recognized as taxable events until you manually edit them and classify them correctly.
Once again, if you don’t want to make a lot of edits in your crypto tax software, foresight is key. Before you start trading or earning on a new platform, do your research to find out if your crypto tax calculator can—or is planning to—support your trades.
Of course, DeFi and NFT enthusiasts may not want to let tax reporting difficulties stymie their investment opportunities. If this is the case and you do choose to use a new or unsupported platform, import your trade history and make edits to correct your data as you go.
Another option is to put aside funds to pay for a crypto reconciliation specialist to reconcile and report your data for you.
6. My friends and I shared a wallet.
Sometimes crypto traders will share a wallet; maybe they’re family or friends or working together on a project. While this may seem like a convenient option, it creates a messy crypto tax situation; crypto tax software has no way to know whose trades are whose, so reconciling the data requires a lot of human intervention. For example, at TokenTax we'd recommend traders in this situation choose our VIP plan.
If crypto tax software can’t tell whose trades are whose, neither can the IRS. This means that in a worst case scenario, the IRS may decide you are liable for taxes on all the trades in a shared wallet—even if you know you didn’t make them or profit from them.
Going forward, we'd recommend not sharing your crypto wallets (both for tax and security purposes!).
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