Cryptocurrency can create headaches for taxpayers and tax preparers alike. You can make things a little easier on yourself by following these 5 tax tips.
1. Keep detailed records on all your transactions.
Sorry everyone, but you can ignore your record keeping requirements and assume “it’s all on the blockchain”. Yes, blockchains to keep public records of all transactions, but they are not clear and detailed like the bank statements you may be used to. You should document every buy, sell, transfer and exchange keeping track of the date, time and transaction ID.
2. Use only one exchange.
We fully understand that not every cryptocurrency is available at every exchange, and therefore sometimes you may need to make a purchase with another exchange. This introduces extra complications when preparing your tax return and will require your tax preparer to go through the time-consuming task of manually adjusting some of these entries which will in turn increase your billable hours, it’s a lose-lose for everyone. Think twice about whether the purchase is worth it.
3. Maintain good wallet hygiene.
Good wallet hygiene is essential for sophisticated traders and regular folks alike because it helps accountants understand transactions from a workflow perspective as they process them. Although it might seem that holding all your digital assets in one location is best, that’s not necessarily true. Always keep transaction-specific wallets—such as investments, DeFi transactions, and revenue—and use a consistent naming system. If you are a miner, keep a separate wallet to hold mining rewards. If you make NFTs, keep a separate wallet for secondary royalties, and so on.
4. Talk to your accountant early and often.
With tracking activity between and across disparate exchanges, blockchains, and wallets, and then accurately reporting those activities to your accountant, accounting can turn complicated very quickly. Talking to your accountant early and often can help mitigate this and ensure you both are always aligned.
5. Automate what you can.
We’re all familiar with the saying, “The only certainties in life are death and taxes.” But that’s not really the case with crypto taxes until we finally get clarity from regulators. There are many different software providers out there that will help automate and streamline the reconciliation process. Just remember, even the best software is only as good as the data it’s given.