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A complete guide to taxes on crypto

Taxes on crypto is a massive headache. We set out to solve all the problems we were facing with crypto taxes. This is the solution we found.

This is not financial advice or tax advice. Just entertainment obviously.

Doing taxes in DeFi and crypto is a massive headache. Especially if you’re using bleeding edge protocols.


How taxes on crypto works is different in every country and you should make sure you understand it before you make any trade. You will regret not doing it.

Table of contents

Problems we wanted to solve

  • Understand transactions from a tax perspective.
  • Be able to assess taxes before every transaction.
  • Not have to doxx both blockchain addresses and personal information.

How taxes on crypto work in general


In general tax is calculated when you sell. And have a realized gain.

Example

  • Jan 1
  • Buy: 7 Ethereum
  • Price: $200
  • Nov 30
  • Buy: 3 Ethereum
  • Price: $750
  • Dec 30
  • Sell: 3 Ethereum
  • Price: $1000

Tax for the sell is calculated like this:

Sell price – Cost basis = Realized gain x TaxRate

What is Cost Basis?

The method for this varies between countries. These are some common ways to calculate it.

FIFO

Certain countries use FIFO. First-in-first-out to calculate cost basis for every sell.
The sell order of 3 Ethereum in our example starts from the first purchases as cost basis.

  • Cost basis = $200 / ETH

LIFO

Certain countries use LIFO. Last-in-first-out to calculate cost basis for every sell.
Every sell of Ethereum starts from the last purchases as cost basis.

  • Cost basis = $750 / ETH

Average Cost

Certain countries use Average Cost. Average cost is calculated from the total cost purchases divided by the total number of units purchased.

Cost basis:

  • 7 ETH x 200 = 1400
  • 3 ETH x 750 = 2250
  • 3650 / 10 = 365
  • Cost basis = 365 per ETH


Example – Calculating taxes on crypto

Let’s say our country applies Average Cost Method.
The capital gains tax on crypto trades is 40%.

Sale: 3 ETH for $1000
Cost Basis. $365 / ETH

Sell price – Cost basis: 1000 – 365 = 635
Realized gain x TaxRate: 635 x 0.4 = 254
Our sell of 3 ETH: 3 x 254 = 762

Tax
$254 per ETH
$762 in total for this sale.

Cost basis after sell
Total ETH: 7
Total cost: 3650
Cost basis: $521.42

Make sure you double check this with a tax professional.

Where it’s get complicated is when you have 40 different coins and 100 purchases and sells per coin. That’s when you want to use a service/software.

Services

These are services which we’ve paid for and tried out. We have an affiliate link to Koinly because it was the one that solved our problem.

Koinly

Summary

Understand transactions: You can select and categorize every transaction from multiple categories.
Control: Easy to get an overview and to work through your transaction history.
Doxx: Only blockchain. No personal info.

How to not doxx when signing up

  • Create an e-mail that you only use for this service.
  • Get a VPN.
  • Sign up.
  • Submit your exchange data in CSV and remove any personal info.
  • Pay for the service in BTC, ETH, Dai from one of your wallets.

Done.

Setup

  • Configure settings for country and currency.
taxes on crypto
tax crypto
  • Add your wallets.
crypto taxes
  • You can add exchanges and Blockchain addresses.
  • You can sync via API or manually a CSV file to import your transactions.
taxes on crypto

Checking transactions

Once you have your wallets imported you can go through transactions from the beginning to see that they’re correct.
We had no issues with CSV or exchange imports. The ETH addresses needed few tweaks though.

  • Click transactions or wallets -> transactions.
irs cryptocurrency
  • To the left you can select any of your wallets.
  • Filter on different types of transactions
  • Filter on currencies.
cryptocurrency taxes

Here you can go through every single transaction and make sure it’s correct.

  • Select transaction
  • Click link to check the transaction on etherscan if you don’t recognize it.
taxes crypto
  • Click the 3 dots to edit or tag the transaction.
taxes on crypto
  • Change type of transaction if needed.
  • Select/change wallets.
  • Make sure the USD value is correct.

Finishing Tax Report

  • Once you’ve gone through everything you should have correct balances in your dashboard.
  • If there’s any errors in your ETH wallets Koinly will notify you.

  • Click Tax report.
  • See your full tax liabilites
  • Download reports for totals and separate coins.
  • Get warnings if there are any remaining errors.

Cointracking

Summary

Understand transactions: You can select and categorize every transaction from multiple categories.
Control: Not easy to go through and correct transactions.
Doxx: Only blockchain. No personal info.

Signup

  • You can create an account without doxxing in the same way as on Koinly.

Setup

  • Add exchange wallet via API
  • Or import CSV / Excel files.
  • Here you can view and go through your trades.

    The problem is that it’s hard to correlate trades between different wallets and exchanges. And to get any sort of overview.
taxes crypto
  • View realized/unrealized gains
  • Balances
  • Trades
  • Portfolio

TokenTax

Summary

Understand transactions: You can select and categorize every transaction from multiple categories.
Control: Not easy to go through and correct transactions.
Doxx: Paying in crypto wasn’t possible in 2020.

Setup

  • Add exchange wallet via API
  • Or import CSV / Excel files.
crypto taxes
  • The interface is not as clunky as cointracking.
  • See realized/unrealized gains.
  • Download reports.

The problem here is similar to Cointracking where it’s hard to correlate transactions and go through your trades when something’s wrong.

Hope this helps you out. Read more about getting started in DeFi in our post.

Crypto taxes

You really need to understand crypto taxes before you start trading. Koinly (affiliate) was the only service that solved our problem with crypto and DeFi tax. It's easy to use and you can try it for free.