What Is Crypto Tax Software and How Does It Work?
Crypto tax software is a necessity for many individuals and businesses managing cryptocurrency portfolios. As the IRS classifies digital currency as property, which incurs capital gains and losses taxes, accounting for these items with traditional methods can be a difficult task. However, with crypto tax software, the process becomes as simple as inputting a few numbers into an interface (such as how much you bought coins for and their price now) to generate an end result of your total profits.
How Does It Work?
Crypto tax software typically stores your cryptocurrency holdings in digital wallets, which are different from traditional bank accounts. When working with crypto tax software, you input the wallet address of your crypto wallet into the program’s interface to receive a report detailing how much you’ve managed to make and how much capital gains/losses you incur accordingly. The most common types of wallets are Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).
The end result is a report with information on the portfolio’s balance, profits, and losses. The currency-type field for each coin shows the amount of U.S. dollars that you’ve made. The total investment amount is listed below the number, which can be your total investments or just what you invested. Under “Total Portfolio Value,” you’ll find the gains you’ve made according to the crypto tax software’s calculations. The difference between the value of your portfolio and your total investment amount is how much capital gains/losses you’ve incurred.
The report generated by cryptocurrency tax software also includes any expenses incurred, including transaction fees as well as exchange fees. Along with transaction fees, exchange fees are an especially common expense to incur when trading cryptocurrencies on an exchange like Coinbase or Binance.
The report generated by cryptocurrency tax software will also break down your profits and losses by currency type. As seen in the image above, the report generated by cryptocurrency tax software breaks down the value of your gains based on specific currencies you’ve held. For example, if you hold Bitcoin in both BTC and LTC, then these would be listed as separate profits on your report. Other currencies that you have held would merely have a total value added to them as if they were another type of currency altogether.
For investments that are too small to show up on the screen (such as small amounts of Bitcoin or other cryptocurrencies), you can still access their information via the “Summary” tab at the top of the program’s interface.
Another feature of cryptocurrency tax software is a built-in calculator, which serves as a useful tool for investors. For example, if you are in India, then a crypto tax software will calculate crypto tax in India according to the measures specified by the taxation body. The best part about this feature is that it’s always accessible from within your crypto tax software program.
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