In the early years of cryptocurrency, governments around the world weren’t equipped with the tools needed to analyze cryptocurrency markets– but not anymore. In the US, the IRS is spending more money on blockchain analytics than any other government agency. On the other side of the globe, Australia’s tax authority recently started collecting bulk records from cryptocurrency exchanges.
These developments make it even more important to report your cryptocurrency gains. The problem is that finding out what you owe can be a difficult task to accomplish. Previously, traders had to rely on spreadsheets to keep track of all their trades. But now, new software has emerged that makes life much easier for cryptocurrency traders.
Cryptocurrency tax calculators import all your trading data and crunch all the numbers for you.
How does a crypto tax calculator work?
Basic crypto tax calculators require you to upload a CSV file of your trading data. These types of crypto tax calculators are better than spreadsheets, but they are still not very convenient. They require you to go to each individual exchange and download your data, then import it. Often, there are errors which need to be manually corrected before you can generate a tax report. One advantage of using these types of crypto tax calculators is that they are usually inexpensive.
More advanced types of crypto tax calculators can import your trading data through exchange APIs (Application Programming Interfaces). Once you connect your exchanges, the software then pulls in your data automatically. Because keeping up with API changes requires constant effort, not all crypto tax calculators support exchange APIs. The crypto tax calculators that do support APIs often charge more to cover the costs of maintaining API connectivity.
How to use a crypto tax calculator
- Simple crypto tax calculators. To use a simple crypto tax calculator, you have to first download your trading information from all your exchanges. The process for doing this is different across different exchanges. Typically, an option to export your trading data can be found somewhere in the settings menu. After you complete the export, you have to then import the data. Once this is done, the software will be able to generate your tax report.
- Advanced crypto tax calculators. To set up an advanced crypto tax calculator, you have to first log into whatever exchange you want to connect and create an API key. Again, the process for creating an API key differs from exchange to exchange. During the process of creating your API key, you’ll also generate an API secret. Once you have an API key and and API secret, you can copy and paste this information into your cryptocurrency tax calculator to complete the connection. After you connect all your exchanges, you can import your trading data automatically and generate your tax report.
Are cryptocurrency tax calculators safe?
The short answer is: yes. No hacker has ever been able to use a crypto tax calculator to steal money from a cryptocurrency trader. The reason for this is that cryptocurrency tax calculators aren’t able to deposit or withdraw money. All crypto tax calculators do is read your trading history and generate tax reports.
If you decide to use an advanced crypto tax calculator, be sure to give your API key the minimum permissions necessary– just to be on the safe side. Some crypto exchanges let you create API keys that can deposit and withdraw money from your account. You don’t need to create this kind of API key to use a cryptocurrency tax calculator.
What happens if I don’t pay taxes on my crypto profits?
Remember: Bitcoin and other similar currencies are only pseudo-anonymous. The IRS and other tax authorities around the world are investing in analytical tools that are designed to trace and track cryptocurrency transactions. In the US, tax fraud can result in fines of up to $250,000.
You may not owe anything if you lost money
Most tax authorities treat cryptocurrency like property for tax purposes. That means that if you sold cryptocurrency for a loss, you may be able to write this loss off at tax time. However, you can’t typically claim a loss unless you’ve sold. If you decided to hold onto your cryptocurrency asset after its price declined, you’re probably not eligible for a deduction. Another caveat: some countries– like Canada, for example– won’t let you write your loss off against income that you earned at your day job.
Keep on the safe side
If you don’t report your crypto gains, you’re committing tax fraud. Use a crypto tax calculator to find out what you owe and file your taxes properly.