Should You Use Crypto Tax Software?
Learn how cryptocurrency tax software works and how it can help you handle your bitcoin and crypto taxes.
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This article is part of TokenTax's Cryptocurrency Tax Guide.
The best crypto tax software platforms are designed to simplify the process of compiling your trades, calculating capital gains, and creating crypto tax reports. Without software, the challenges of trying to do your own crypto taxes add up to a significant amount of your time at each step in the process, which we’ve outlined below.
Particularly if you have made a lot of trades, you might need to use cryptocurrency accounting software. Compiling your trade data, finding the historical market values for assets like bitcoin, and calculating tax reports are all otherwise challenging processes for investors and traders.
Purchases, trades, and sales from all exchanges you have used need to be standardized in format, organized, and sorted. This can be very tedious if you need to track hundreds or even thousands of trades from different exchanges. Crypto accounting software automatically imports data from exchanges and keeps them in one ongoing record.
You will need the fiat currency value equivalent for all purchases and sales of crypto. This entails tracking down the fiat value prices per coin per date of transaction, which cryptocurrency accounting software can handle automatically.
After standardizing your tax lots, purchases and sales need to be paired via an accounting method like FIFO or LIFO in order to calculate your capital gains or losses. More complicated situations, like DeFi loans or margin trading, will require special attention.
Crypto and bitcoin tax software will automatically link your cost basis for all the IRS-accepted accounting methods and return the result for the current tax year, as well as reconciling previous years if your tax professional needs to amend them.
Capital gains and losses and their associated dates and cost basis need to be formatted into a tax report. Crypto tax tools take the data and calculations and automatically construct tax forms, like the Form 8949 for U.S. filers, or international tax reports for filers in many other countries.
It’s important to keep track of your gains and losses throughout the year. You’ll want to know what tax liability you’ll incur, and what unrealized gains or losses you currently have. You can also use crypto accounting software to harvest your losses in order to reduce your taxes.
Crypto tax software makes your life easier by aggregating your data, calculating your tax liability and creating your reports quickly in a few easy steps. When deciding on the best cryptocurrency software for your tax preparation, you should look for a few key attributes:
- Crypto tax software should allow you to you to upload all of your cryptocurrency CSV files, connect your APIs and wallets with seamless crypto exchange integration.
- Look for a platform that displays all your taxable events in one view, like our TokenTax dashboard below. TokenTax's crypto tax software dashboard
- Be sure the platform automatically generates your needed tax forms and supports more advanced tax situations. The crypto tax software should generate the Form 8949 for U.S. filers and international gain and loss reports. It should allow the export of different files for all major tax filing platforms, like TurboTax or TaxAct. Form 8949 filled out with TokenTax crypto tax data
- To minimize your tax liability, the crypto tax software should track your current year tax liability and also automate tax loss harvesting for you at year-end. You should also expect the software to be CPA-friendly so that you can easily work with any internal or external tax preparer of your choosing.
If you do not want to use crypto tax software, there are a few alternatives, like using a crypto CPA or a crypto tax lawyer, or even doing it yourself. In these cases, either a trained professional will take your data and reconcile your taxes for you, or perhaps your situation is simple enough to be handled via manual calculations.