Crypto Tax Reporting Tips for High Volume and Algorithmic Crypto Traders
The U.S. tax filing deadline, April 15th, is right around the corner. For most people, getting their taxes filed for the year is a painful process. This is especially true for those investing in cryptocurrencies, as reporting gains and losses in US dollar terms is required for every trade. In this guide, we’ll discuss different tax reporting tips that those leveraging crypto trading bots and automated strategies can use to make their crypto tax reporting easier.
1. Take account of all of your crypto exchanges
Tax reporting gets exponentially easier when you have records detailing all of your crypto trading history. In the U.S. and most other countries, trading one cryptocurrency for another triggers a taxable event that needs to be reported on Form 8949. If you haven’t been keeping track of every one of your cryptocurrency trades, don’t worry. Almost all cryptocurrency exchanges have an option for users to download a CSV file containing their complete transaction history that occurred on that exchange.
Before sitting down to do your crypto taxes, make a list of all of the exchanges you used for the year. Whether you are using specific software, excel, or hand calculations, downloading your transaction history from each of your cryptocurrency exchanges will aid in the tax reporting process.
2. Look into using a specific identification calculation method
After the new IRS cryptocurrency tax guidance came out in October 2019, it clarified that specific identification costing methods could be used when calculating your gains and losses for your cryptocurrency transactions provided that you had records to specifically identify your crypto.
This sounds a lot more complex than it is. Essentially, pre-2019, most bitcoin and crypto investors were using the common First-in First-Out calculation method to calculate their gains and losses from their trades (the cryptocurrencies that you bought first are sold first) because the IRS had not yet specified whether specific ID was allowed. Now that the new guidance makes this clear, specific identification is a great way to reduce your gains.
In using this strategy, you want to specifically identify and “sell” the cryptocurrencies that you bought at the highest price first. For active traders, this slight change can lead to huge tax savings.
Crypto tax calculators like CryptoTrader.Tax have built in tax minimization algorithms like HIFO (Highest in first out) and LIFO (Last in first out).
Before you can use a specific identification method, you have to be able to specifically identify a unit of crypto as the IRS outlines:
To specifically identify a unit of cryptocurrency, you must have records of the following information:
The date and time each unit was acquired,
Your basis and the fair market value of each unit at the time it was acquired,
The date and time each unit was sold, exchanged, or otherwise disposed of, and
The fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit
If you have this data for your transactions, you are able to use specific identification methods like LIFO or HIFO which can drastically lower your cryptocurrency capital gains taxes.
3. Use your losses to reduce your taxable income
2019 had its share of both ups and downs within the crypto markets. Towards the end of the year, everything seemed to trend downward; however, earlier in the summer bitcoin went on a phenomenal run surpassing $12,000 per coin. While the goal is always to have gains, you can use any losses incurred to actually lower your tax liability.
Let’s say you purchased bitcoin at $10,000 and proceeded to trade in and out of the asset. Let’s say you incur about $2,000 of net losses as a result of this trading activity. These losses are filed on Form 8949 just like your capital gains would be. However instead of adding to your taxable income, they reduce it. This means that filing your crypto losses on your taxes actually saves you money!
4. Try out Crypto Tax Software to automate your reporting
Cryptocurrency tax software tools like CryptoTrader.Tax have been developed to automate the entire cryptocurrency and bitcoin tax reporting process. For high volume and algorithmic traders, software tools can be a huge time saver. Because the Shrimpy team has teamed up with CryptoTrader.Tax to make it easier for users to report their taxes, Shrimpy users can receive a 20% discount on all tax reports with code SHRIMPY2019.
CryptoTrader.Tax works by integrating with all major cryptocurrency exchanges to allow users to automatically import their historical transactions. The software can handle tens of thousands of trades with no problems. Once you connect your accounts with API keys or through CSV imports, you can generate Form 8949 and your other crypto tax reports with the click of a button. These reports can be imported into platforms like TurboTax or TaxAct, or simply sent to your tax professional to file on your behalf.
Have any specific questions about your crypto tax situation? Feel free to reach out to the team at CryptoTrader.Tax. They have a live chat option and can help you out for free :)
Guest Blog by the CryptoTrader.Tax team
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