But if you had other gains from real estate, business, or you think you might have gains in the future...it might be worth auditing your crypto tax report to see if your loss was understated.

Because your losses can be used to offset other gains, income, or gains in future years.

So how can you see if there were losses you missed in 2022?\

How about we do it for you?

From now until May 18th, I'm offering free crypto tax audits where I'll dive deep into your crypto transactions and show you how much you could potentially save with our Done-For-You Crypto Tax Service.

We've already helped clients save collectively tens of millions in taxes by fixing errors made by their crypto tax software or accountant, and now it's your turn to benefit from our expertise.

If you'd like to claim one, just fill out our contact form for instructions.

Tax Loss Harvesting Explained

Crypto tax loss harvesting is a strategy that allows you to sell your underperforming crypto assets, creating a taxable loss that can offset your capital gains.

It can be one of the most effective ways to help reduce your tax bill and free up cash to reinvest in more profitable crypto assets. However, most of our clients wait until its too late to tax loss harvest and save on their tax bill. You have to sell the assets before the end of the tax year.

So we will discuss how tax loss harvesting works, and its drawbacks so you can make an informed decision with a tax professional about whether this is the ideal strategy for you.

Before you consider a tax loss harvesting strategy, it's important to get an informed opinion from a tax professional about how the rules apply in your country's tax code.

Comparing Tax Loss Harvesting in the United States and Australia

The differences between tax loss harvesting in the United States and Australia, for example, are substantial. A crucial distinction is the application of the wash sale rule in each country.

In the United States, the wash sale rule applies to securities. But many crypto assets like Bitcoin are not yet regulated as securities. This means that U.S. crypto investors can potentially sell an underperforming asset, claim the tax loss, and repurchase the same asset immediately without facing any restrictions.

In Australia, on the other hand, the Australian Tax Office (ATO) has released guidance indicating that it will crack down on wash sales involving crypto assets. The ATO has published a press release that it will use advanced data analytics to determine whether Australian crypto investors engaged in wash sales. And they have said that they will charge penalties + additional taxes on investors who attempt wash sales.

Therefore, in Australia it would be wise to only focus on selling underperforming assets that you do not want to hold long term or repurchase.

Crypto Tax Loss Harvesting Explained

To effectively utilize tax loss harvesting, you'll need an accurate cost basis for all your crypto tokens.

Cost basis is, simply, what did it cost to acquire the tokens you are trading to lock in a tax loss? This is not always easy to determine. Especially if you have tried yield farming, staking, or other decentralized finance protocols.

To get an accurate cost basis, you need to set up your tax software, manually categorize transactions the software doesn't automatically recognize, and reconcile your on-chain balances. This is something Crypto Tax Made Easy can help with.

Once everything is set up, you can simulate trades in your tax software to see the tax impact, avoiding any nasty surprises at tax time.

Crypto Tax Loss Harvesting Example

For example, if you bought some "MarsCoin" at $10, and now it's worth $5, selling MarsCoin will generate a $5 loss that can be used to offset your capital gains. This strategy also allows you to explore more promising crypto investments and potentially increase your profits.

It is important to understand the potential downsides of Tax Loss Harvesting which I will discuss in the next issue.

Need Help?

Ready to tackle your crypto taxes like a pro? Subscribe to download our crypto tax guide now. The Guide will teach you how to properly set up your tax software, start labeling transactions, and get an accurate cost basis.

If you need help or want someone to do it all for you, contact us at Crypto Tax Made Easy. We'll help you generate an accurate crypto tax report and ensure you don't overpay on your tax bill.

While crypto tax software can be useful for basic transactions, it may not be accurate for more complex transactions like minting NFTs, yield farming, or using self-custody wallets. This can lead to overpaying on your taxes.

In this article, we will discuss how to amend your tax return in the United States if you think you overpaid, as well as provide tips on how to get your crypto taxes done right.

Why Crypto Investors Usually Overpay On Taxes

Crypto tax software is typically designed to ensure compliance with tax laws rather than tax optimization, which can result in inaccuracies that take satoshis out of your pocket.

Additionally, the fast-paced nature of the crypto and web3 ecosystem makes it difficult for crypto tax software to keep up with changes.

As a result, investors may end up overpaying on their taxes.

What To Do If You Think You Overpaid

If you think you overpaid on your taxes, filing an extension or an amendment could save you money.

Filing an extension can give you more time to gather the necessary information to file an accurate return, while filing an amendment can correct any errors on a previously filed return.

Pros & Cons Of Amending vs. Filing An Extension

Filing an amendment can be beneficial, but it does come with audit risks.

However, if you are entitled to a refund, filing an amendment can result in receiving that refund sooner.

Additionally, a more accurate cost basis can save you money on future returns.

If you have not already filed a return, filing an extension can give you more time to gather the necessary information to file an accurate return.

However, it is important to note that filing an extension does not extend the time to pay any taxes owed.

Whether you file an extension or decide to amend your return, the first step is to get an accurate crypto tax report.

How To Get An Accurate Crypto Tax Report To Save Money

There are several options for getting your crypto taxes done right, including using an accountant, or using a crypto tax software and doing it yourself.

Each option has its benefits and drawbacks, so it's important to evaluate which is best for your specific needs.

Using an accountant has the benefit of getting an informed consultation about the crypto tax laws that apply to your situation, and how to minimize your taxes in a legal way.

A good accountant will generally do what they can to save you money without increasing your risk of an audit.

However, using an accountant does come with its costs, and many accountants do not have the capabilities to properly reconcile some of the more...degenerate transactions you might have done.

Benefits of using crypto tax software

Crypto tax software can save you time and effort by automatically retrieving data from the blockchain, tracking trades, and calculating your tax liability in real-time.

Additionally, using crypto tax software to keep a ledger of transactions can provide a starting point for manual review.

Manual review for accurate tax reporting

While crypto tax software can be a helpful tool, conducting a manual review is crucial to ensure accurate tax reporting.

This can be done independently using a step-by-step guide or by hiring a professional firm like ours at Crypto Tax Made Easy.

Conducting a manual review involves reviewing transaction details, interpreting smart contracts, fixing inaccuracies, and applying the correct labels for compliance with tax laws.

It also involves making sure your crypto balances in the tax software match your on chain balances, a process called "reconciliation".

Integrating your report with tax software or CPA services

Once you finish a manual review, or have a firm like ours do the review for you you can now file your return or file an amendment.

You can send the report to your accountant and they can review it, include it in your tax return, and file the return or amendment on your behalf.

Or, you can use a tax software like TurboTax to upload the report and follow their instructions for filing the late return, or filing an amendment.

Accurately reporting your crypto transactions can be challenging but taking the time to get it right can save you money in the long run.

By using crypto tax software effectively and conducting a manual review for accurate reporting, you can avoid overpaying on your taxes.

We encourage you to take the necessary steps towards mastering crypto taxes by working with a firm like Crypto Tax Made Easy, or requesting our step-by-step guide for setting up crypto tax software and conducting a manual review.

Here's how to do it.

If you will be using an accountant this year, you can have them file on your behalf.

And if you are filing taxes yourself through Turbotax or a similar software, below are the DIY instructions to file an extension.

1)Determine if you need to file an extension:

The IRS automatically grants a six-month extension to file your tax return if you pay at least 90% of the tax you owe by the original due date (this year is April 18th).

However, if you fail to pay at least 90% of your tax liability by the original due date, you may face penalties and interest.

An extension to file is not an extension to pay. This is an important distinction!

2)Download Form 4868:

To file for an extension, you'll need to fill out Form 4868, also known as the "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return." You can download the form from the IRS website or pick up a paper copy from your local IRS office.

3)Fill out Form 4868:

On Form 4868, you'll need to provide your personal information, and you'll also need to estimate your tax liability for the year and how much you've already paid in taxes. The form will calculate the balance due or refund owed, based on the information you provide.

Alternatively, you can do your tax as normal in TurboTax or TaxAct and use that + your best guess as to crypto tax owed as an estimate on your tax liability.

But most people lost money in '22...so who am I kidding!

4)Submit Form 4868:

Once you've completed Form 4868, you can submit it electronically through the IRS e-file system or mail it to the IRS at the address listed on the form. If you're mailing the form, be sure to send it certified mail, return receipt requested, so you have proof of mailing.

5)Pay any tax due:

If you owe taxes, you'll need to pay them by the original due date to avoid penalties and interest. You can make a payment online using the IRS Direct Pay system, pay by credit or debit card, or send a check or money order with your Form 4868.

6)Keep a copy of your extension request:

Once you've filed for an extension, keep a copy of Form 4868 for your records. This will help you keep track of the new filing deadline and ensure that you've fulfilled your tax obligations.

And if you need help getting your crypto taxes done with less stress, go to https://cryptotaxmadeeasy.com/pages/contact to get a quote.

Good luck!

Matt

Most accountants haven’t even figured out how to help their clients, either.

So you’re kinda in this “do I overpay my taxes? Or just not report them and go to jail” situation.

But it doesn’t have to be that way. 

And I’ve committed to help make crypto tax easy again (I long for the days when I just bought and HODL'd Bitcoin)

So in this article, I will teach you everything you need to know to get a handle on your crypto taxes this year.

Who Am I To Teach This?

I want to say straight out of the gate that I am not an accountant. So it is important to consult your accountant when implementing this information.

I’m just a guy who has been in crypto since 2017 and had a lot of anxiety around my crypto taxes. So I wanted to do something about it.

I beat my head against the wall for HOURS trying to figure out why my crypto tax software was showing 2x the capital gain I was expecting for the 2020 tax year.

And even after I went back to fix the transactions manually - I still made some costly mistakes because I didn’t know what I was doing.

I vowed to learn how to properly do my crypto tax for the 2021 tax year so I didn’t overpay and stress so much.

And after hours of research I learned that if you know what you are doing it’s actually pretty easy to fix the crypto tax reports (and potentially save a ton of money!)

That’s why I decided to record all the time & money saving tricks I learned to help other people.

I created a Continuing Professional Development (CPD) course that teaches accountants & bookkeepers how to do this for their clients.

I’ve also created a service that does people's crypto taxes for them.

And in today’s article, I am going to break down for you some of the strategies we use to reduce clients taxable crypto gains.

That way, if you choose to do this yourself, you have a starting point to reduce crypto tax induced stress & anxiety!

Understanding Crypto Taxes

There are some basic principles you need to understand when it comes to your crypto taxes.

There are going to be two areas where you get taxed (depending on the tax laws in your country).

1)Income from crypto.

Depending on the tax laws in your country, this might include:

• Getting paid in crypto

• Earning crypto rewards from staking tokens (including NFTS)

• “Interest” from centralized platforms like Nexo or decentralized platforms like Compound, Aave, etc.

2)Capital Gains/Losses

This is the amount you earn or lose from acquiring & disposing of crypto assets.

Usually, the way this to calculate capital gains is by taking the value of the tokens you dispose of (trade, send to driends/family, etc.) and subtracting the cost basis of those tokens.

The cost basis is essentially: how much did you acquire the tokens for? And there are multiple ways to calculate this (consult your accountant to determine the best cost basis method for you)

Ex. if you bought 1 BTC for $3000 and sold it for $20000 your taxable gain is $17k.

This basic concept is important to understand. Having an accurate cost basis for your tokens can be the difference between getting a tax credit this year vs. paying for a gain you didn’t actually make!

Now that we’ve defined some basic terms, let’s talk about how to sort out your crypto taxes.

Should I Use Crypto Tax Software

The best first step to make crypto tax easy is to start using a crypto tax software.

But, crypto tax software is still a new product. And like all new products, there are some kinks to work out.

The biggest problem with crypto tax software is that their reports often overstate how much you actually need to pay in taxes. Or they understate your gains.

Why? Because they are not equipped to handle many defi and NFT transactions properly. 

Especially, the more “degen” plays.

I’ve seen people whose crypto tax software said they had a $5.5 million gain. And by applying the principles I’ll teach you in this article, I was able to help them get that down to a $200k tax loss. Legally.

That’s the difference between liquidating $2.5 million in your portfolio vs. getting to apply a $200k tax credit. 

I’ve also seen some people who have used a crypto tax software in 2021 and were happy to see a loss on their report. So they didn’t question it.

But then in 2022 they had an unfathomably high gain because their cost basis went to near $0 and every transaction they made looked like a gain.

So does this mean you should avoid crypto tax softwares completely?

No!

They are incredibly valuable.

-They automatically pull your transaction data off the blockchain.
-They accurately track your cost basis.
-They are decent at automatically categorizing basic transactions (buy, sell, transfer).

So crypto tax software beats the hell out of using a spreadsheet to track transactions, calculate cost basis, capital gains, costs, etc.

And when you manually categorize your transactions properly, crypto tax software handles all the heavy lifting of calculating your taxable income for you.

But Why Do Crypto Tax Softwares Overstate My Gains?

The purpose of a crypto tax software is not to save you money on your crypto taxes.

The purpose is to make sure that you file a crypto tax report that is compliant with your tax office’s regulations.

So, by default, it will give your transactions the most strict tax treatment possible.

It is up to you and your accountant to determine which tax laws are applicable, and which aren’t. 

And then, you must manually edit the transactions in order to get a more accurate report to avoid overpaying.

What types of transactions cause problems?

I’ve found the following list of transactions to be the most likely to have errors in crypto tax softwares.

• Yield Farming or Staking Altcoins

• Trading on a Dex

• Presales, Private Sales, ICOs

• Using Autocompounders

• Buying rewards tokens

• NFT Mints and Pre-mints

• Bridging tokens cross-chain

• Providing Liquidity

• Locking liquidity or tokens

• Staking on dexes for rewards (Pools, Raids, Citadels)

• Lending Networks (Like ola.finance)

But two other issues that can massively inflate your gains on a crypto tax report include:

• Centralized exchanges like Kucoin and Crypto.com have incorrect timestamps

• Forgetting to add ALL of your wallets to the software

What is The Best Crypto Tax Software?

I tried 6 crypto tax softwares (Koinly, Cointracker, Taxbit, Zenledger, Cointracking, Coin Panda)

Some of them were an immediate write off because they didn’t even support Binance Smart Chain wallets or some other chains I was using at the time (like FTM).

Others annoyed me because you needed a paid plan before seeing whether they worked.

And some just straight up did not have the capacity to interpret defi transactions.

Ultimately I found Koinly to be the undisputed champion of the space because:

1)You can preview your tax report for free
2)They have great customer support, even before you pay
3)They support every blockchain & exchange I used, but even if they didn’t I could upload a formatted csv of the wallets to pull the data in
4)Every crypto tax software struggled with NFTs and Defi. Koinly struggled the least.
5)The interface made correcting errors really easy to do.

*Note that I became an affiliate for Koinly after testing these softwares and choosing to use it for myself. I also use Koinly's accounting plan in-house for my firm.

How Can I Fix My Crypto Taxes?

Once you learn how to do your crypto taxes, you can usually fix all the high impact errors yourself.

It just takes time! So don't wait until last minute to start (unless you want to file an extension).

There are a few steps you need to take to lay the foundation.

Step 1: Set up your crypto tax software account. Pick whichever you want, but I prefer and recommend Koinly.

Step 2: Add all of your wallets and exchange accounts through either CSV or API.

Make sure to include EVERY blockchain you made a transaction on for each Metamask Wallet.

DO NOT try to hide wallets, this will lead to you paying more in taxes 9.9-out-of 10 times! If you used it: include it.

I've included some of Koinly's help documents for this step:

• Overview

• Importing data from exchanges (2 options): 

• API Import

• Importing from Blockchains:  
  *(needed for EVERY network you used with a self custody wallet like metamask)

• Importing from Ethereum Network Metamask
  

Step 3a go to the “Dashboard” in Koinly and see whether the balances Koinly shows for each token matches what is actually in your wallet.

You may want to use a wallet scanner like tin.network for your self custody wallets to get a picture of their balances for comparison.

If it matches, your report is probably already accurate.

If the balances don’t match, like in the examples pictured, then you know which tokens you need to focus on fixing errors for.

Step 3b Go to your “Tax Reports” tab and take a screenshot of the numbers it gives.

This gives you a baseline to work off of, it’s nice to go back later to look and see that your work might just have paid off ;)

Step 4 Click the “Settings Tab” and select the options that match the tax laws in your country.

By default, all of these are turned “on”

Consult your accountant about which are applicable to your country’s tax code, and which can be turned off.

You should also consult your accountant about which Cost Basis method is best for your situation. Once you choose a cost basis method, you must continue to use this every year. So this is an important step.

Finally, make sure the other settings are correct (ie. country, currency, tax year)

Now, you are ready to start investigating your transactions and correcting errors.

As I mentioned earlier,I have a course that shows you exactly how to do this for every possible transaction that will overstate your capital gains.

But for the purpose of this article, I am going to focus on two that I’ve found save people the most amount of tax in the least amount of time.

Liquidity Transactions

Adding liquidity to decentralized exchanges and yield farming are probably the most difficult for tax softwares to label.

The best way I have found to fix this is to grab the contract address for all of the liquidity pools you have entered from the blockchain scanner (like etherscan.io)

You can then search Koinly for transactions you made with these LP tokens.

Many times, I see gains overstated because people haven’t labeled moving their LP tokens into yield farms as “sent to pool” and “received from pool”.

This usually means that when you remove liquidity, and if you sell the tokens from your LP that they have a $0 cost basis.

This means that you are taxed on 100% of the gain.

Whereas when you properly label the transactions as sent to pool & received from pool the cost basis is attributed to the coins.

For example if you added $100 of BTC and $100 BNB LP on Knightswap today, the LP token should be valued at $200. 

When you send the LP to a yield farm, and label it as “sent to pool” in Koinly then there is no taxable event.

And when you take it out and label the transaction “received from pool” then the cost basis for the LP token is still $200.

If you remove liquidity the BTC and BNB you receive are assigned a $100 cost basis each.

If you sell both for $150 each then you have made $100 in taxable gains:

$150 x 2 = $300 sale price
- $100x2 = $200 cost basis
=$100 taxable gain.

Compare this to if you do NOT label the transactions as sent/received from pool.

When you send the LP tokens to the farm it looks like you disposed of them at $200. Any gains that might have occurred are taxed.

For example, If you only had a $50 cost basis for the BTC and $50 for BNB, then you actually have a $100 cost basis.

But the value of the LP token is $200 when you “dispose” of it by sending to the pool without labeling the transaction accordingly.

This locks in a $100 capital gain.

 Then, when you take the LP tokens out, it looks like you got them for free.

So the cost basis is $0.

If you then remove liquidity the cost basis for your BTC is $0 and the cost basis for your BNB is $0.

So if you sell $150 of BTC and $150 of BNB it looks like another $300 taxable gain!

Therefore, the difference in taxable income in this scenario is 3-4x reality. If your Liquidity transactions are not labeled correctly, you are massively overpaying!

Another place where liquidity transactions can go wrong in Koinly is when a token you add liquidity to does not have a coinmarketcap price feed.

Koinly will assume a $0 value, and it’s automations will not label this as a Liquidity transaction. 

Instead it either looks like you disposed of both tokens in the liquidity pair (taxable gain). r that you received the tokens for free ($0 cost basis, 100% taxable gain if you sell) 

So this is where you have to manually add the correct value of the tokens on the day where you add liquidity. Next, you merge the transactions so  Koinly recognizes them as a Liquidity transaction.

Staking Tokens & Pools

Another area that can cause issues is if you are staking tokens. For example, with KNIGHT pools or raids in decentralized exchanges like Knightswap.

For example, if you stake a DEX reward token like KNIGHT in pools/raids or whatever the dex calls it to earn other tokens.

This is another area where your tax can be massively overstated. The problem & solution is the same as with LP tokens

You must manually label when you stake tokens anywhere as “sent to pool”, and “received from pool” when you unstake.

Getting Help With Your Crypto Taxes

Would you love to get more support, step-by-step videos, as well as handy cheat sheets to make your crypto tax even easier?

If so, our Crypto Tax Made Easy course shows you EXACTLY how to identify & solve all the issues that commonly inflate your taxable gains by 3-4x.

If you'd rather just save the time & energy and have somebody else deal with your crypto taxes we also offer a “done-for-you service”. We do all of the heavy lifting to make sure you have an accurate tax report.

That way, you can have peace-of-mind that you are neither overpaying, nor potentially submitting a report with errors that get you in trouble in case of an audit.

I'm Matt Walrath, founder of Crypto Tax Made Easy, and my mission is to reduce your stress & anxiety around crypto taxes.

So despite the seriousness of the topic...I endeavor not to bore you to death. I'm not an accountant so that should be easy...no offense accountants, I love you guys ;)

So if I'm not an accountant, who am I to help with crypto taxes?

A little background:

In 2020 I started experimenting in the wonderful world of Decentralized Finance (defi). But this created an absolute nightmare at tax time.

Prior to 2020 my crypto taxes were easy. I bought and HODL'd BTC and ETH on centralized exchanges. Nothing too complicated.

With over 1000 defi transactions in 2020, I had so much stress & anxiety while trying to get an accurate tax report!

I ended up having to file an extension, but this didn't help because I couldn't find a competent accountant to help me navigate the tax impact of defi & NFTs.

I tested out 6 different crypto tax softwares, and all of them gave me wildly different estimates of what I owed the tax man.

And many lacked integrations with some of the 'exotic' blockchains I was using at the time...like Binance Smart Chain (not so exotic anymore!).

I ended up finding one tax software that was the least-bad of all (more on that soon). And developed a system to fix all of the transactions it got wrong in a time-efficient manner.

I documented my process in detail because I didn't plan to stop using defi. And I wanted a guide that I could reference in future tax seasons. That way I didn't have to keep re-learning the process.

I shared this guide with one of the crypto communities I was a leader in. And things snowballed from there.

Hundreds of people purchased the DIY crypto tax guide. And collectively they saved tens of millions in taxes vs. what the crypto tax softwares estimated they owed.

A few accountants in the crypto community asked me if I could train their firm on the process. And I developed a continuing professional development (CPD) curriculum for accountants.

Then, one of my friends in the community asked me if I could just do his crypto tax report for him. I did, and our done-for-you crypto tax service was born.

Now my goal is to share more of what I've learned publicly to help those suffering with stress & anxiety related to their crypto taxes. And this newsletter will serve that function.

So stay tuned, and make sure to subscribe if you need help as the next issue will be my Ultimate Crypto Tax Guide.

Big love,

Matty Dubs

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