Let’s face it, getting your tax report done is no easy feat. It requires proper planning, data recording, and a deep understanding of the local law that surrounds it.
While you may have tax systems in place to handle your personal, fiat-based income, adding crypto under your name will also entail some tax obligations you must fulfil as well.
The good news? You don’t need to manually track every transaction or employ some overly complicated strategy to file your taxes properly. There are tools you can implement into your accounting system or personal budget planner to systematise this task and transform it into a structured operation.
If you’re curious to learn about ways you can manage your cryptocurrency taxes more effectively, then you’re in the right place. In this article, we’ll delve into strategies and tools you can consider to manage your cryptocurrency taxes with greater precision and efficiency.
Let’s jump right into it!
The Relationship Between Tax and Crypto
For the uninitiated, cryptocurrency is a peer-to-peer digital asset class that operates within its own decentralised network called the blockchain. It holds its own store of value independent of the influence of any third parties or central authorities.
Over the years, crypto has evolved from a niche innovation to something recognisable across the globe as a potent wealth-building asset. Many people equate crypto to similar asset classes like cash or stocks, but the truth is that it’s its own class in itself, and it’s taxed as such.
An important distinction between fiat and cryptocurrencies in the context of taxation is that crypto is regarded as an investment or property asset.
It’s not legal tender in Australia and in many other countries around the globe. This means that activities like crypto disposals, such as selling digital assets, trading two cryptos, or using crypto as payment, can trigger capital gains tax obligations.
In addition, the amount taxed largely depends on the difference between the acquisition cost of the crypto asset and the market value at the time of purchase.
If the asset increases in value, the holder will be subject to a corresponding capital gains tax. Conversely, if the asset decreased in value, then the investor can gain capital loss tax breaks to offset the gains.
Aside from trading and disposal, cryptocurrency can also generate taxable income through activities such as mining, staking rewards, airdrops, and participation in decentralised finance platforms. Considering the wide range of crypto activities that can generate new tokens, it can get quite messy maintaining accurate records for compliance and tax reporting purposes.
But that doesn’t mean it’s impossible. There are tools and strategies professionals can consider to keep their crypto tax obligations well organised. Let’s take a look at these types of platforms in greater detail.
Top Tools To Simplify Crypto Tax Management
With cryptocurrencies being a more popular addition to one’s wealth portfolio, there comes with it a natural rise in popularity of new tools built to assist investors in managing their crypto and helping them achieve their financial goals.
These crypto platforms perform a slew of functions, like automating record-keeping and calculating liabilities. Below are the categories of tools that professionals typically use to manage their cryptocurrency taxes.
1. Crypto Tax Calculator
One of the most reliable tools you can use to make crypto tax management simpler is a dedicated crypto tax calculator.
These tax calculators help investors optimise their tax reporting because of built-in features designed to process transaction data. These tax calculators also take into account the requirements set by the Australian Taxation Office (ATO) and subsequently apply suitable accounting methods that comply with these requirements.
These tax calculators are capable of calculating and categorising taxable transactions through different methods set by the user, like FIFO and LIFO. This helps them view the ideal tax strategy to legally optimise their tax payment requirements for filing.
Another neat aspect about crypto tax calculators like Independent Reserve’s crypto tax calculator is their ability to integrate with crypto exchange platforms. This makes importing transaction histories easier and collecting transaction data a smoother ordeal.
When the correct data is used, these calculators can estimate capital gains, losses, taxable income, and other tax-related figures derived from crypto activities. In turn, this helps you get an estimate of your tax liabilities within a set period—helping you allocate the right funds to comply with these legal requirements.
2. Crypto Tax Aggregation and Reporting Platforms
Crypto tax aggregation platforms, such as Koinly and ZenLedger, serve one primary purpose: and that’s to gather data from crypto exchanges—both centralised and decentralised—to later be used to produce accurate and tax-compliant reports.
These platforms do this by integrating with exchanges and blockchain networks through API connections. Once transaction histories are imported, the platforms organise and standardise the data in a single dashboard. This means that if you’re using multiple crypto exchange platforms, then this tool can reconcile records from all these sources with ease.
On top of that, these platforms categorise the imported data’s transaction list into two different buckets: taxable and non-taxable events. This helps investors identify which transactions will warrant a capital gains tax record and which ones may not need it. These platforms can also flag erroneous entries and help improve report accuracy.
3. Pro-Crypto Accounting Software Tools
If you’re a business owner, you don’t need dedicated crypto software to do your tax reports. You simply have to use reliable accounting software with crypto-friendly features to get the job done.
One such example is QuickBooks, which is an accounting software that supports crypto transactions through specialised integrations and plugins. The software doesn’t natively support crypto, but it does offer integration capabilities with tools like Bitwave and Ledgible to automate reconciliation and create a more streamlined bookkeeping process.
In essence, these integrations help convert complex blockchain transaction data into standard accounting entries that align with traditional reporting frameworks. This makes generating financial reports easier while still respecting the separation between fiat and digital currency.
Additional Strategies to Consider When Managing Crypto Taxes
The right tools make managing taxes easier for business owners and professionals, but besides that, you can further enhance compliance by following some key strategies.
Here are some notable strategies to keep in mind:
- Hold assets over 12 months: Holding assets for over 12 months helps you get the best value for long-term capital gains tax rates compared to short-term rates.
- Tax-loss harvesting: Selling underperforming assets at a loss can offset capital gains, and then rebuying can net you capital loss benefits.
- Hold period timing: Delaying disposals to qualify for long-term capital gains tax is a viable strategy.
- Donate crypto to charity: You can avoid capital gains tax and potentially claim a fair market value deduction if you donate crypto that has appreciated in a long-term period.
By integrating these aforementioned tools and following these strategic approaches, you can build a more organised and compliant tax management system. This structured approach helps you stay on top of your tax obligations when dealing with digital assets.
All the best in keeping up with your crypto tax requirements!
