This post is part of The Rollup, Decrypt’s curated collection of stories presented in partnership with Koinly.
If you currently hold cryptocurrency in your portfolio or you have traded crypto over the past year, it’s high time you started figuring out your crypto tax obligations.
That can sound like a daunting prospect—even if you don’t owe anything in taxes.
Browse through crypto social media, and you’ll find that the main tax preparation advice given to newbie traders is to make a note of the details of every trade. That means you need to record the purchase or sale date for each trade, as well as the purchase or sale price—and take into account complications like dollar-cost averaging.
That’s before you even begin to take into account the complexities of flipping NFTs, or decentralized finance (DeFi) tools like flash loans and yield farming. It all adds up to an awful lot of paperwork—but trying to maintain meticulous spreadsheets in minute detail is not only draining but also plain unnecessary.
There’s no need to lose hours over crypto taxes when you can easily automate almost all of the process simply by using crypto tax software like Koinly. It offers an array of free features and serves the needs of all sorts of investors and traders.
Here’s how tax software like Koinly can streamline and simplify your crypto taxes.
Import your data from cryptocurrency exchange
When you sign up to Koinly, you’ll be asked to plug your crypto data from any centralized exchanges you use into the web-based software. This process doesn’t require your exchange log-in details or the KYC documents you shared with them. All it requires to get things started is your raw trading data.
Since centralized exchanges are used to working with crypto tax software, the process is rather straightforward. Exchanges can share your data with Koinly via API—an intermediary technology—or in the form of a CSV, a Microsoft Office Excel file type, which you can download and then upload to Koinly yourself. Either process takes just a few clicks.
Koinly currently works with 370 centralized exchanges, including big hitters like Binance, Coinbase, Kraken and FTX, meaning that your preferred exchange is almost certainly supported.
If your crypto is invested in savings accounts or similar through other centralized platforms such as Nexo or BlockFi, that’s no problem—Koinly works with 11 major services. Or if you’re a “not your keys, not your coins” kind of person and use a self-custody wallet, you can get Koinly to read your wallet data with ease. The software supports more than 50 wallets, including software wallets such as MetaMask and Electrum, alongside hardware wallets such as Trezor and Ledger.
Scan and collect your DeFi data
With the rise of decentralized finance, or DeFi, crypto tax calculations now have to go beyond simply importing data from centralized exchanges, taking into account DeFi tools such as decentralized token swaps, liquidity pools and yield farming.
However, because the blockchain data that underpins DeFi is orderly, predictable, and immediately available, it’s relatively simple for crypto tax software like Koinly to read.
With the exception of a few privacy-oriented blockchains, DeFi is largely built on top of transparent blockchains like Ethereum and Avalanche. That means anyone can see what anyone is up to.
Throw pussyriot.eth into blockchain explorer EtherScan, and you can see in real-time what the crypto-savvy Russian punk band is up to on the chain. For crypto tax software, the benefit of on-chain transparency is that it can effortlessly scrape and analyse your crypto activities in order to calculate your tax liabilities.
Koinly lets you sync data from most major blockchains and it’s highly customised to work well with their native technology stack. You can plug in anything, from a Fantom public address that starts with 0x, to a BTC xpub key, or a Cosmos address, and Koinly will analyze them in conjunction with other data from centralized exchanges.
Flag inconsistencies and reconcile
As your data is flowing in from multiple sources, you’ll sometimes find clashes and inconsistencies—which would be a nightmare to address if you were using pen and paper. Tax software can flag them to help you work out the issues and reconcile your accounts.
In some cases, it can be due to complex actions on exchanges, like forked coins, receiving airdrops with no cost basis or putting crypto into a savings account and taking it back out in transactionally complex ways.
You’ll need to trace back these issues individually. But if you don’t feel confident in your own reconciliation, Koinly offers a premium Expert Review service. One of Koinly’s crypto tax experts will closely review your data and make sure everything’s fine and resolve any outstanding cases.
Generate the complete paperwork
The tax process involves a mountain of paperwork—but tax software can help take care of that.
Koinly’s not only useful for collecting and organizing your crypto data ready for reporting. It actually does the job of dealing with the paperwork and completing the necessary forms. That means the software will fill out the IRS Report (Form 8949 and Schedule D) for capital gains and losses and Schedule 1 form for income totals.
All you’ll need to do is submit them. If you use software like TurboTax or TaxAct, you’ll be able to upload the documents as part of your overall tax submission. Phew!
Keep tabs on your portfolio
Although most people turn to crypto tax software near the end of the tax year, one obvious benefit they offer is the ability to keep tabs on your portfolio all year round.
Apps like Delta and Zapper are good for tracking centralized exchanges and DeFi, respectively, while Koinly’s holistic attitude to crypto reporting makes it ideal for monitoring the health of your overall portfolio.
By keeping your portfolio under your watchful eyes, you can also spot opportunities to minimize your tax burden early in time—a legal strategy called “tax loss harvesting.”
Once you’ve submitted your taxes with the help of Koinly and weighed up your gains, you might want to explore jurisdictions with crypto-friendly tax regimes. And if you do decide to up sticks, keep in mind that Koinly supports more than 100 countries.
Decrypt readers can get 30% off Koinly plans by signing up with the code DECRYPT22 at koinly.io.
Sponsored post by Koinly
This sponsored article was created by Decrypt Studio. Learn More about partnering with Decrypt Studio.
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Source: https://decrypt.co/96289/how-crypto-tax-software-can-simplify-your-taxes