Tax authorities in jurisdictions around the world are paying ever closer attention to crypto trades and related payments as a source of revenue. Their focus has, in turn, highlighted the importance to crypto investors of high-quality transaction data – its being complete, structured, accurate, validated, and available.
High-quality crypto transaction data covers the complete series of transactions in a given date range, including all deposits, withdrawals, trades, and transfers to other wallets and exchanges. You need all of that to accurately calculate an asset’s correct cost basis – and, ultimately, the profit you made on it.
Transferring assets from wallet to wallet on multiple exchanges, you can quickly lose track of the data you need to calculate your cost basis and profit.
In simple terms, an asset’s cost basis is the amount paid for the investment, plus any commissions or fees. Consider the following example:
- You purchase 2 ETH on 1 February 2019, valued at $214, and you pay a 5% transaction fee. The cost basis is therefore $224.70.
- You sell 2 ETH for $9760 in November 2021. To calculate the profit or loss made from this sale, you subtract the cost basis from the proceeds. The profit is $9535.30.
Our example is a simple one. In reality, things can get a lot more complicated. Taking advantage of crypto’s decentralized, easy transferability – moving assets from wallet to wallet on multiple exchanges – you can quickly lose track of the data you need to make these calculations.
Incomplete or inaccurate data may result in the cost basis being distorted, which could artificially inflate gains (raising your tax) or undercount them (raising your chances of an audit).
Crypto capital gains tax in the United States
In the United States, cryptocurrency is viewed as a capital asset, potentially subject to tax. When an individual disposes of a crypto asset and generates a profit from it – whether by trading one crypto asset for another or using crypto to buy goods and services or fiat currency – they are liable to pay capital gains tax.
The tax rate applied to capital gains depends on how long an individual holds their crypto asset. Keep it less than a year and a short-term capital gains rate will be applied; anything longer than that is subject to the long-term capital gains rate. Short-term capital gains are subject to the same tax rate as taxable income. Long-term capital gains is subject to a 0%, 15% or 20% rate, depending on the individual’s income.
Incoming – your crypto capital gains are on the IRS’s radar
If you think that the Internal Revenue Service (IRS) and other tax authorities are oblivious to your cryptocurrency holdings and associated capital gains, you might want to take a seat now. Whether you use centralized or decentralized exchanges, they are very likely to know you’re trading. And, if they suspect a closer look will be worth their while, what they don’t yet know, they can and will find out.
The IRS has an array of tools to track your transactions. For instance, if you are based in the United States, your exchange may have had to provide them with a Form 1099-K or Form 1099-B on your behalf. They are legally required to issue the first of these if an individual makes 200 or more crypto transactions via a third-party payment network in a given tax year, the volume of which equals at least $20,000. (The American Rescue Plan of 2021, a stimulus bill, lowered this threshold to $600, but the IRS delayed its implementation until this year. Form 1009-B pertains to individual trades.)
If you underestimate capital gains by accidentally leaving out data or relying on inaccurate information, you could find yourself in hot water.
Other methods that the IRS uses to track activity include the issuance of subpoenas to exchanges, ordering them to disclose information pertaining to user accounts. It has also consulted various blockchain companies to assist it with advanced data analysis and tracing.
Save yourself trouble with high-quality crypto transaction data
Data integrity is essential to fair and accurate assessment of capital gains. We know the IRS can track cryptocurrency transactions. We also know that they are able to verify the content of corresponding tax reports on the blockchain. So, if you file a tax return that underestimates capital gains by accidentally leaving out data or otherwise relying on inaccurate information, you could find yourself in hot water.
On the plus side, if you ensure that your transaction data is of a high quality from the start, you’ll save yourself a lot of hassle down the line. Your first tax return covering your investment activity will form a very solid foundation for tax reports in subsequent years. Asset value will be captured correctly and capital gains will be much less likely to be over- or underestimated.
For individual traders and reporting firms alike, ensuring a high quality of transaction data cannot be overstated. It’s the basis for accurate and efficient reporting, which is in everyone’s best interests.
(Disclaimer: This does not constitute financial advice)