Generating an accurate and efficient crypto tax report goes far beyond hitting the “Generate report” button on your reporting software. Not being clued up on the technicalities underlying crypto tax software can have serious tax consequences. It may affect both the size of your tax liability and the defensibility of your tax report when audited.
Knowledge of how accurate cost bases are obtained is essential. A big part of the battle when plugging data into software is to capture the correct cost basis. The consequences of not accurately handling transactions related to staking pools and wrapping or unwrapping (to name only a few), are significant. By doing this you may very well end up with inaccurate and inefficient reports.
The average trader racing against that dreaded tax deadline may be easily swayed by software that promises to “get your taxes done in less than an hour”. In reality, though, depending on your transaction volume, accurate reports may take quite a bit longer to produce. This. is true even if you possess ample technical expertise. Many nuanced issues require in-depth knowledge of the software on which transactions are reconciled. Technical know-how regarding data normalization and native crypto or DeFi context is just as important. This should prompt traders to seek help from crypto tax or data specialists (and not accountants or CPAs, who may not have sufficient crypto knowledge to compile these reports).
Generating an accurate and efficient crypto tax report goes far beyond hitting the “Generate report” button on your reporting software.
Complete transaction data
This arguably tops the list of issues that need to be nailed from the get-go. To capture the correct cost basis of an asset, you need a complete transaction history for the specific asset and the wallet in which it features. If not, the software assumes that you acquired the asset for a price that does not reflect its true activity. This results in an incorrect cost basis, which may cause capital gains or losses to be reflected inaccurately. As a partial solution, reporting specialists can utilize wallet tracing software. This solution enables them to find that Metamask or dead FTX account you may have forgotten about. Always remember that crypto tax software is only as good as the data you feed it. It cannot absorb all human error.
Always remember that crypto tax software is only as good as the data you feed it. It cannot absorb all human error.
Crypto tax reporting is very much a data game. The crypto tax reporting specialist can step in where you may lack the technical skills to pull data from the necessary sources. They may also be able to assist you to convert it into a format supported by tax software. Essentially, transactions can only be properly reconciled once data – containing as much information as possible – has been enriched and pulled into the software. Enriched data is data that has been normalized through a process that reduces redundancy and improves integrity.
Transfers between wallets
Without the correct intervention, transfers between your various wallets can cause cost basis-related reporting inaccuracies. Often, the software would report an asset withdrawal from your one wallet before the asset is received in the other wallet. This means that the cost basis of the asset will most likely be vastly understated, as the tax software may interpret it as missing inventory. Unless the issue is fixed, an incorrect capital gain will be realized when the asset is disposed of. Depending on how your tax software reports the ‘missing stock’, you might be blissfully unaware of this flaw. Transfers between wallets are import to keep track of, especially when large transaction volumes are involved.
A crypto tax specialist’s contextual and technical expertise is particularly useful to ensure that your DeFi activity is handled correctly. Granted, degens who are particularly invested in the DeFi world may have knowledge of the projects they are involved in. Having said that, it is one thing to understand the protocols. It is something completely different to grasp the intersection between DeFi activity and reporting software. For instance, it is crucial that any staking activity be marked accurately on your software. The reason being that transactions that are destined for a liquidity pool, but remain marked as disposals, may trigger gains or losses that should not exist. There are many other, similar examples where small knowledge deficits on the part of the DIY crypto tax reporter could have fairly large tax implications.
To capture the correct cost basis of an asset, you need a complete transaction history for the specific asset and the wallet in which it features.
Don’t go for the quick and easy option at the expense of quality and accuracy…
So, before you opt for that “generate while you wait” crypto tax report, consider whether a crypto tax specialist might not be better equipped to help you minimize your tax bill.
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