5 Tips for Crypto Tax Preparation

By Frank Corva

If you’re a frequent crypto trader or if you like to engage with DeFi protocols, doing your crypto taxes can be about as much fun as walking barefoot on broken glass. 

Selecting the right crypto tax software can help you review the crypto transactions you made last year and produce the required tax documents. However, you’ll still likely need to check and revise the transactions that may have not been properly documented in the software-generated reports. 

So, below are five tips on how to make the crypto tax reporting process a bit less painful and your records a lot more accurate.

1. Keep a crypto trading and transaction journal

Granted, it’s a bit late for this advice, but it’s best to get in this habit for the year ahead. 

Write down each of your trades and transactions so you can double-check the tax software-generated report with your records come tax reporting time.

For trades, you might want to record the following information:

• The date of the trade
• The platform on which you made the trade – e.g., Coinbase, Binance, Uniswap
• The non-custodial wallet from which you made the trade – e.g., a Ledger wallet or MetaMask – if applicable
• Which assets you traded – e.g., maybe you traded some Bitcoin (BTC) for some USD Coin (USDC)
• The amount of the asset you traded for the amount of the asset you received as well as the prices of those assets noted in the fiat currency in which you pay your taxes – e.g., 0.1 BTC at $23,000/BTC for 0.006 ETH at $1,600/ETH
• The trading or blockchain transaction fees, which can be denominated in fiat or cryptocurrency amounts 

The following is an example of such an entry:

12/20/22 | Coinbase | Sell | 0.1 BTC at $16,800/BTC for 1,655.87 USDC | Fee: $14.13

It’s also good to keep records of whatever DeFi protocols you’ve engaged with.

While the information that you have to record for these transactions differs depending on what the on-chain transaction looks like – for example, staking a crypto asset or creating a liquidity pool (LP) token – it’s important to get in the habit of writing down whatever details you can.

2. Use a block explorer

If you didn’t keep a crypto trading and transaction journal last year, don’t fret. 

You can still find records of your on-chain transactions using a block explorer.

When you upload information to your crypto tax software, a transaction hash or transaction ID is one of the data points that gets uploaded.

You can input that transaction hash or ID into a block explorer and find a public record of the transaction.

For example, if you made a transaction on the Ethereum network, you can copy the transaction hash or ID from your crypto tax reporting software and paste it into the Etherscan Blockchain Explorer at https://etherscan.io. 

You can also paste your Ethereum wallet address into this input field to see all of the transactions that you’ve made via your wallet.

3. Cross-check your transactions with centralized exchange records

If you do most of your crypto trading on a centralized crypto exchange like Kraken or Gemini, you can download records of your trades from those exchanges. 

You can then cross-check the exchanges’ records with the transaction records that your crypto tax software provides.

4. Be mindful of the accounting method you select

If you are doing your crypto taxes for the first time, one of the big decisions you have to make is whether to use the FIFO, LIFO or HIFO accounting method to calculate your crypto gains and losses.

Using FIFO – or first in, first out – you subtract the price of some amount of a crypto asset when you first sold it by the earliest price that you paid for that same amount of the same crypto asset.

For example, if your earliest purchase of 0.2 BTC cost you $5,000 and the first time you sold 0.2 BTC you did so in exchange for $10,000, then you would owe $5,000 in capital gains tax using this method. 

Using LIFO – or last in, first out – you subtract the price of some amount of a crypto asset when you first sold it by the most recent price that you paid for that same amount of the same crypto asset.

For example, if your most recent crypto purchase was for 0.2 BTC at $8,000 and your earliest sale of 0.2 BTC was $10,000, then you would owe $2,000 in capital gains tax using this method. 

Using HIFO – or highest in, first out – you subtract the highest price you paid for a certain crypto asset from the most recent price at which you sold the same amount of that asset. 

For example, if the highest price you paid for 0.2 BTC was $10,000 and you first sold 0.2 BTC for $7,000, then you would report a loss of $3,000 in your tax report.

Very important: Please keep in mind that you must use the accounting method that you use the first year you report your crypto taxes in all subsequent years. In other words, you cannot use the FIFO method one year and the HIFO method the next.

FIFO is considered the most conservative of these accounting methods, especially if you purchased crypto at price points much lower than those at which you first sold.

You may have a bigger tax bill after your first year filing crypto taxes using this method, but some consider it safer to pay that bill earlier rather than later, especially if you aren’t good at keeping funds set aside long-term to pay it. 

HIFO and LIFO may reduce your tax bill the first year you file, but since you’ll have to use these methods in all subsequent years, you’ll eventually have to pay the tax authorities based on the gains you made.

5. Ask for help

Certain crypto tax software platforms offer assistance from certified accountants. 

While it can be costly to employ these services, so can making a mathematical error and paying more than you should in your crypto taxes. 

You might want to consider switching to a tax accountant who’s more familiar with crypto taxes, as you’ll likely be reporting these taxes for many years to come.

It gets easier

Your first go at your crypto taxes can be quite overwhelming, especially if you’ve made hundreds or even thousands of trades or transactions. 

The curve in learning to report your crypto taxes can be steep, but once you get the hang of it, it gets a bit easier.

Following these tips can make the process feel more manageable and help you to minimize your frustrations.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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