I finally gave into what I’ve been dreading since the start of the year…I opened my crypto tax software to start calculating my 2021 taxes.
In the past years, I have been a buy-and-hold guy on centralized exchanges like Coinbase. I only ever was taxed when I decided to take some profits. I’m still mostly a buy and hold guy as I don’t day trade, but I did get involved in the following areas in 2021:
- DeFi – Using decentralized exchanges like PancakeSwap and providing liquidity to trading pools, I receive rewards.
- Crypto Staking – Using Coinbase I stake a majority of my Ethereum for ETH 2.0 which is locked up until the merge. For anyone wondering, no that interest accruing on ETH 2.0 staking through Coinbase isn’t taxed until it is accessible.
- Crypto Lending/Interest – Through firms like BlockFi and Gemini, I was able to get around 3-5% on my bitcoin holdings, around 4-5% on my Ethereum holdings, and around 8-9% on my stablecoin holdings.
- Mining – Instead of traditional proof of work mining with cryptos like Bitcoin and Ethereum, I got involved with helium mining which uses proof of coverage as its protocol. This allows me to not worry about buying expensive equipment or paying high electricity bills, but it does introduce a bit more complexity when it comes to taxes.
I went from monthly buys and the occasional sell to 1000s of transactions. Well, 2962 transactions to be exact.
If you are doing more than just buying and selling through one exchange, I honestly don’t know how you aren’t using tax software.
I’ve used TaxBit in the past but wanted to do a full review on it today to talk about my experience along with just the process of getting through what at first seemingly is a scary experience.
Where did the 2,962 transactions above come from? They were imported via syncing with exchanges, wallet connections, and CSV files (excel uploads).
I use a wide range of wallets and exchanges and send money between these wallets to transact or get involved with different projects in the crypto space. What is nice about tax software is it connects the dots of all movements between these wallets to establish a cost basis for tax purposes.
There are two types of exchange connections. Network and out of network. What that means is being able to log in to a network account such as Coinbase/BlockFi/Gemini and authorize TaxBit to see your transactions. Once authorized, the software aggregates all the transactions on that exchange.
If you are thinking “what the heck I don’t see my exchange on that list!”. Well, there are plenty of exchanges that have you connect via an API or a CSV upload option (which we’ll cover below).
This was a big one for me as I got started with my Helium mining journey which was around 2,189 of the transactions for 2021. Why so many? Because my helium miner is constantly mining very tiny amounts of HNT. Every time my helium wallet receives those HNT it is a taxable event and considered income.
Then when I send that HNT from my wallet to crypto.com to convert to USD, it now has a record of my cost basis. If I sell and get hit with a capital gains tax (profit or loss) the software knows that I shouldn’t be taxed the full amount.
Example: Mine HNT for $20 equivalent. I send it to crypto.com and sell it for $22 as the price of HNT has gone up.
For tax purposes, I have $20 income and $2 in short-term capital gains tax. There is a helium tax tool, but it’s nice that TaxBit essentially does the same thing.
Outside of helium mining, the wallet connection also allows you to connect to your browser wallets such as Metamask or Binance Smart Chain wallet. These browser wallets may be used to interact with projects in DeFi, NFTs, Metaverse, etc.
To connect the transactions to the software, you need to input the wallet address and the crypto that the wallet is for.
If you have a ton of altcoins or use smaller wallets then you may be required to get a download of transactions from the said wallet.
This is the manual option to import transactions into the tax software for exchanges and wallets. I had to do this with crypto.com related transactions. For crypto.com they have a blog post on how to export transactions.
It’s pretty simple though. Open the app, go to accounts, click in the top right corner for transaction history, click in the top right corner again to export, select a date range, and it will download the history (which you can save to your phone or send to yourself via email).
The process of getting the information from different exchanges or wallets may be different, but once you have the excel file saved to your computer you simply upload it to the software.
Taxes vs. Income
Once you have all of your transactions imported, you are ready for the grand reveal!
How much in taxes do you need to pay to Uncle Sam?
It will be broken down between short-term capital gains, long-term capital gains, and income. Each of these buckets has a different tax treatment.
- Short-term Capital Gains – is a tax on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals your ordinary income tax rate or the same treatment as the income section.
- Long-term Capital Gains – is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15%, or 20% depending on your taxable income and filing status.
- Income – is considered the same as ordinary income and this is from crypto activities such as referrals, mining, staking, interest, or rewards.
For short term capital gains and income taxes you would use the following tax brackets:
For long term capital gains you would use the following tax brackets:
It pays to be a long term investor over day trading 🙂
In terms of tax forms that may need to be uploaded to a tax software like TurboTax or mailed-in (I can’t believe that’s still a thing), you do get the following forms generated.
- 1099-MISC – Provides information for a wide range of income payments such as crypto interest, referral bonuses, and other income. These should be available from each centralized exchange as well.
- 1099-B – Provides transactional information detailing capital gains and losses from disposing of capital assets. At this time, cryptocurrency is classified as property. These should be available from each centralized exchange as well.
- 8949 – When you sell/trade cryptocurrency for a profit or loss, the IRS requires the details of the transaction to be reported on Form 8949, “Sales and Other Dispositions of Capital Assets”. TaxBit simplifies tax reporting by generating Form 8949 for you using your FULL transaction data, which should reconcile to each of the 1099-B forms you receive.
Easy to Use
Overall, the software is simple to use and it does have a ton of self-help articles and a support bot that can help if you run into questions.
No matter what package you go with, it allows for unlimited transactions. If it was by transaction and you have any mining/staking/interest sources then you would have a bad time.
Base Package is Reasonable Cost
I utilize the basic plan which has everything I need (limited support). I’ll gladly pay $50 for automating this network of transactions that would be a total nightmare without the software. Plus they have a free option!
There were a couple of questions I had when going through some error checking and I used their chat support system. The key to getting a human agent is as soon as the bot chat pops up, just type “human please” and it will redirect you to someone who can help with more complex questions (outside of those that can be answered via a help center article). The wait was short and the agents were helpful.
Crypto Wallet Support
I noticed that the number of wallets they support is on the smaller side. Not only that but there doesn’t seem to be big support for a ton of altcoins. So if you are mostly dealing with larger cap cryptos like bitcoin or ether it is much less of a headache.
I did confirm though with their support that they support all cryptocurrencies and if there is one that is found not supported you can request for them to add it to their database. So, if you are heavy into…Angry Squid coin, they got you covered 🙂
Missing Cost Basis
With the pure number of transactions being uploaded, there is the occasional transaction issue such as unknown tax gain because of the following:
- Missing Transfer Data
- Missing Acquisition Data (Buys and Trades)
- Missing Acquisition Data (Income)
- Duplicate Disposals
- Transactions Out Of Chronological Order
Big call out on resolving it! To fix the missing cost basis issues, you can’t edit the transactions you have. The real issue is you are missing a transaction that completes the loop of transactions.
Example: You get paid $500 in USDC (stablecoin) from someone and it shows that you only sold it on Coinbase. The software doesn’t have the transaction of it being income that entered your Coinbase account. It just sees that you sold $500 in USDC and it will flag it as missing information. To solve this problem, you would need to add a manual income transaction to complete the loop.
No CPA Support Outside of Review
With my background in Finance and Accounting, I feel like I have a pretty good grasp on taxes and my ability to file by using software like TaxBit and TurboTax.
Not everyone has the same passion for being a finance nerd and may still not feel comfortable with doing their taxes. Using this tax software still requires some knowledge and some occasional research from your end.
If your crypto situation is complex or you want some hand-holding, you can hire the help of a CPA with crypto expertise. You can use a service like 1800accountant.com to set up a free call to see how they can help.
And they aren’t some random service, they are the official accounting partners with TaxBit.
While crypto taxes can be a little intimidating, they don’t have to be with the help of tax software. It does require some work on your end in terms of linking up all the transactions, but once you get the hang of it, it’s not too bad.
So, what I’m trying to say is…you got this! It is better just to rip the band-aid off as soon as possible instead of waiting days before taxes are due!
If you do want to use TaxBit and get a 10% discount you can use the following promo code: SUZBrsBw