At its best, crypto taxes are easier said than done, especially as the ecosystem and use cases evolve. Four years ago, decentralized finance was barely a thing. Now, seasoned DeFi traders are moving their assets from Layer 1 to Layer 2 protocols, liquid staking, yield farming, moving assets between different blockchains, and more. The DeFi ecosystem has about $68 billion in total value locked.
Those who are holding and dollar cost averaging as they add to their portfolios during periods of volatility aren’t free from ridicule or non-fungible token collectors—especially the latter. It is extremely difficult to price NFTs accurately.
Every single transaction has accounting and tax implications. Do you know how hard it is to track cost basis across hundreds, if not thousands, of daily transactions? And that’s on the individual level. I’ve seen organizations that make millions of transactions per month.
If we think about the current crypto winter in which we find ourselves, where prices can fluctuate 10% or more in a given day, well, let’s just say that I’m getting a headache typing out all the variables that must be accounted for during tax season. The good news is that with a little preparation and understanding of the basics, we can do better. Let’s show our accountants a little love by making their lives easier next tax season.
Here are five crypto tax best practices to have your accountant singing your praises:
1. Keep detailed records of all your transactions.
Sorry folks, but you can’t ignore recordkeeping on the blockchain. Many people think of the blockchain as this all-seeing, self-documenting technology. And in some respects, it is. But blockchains aren’t like bank statements that clearly record detailed information such as vendor and payee, or, in some cases, a short description of the sold item.
In practice, blockchains are essentially a permanent record of letters and numbers that can be examined through a block explorer like Etherscan, but the information isn’t people-friendly.
Copying and pasting this information blindly into a spreadsheet and emailing it to your accountant is like asking them to solve a “Da Vinci Code”-style mystery.
2. Use only one exchange.
Using multiple exchanges introduces unnecessary complications for your accountant come tax season. The more pricing sources you’re pulling from, the bigger the headache for your accountant. This is for two reasons. First, every exchange outputs its data in a different format, which increases the likelihood of errors when your accountant combines CSVs. Second, this is an incredibly time-consuming, manual task that increases your billable hours. It’s a lose-lose situation for everyone involved.
3. Maintain really 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.
My final piece of advice would be to eliminate as much uncertainty in this process as possible by using software to automate and streamline as many of these processes as you can. Fortunately, there are many solutions that integrate directly with digital wallets and accounting software—you just have to find the solution that works best for you.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Pat White is the CEO and co-founder of Bitwave, a software platform that provides cryptocurrency accounting, tax tracking, bookkeeping, DeFi ROI monitoring, and crypto AR/AP services for enterprise businesses.
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