Cryptocurrency Trading Poses Unique Challenges for Tax Time

Tax time is approaching, and for crypto investors that means navigating a quickly evolving arena when it comes to ensuring accurate financial reporting.

Because of the unique characteristics of crypto trading, such as the large size of some trades as well as the ability to trade in a variety of jurisdictions, Vamshi Vangapally, the CEO and co-founder of the cryptocurrency tax software BearTax, said those trading in crypto have other factors to consider when filing their taxes.

Recently, the IRS released new guidance for cryptocurrency traders outlining the rules around filing taxes as a charitable organization that accepts virtual currency, something that has recently been on the rise.

Regulators in Canada also revealed new information about filing cryptocurrency trades in January, which defined when crypto trades fall outside of the country’s current securities laws.

Changes to securities regulations have been a marker of the increasing interest and overall adoption of digital currency as a viable asset, but since one of cryptocurrency’s strengths is in its maneuverability, and trades happen rapidly, filing the gains or losses during tax time can be challenging.

This is where BearTax comes in, Vangapally said.

The executive explained he decided to start the company when he fell into some tax trouble over his own cryptocurrency transactions. Existing solutions weren’t able to handle a high volume of transactions so he, along with his colleagues, founded BearTax in 2018.

Vangapally spoke to the Investing News Network (INN) about the software and the unique hurdles facing crypto traders who want to avoid the ire of tax regulators.

The following interview has been edited for clarity and brevity. Continue reading for more of what Vangapally told INN.

Investing News Network: What’s unique about filing cryptocurrency trades, and what are the unique challenges of doing so for tax time?

Vamshi Vangapally: It begins with the jurisdiction of the exchanges that you trade (in). They are in different countries, and they are not mandated to provide the tax documents. If you’re trading your stocks on Robinhood or Ameritrade or other e-trade platforms, they provide you (with) a document where your gain-loss is being defined, and you get the document for trading stock. But for cryptocurrency exchanges, you don’t get those kinds of documents. That’s the first challenge.

The second one is stocks are always traded in US currency. So you trade with the USD and you know exactly what you purchase it for and what you (sold) it for, but cryptocurrency, you trade between crypto … you sell bitcoin and buy ethereum. You trade a lot of these between different coins and that’s a huge number of permutations and combinations. All these things have to be broken down into US dollars.

And then consolidating all of them together and matching them (in) first in and first out; you have to do it all yourself because there is no central entity providing all this information and obtaining all these things and providing a document, so you have to do it all manually. Getting information from all exchanges into a unified format is a challenge.

INN: How do you file your cryptocurrency trades on your taxes with the software?

VV: You have to put all your trades together and you have to match them … what you bought first and what you sold, and then you have to find out the gains on each asset (to) put them on your taxes.

Our software will help you import trades from 60 different exchanges using direct connections like an API (application programming interface). You can download the file from their exchange or you can stick with an API and get those trades, so they are all consolidated on our platform and we identify all the transfers automatically. You can tell where (you got) it from and the right price. Finally, it does the FIFO matching, first in, first out, depending on the algorithm that you choose, and it gives you a gain or loss. It lets you preview the gain-loss on each asset. You can go by the details, like when did you acquire it, when did you (sell) it, what was the cost basis, what’s the purchase price, what (were) the total proceeds, the selling price and the net gain or loss, whether it’s short term or long term.

It’s a detailed document that you get … and you can also export it to Turbo Tax, if you’re filing it yourself, and various other formats … for audit purposes like if ever you get questions from the IRS, then you clearly show them “Okay, this is asset that I bought on this particular date, and I sold it on this particular date.”

INN: What does the new IRS guidance mean for cryptocurrency traders?

VV: It actually gives more confidence to traders on how to post the gains because it was all unclear before that. There was only one statement saying it’s treated as property and you have to follow the capital gains rules for that. It’s more detailed on how different ways of getting the crypto and different ways of trading crypto are going to be charged.

If you’re getting free crypto, you put it in (as a) zero cost basis, like referrals and gifts and mining, you just put it in as a zero dollar cost basis, and that’s leading to huge gains.

INN: Could you talk a bit about smart matching and where it plays into crypto trading and filing your taxes?

VV: Crypto exchanges are spread out across the world. You have US-based exchanges, like Coinbase and Bittrex, and you have Binance, which is located in Asia, and there are a bunch of other exchanges that you use to buy some lesser known coins, so you’re moving your cryptocurrency between various exchanges. You move it from one exchange, because you have to buy it in USD on Coinbase and then move it to another exchange and from there, to somewhere else. All this movement has to get tracked properly. If not, the asset going out of one particular exchange could be treated as a taxable event instead of moving your money across the exchanges.

What our smart matching algorithm does is it considers the threshold on timestamps, how much time it takes from one exchange to another exchange, the fees (incurred) and also the quantities that move between the exchanges and it consolidates all this information. It also reduces the number of taxable events.

Other platforms … push you into a negative balance because the system doesn’t understand where you got some bitcoin like an unexpected deposit, like your friend bought it for you and he sent it to you, so the purchase of that particular bitcoin is not recorded anywhere. In our system, … the user can classify (deposits) into 13 different categories so that they can be classified as mining or staking or they got paid for doing some kind of service or they’re referral bonuses. So they’ll be appropriately put into different buckets like whether they should be assigned for the capital gains or they should be income so we provide income statements based on this classification, too.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.