Day trading crypto only grows more popular as decentralized finance (DeFi) flourishes.
Dogecoin’s price surge has seen money flow into smaller altcoins like Shiba Inu Coin (SHIB). It’s also led to a frenzy on Twitter as crypto day traders discuss the hunt for new coins with immense growth potential.
Crypto day trading communities only grow as crypto prices rise. Many are also eager to share perspectives on chart patterns, price action and other technical indicators for coins.
While day trading can be an enticing way to profit big on virtual currency, volatility often means traders are executing many daily transactions. The allure of profits can quickly become a headache when it’s time for tax season.
Tax authorities are quickly becoming more stringent when it comes to collecting crypto taxes. In 2021, the Internal Revenue Service (IRS) secured court permission for a John Doe summons for crypto transaction records to Circle. As of early May, a request is pending to issue the same summons to the crypto exchange Kraken.
Unsurprisingly, those who trade crypto on a daily basis often run into the most trouble come tax time.
Back in 2018, IT consultant Mike Schreibman explained at one crypto tax conference he was thinking about filing an extension to give himself more time to analyze his many virtual currency trades. Credit Karma Tax General Manager Jagjit Chawla notes the "perceived complexities of reporting cryptocurrency gains" means many virtual currency holders wait to file taxes at the last minute.
Many Crypto Holders Remain Unprepared As Tax Scrutiny Heats Up
Bull runs in 2020 for both cryptocurrency and stocks led to a bevy of taxpayers realizing they have plenty of paperwork to handle in 2021. Taxpayer Mike Ziemer told NBC News his 2020 Robinhood tax form was 374 pages long.
CPA Robert Green, focusing on frequent traders, indicated "almost everyone comes in having booked a solid $200,000, half-million, $1 million and didn't pay estimated taxes" on investments like cryptocurrency.
Tax experts consistently warn crypto holders to be careful about filing taxes and to understand there’s several unique nuances for virtual currency. Currently, the IRS regards crypto as property, meaning holders should understand they’re subject to either the short or long-term capital gains tax rate.
While some crypto holders turn to a traditional accountant for advice - this route can sometimes lead to more harm than good.
Crypto-focused accountants can be hard to find or prove to be expensive. A traditional accountant might not know what to do with pages of transaction information or even where to start with categorizing and organizing crypto financial records.
Shane Brunette certainly knows what it feels like to agonize over his taxes. He ran into trouble after realizing he had a bevy of undocumented transactions on the Ethereum network after the 2017 ICO boom. Accountants were too expensive and tax software just could not handle intricate transactions.
He relied on a software engineering background to launch Crypto Tax Calculator, an online platform designed for day traders and casual investors looking for help totaling up crypto-based tax obligations.
Emphasizing supporting new protocols as fast as possible, Crypto Tax Calculator was the first tax software to support Binance Smart Chain and is able to accurately handle NFTs and other DeFi protocols like Uniswap and Sushiswap.
The software supports more than 100 exchanges and offers an accounting dashboard for users to understand their portfolios and owed taxes.
Software Remains An Effective Tool To Easily Calculate Crypto Taxes
Many might balk at paying extra money for crypto tax software solutions on top of accounting fees and/or the cost of a traditional tax software like TurboTax. But as regulators keep cracking down to make sure crypto traders pay their taxes, many are realizing a strategy of "hoping for the best" might be coming to an end.
Tax preparation software makes it easy for frequent crypto traders to keep up with obligations and make sure they know what they owe come tax time.
Prospective buyers should look for several key attributes in a software solution before making a final decision.
They should make sure the platform integrates with exchanges and allows CSV file uploads of crypto transactions for automatic categorization. It should also automatically generate tax forms like the Form 8949 (for US filers) and allow these forms to be saved and uploaded into traditional tax software.
Ideally, crypto tax software should also be able to keep tabs on current-year liability and automate year-end tax loss harvesting. Those who work with an accountant should find software that is CPA-friendly to make the entire tax process simpler and more cost-effective.
Overall, crypto tax software remains the easiest and cheapest way for crypto holders to calculate taxes and ensure they stay in regulatory compliance.
As the crypto world only gets more complicated, it is becoming more important than ever for day traders to understand how virtual currency transactions are taxed and how to easily handle large amounts of transactions.