Bitcoin and other cryptocurrencies have become increasingly popular over the past few years. The rise in popularity has brought intensified scrutiny from government bodies including the IRS. As a result, cryptocurrency tax software like CryptoTrader.Tax has exploded onto the scene offering accountants and their clients with an easy way to calculate capital gains and losses from cryptocurrency investing.
How is Bitcoin Taxed?
The IRS classifies bitcoin as property, meaning that the income generated from buying, selling, and investing in cryptocurrencies is subject to capital gains tax.
For example, if your client invested $10,000 into bitcoin and sold it years later for $15,000, he or she would have a $5,000 capital gain that needs to be reported on his or her tax return.
Unfortunately, the tax calculations for heavy crypto investors are often not this straightforward. Many crypto investors use multiple cryptocurrency exchanges, wallets, and platforms to carry out their investment strategies, and doing the necessary tax calculations and reconciling all of this data becomes very difficult.
In these scenarios, it makes for accountants and their clients to look at tax software to help with the reconciliation.
What is Cryptocurrency Tax Software?
Cryptocurrency tax software automates the tax reporting process for crypto investors and their accountants.
Many accountants use software tools to help with the reconciliation process for their cryptocurrency clients. Finding a fair market value for every taxable event is extremely difficult for tax professionals as most trades are quoted in other cryptocurrency values, not in USD. Software automates this process and is able to reconcile cost basis for all assets.
CryptoTrader.Tax - An Introduction
CryptoTrader.Tax is a cryptocurrency tax software solution built by the Coin Ledger team. Founded in 2017 at the peak of the first wave of cryptocurrency adoption, the company serves tens of thousands of crypto investors and accountants all over the world.
How It Works
CryptoTrader.Tax works by integrating with all major cryptocurrency exchanges and platforms where investors are incurring taxable events like selling crypto, trading crypto, and earning crypto.
These integrations enable investors to import their complete transaction history into their CryptoTrader.Tax account with the click of a button. Once all of an investor's transactions are in the app, they can generate auto-filled tax documents like IRS Form 8949. These documents can be imported into other tax filing softwares like ProConnect, Ultra Tax, and Drake to make it easy for accountants to report their clients' crypto investing activity.
Step 1: Invite Your Client
Get started by inviting your client to import his or her data into the CryptoTrader.Tax platform. Contrary to reporting the investing activity of stocks, cryptocurrency platforms generally are not able to provide accurate 1099 reports detailing cost basis and capital gains. Because of this, it’s much easier to work in tandem with your client on this reporting.
Once you invite your client, the software will guide them through the data import process with a few simple steps.
Step 2: Import Data
Your client can import their data into CryptoTrader.Tax through one of two ways: by connecting their cryptocurrency exchange directly to the app, or by importing a transaction history file that the exchange exports. Either option works for importing historical data.
Your client should import all of their cryptocurrency transaction history from all years of investing or trading so that cost basis can be established and tracked properly.
Step 3: Reconcile
Once all data is imported, CryptoTrader.Tax will flag any transactions that need to be reconciled with cost basis data or alert you when there are any gaps or missing data. As a tax professional, you should walk through this process with your client to make sure they have not accidentally left out any taxable events that need to be reported.
Step 4: Generate Tax Reports
After you have reconciled all client data and confirmed that everything has been imported into the system, you can generate the tax reports from this data.
CryptoTrader.Tax generates a number of necessary reports including an income report, capital gains and losses reports including an auto-filled Form 8949, and a complete audit trail report for your records. The Audit Trail Report breaks down every single tax calculation and how the numbers were generated for your records.
These reports can be imported into other tax filing software or sent to the IRS directly.
This past fall, the IRS sent out over 10,000 warning and action letters to cryptocurrency investors suspected of misreporting income on their taxes. This increased scrutiny is making proper reporting and tax prep even more important for tax professionals, CPA’s, and cryptocurrency investors. Make sure you have the toolset to keep your clients compliant.You can learn more about how cryptocurrencies are taxed with this complete cryptocurrency tax guide.
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