The majority of cryptocurrency activity will result in some sort of reportable transaction. This can cause difficulties both if you’re trading on a larger centralized exchange and if you’re using a smaller decentralized one.
On the larger platforms, your activity is much more likely to be reported directly to the IRS from the exchange. So of course, you need to make sure that your records match what the IRS is receiving to avoid receiving letters from them or trigger an audit because of some discrepancy.
But at least those platforms are doing some of the work for you.
Centralized Exchange vs. Decentralized Exchange Reporting
On a decentralized exchange, you’re entirely on your own. Coinbase is going to keep track of your transactions for you because they’re required to. Your MetaMask wallet is not. So you have to keep track of every bit of that activity on your own.
And for most of us, we’re not just using one platform. We’re trading on multiple exchanges and using different wallets.
Worse yet (at least from a tracking standpoint), a lot of us aren’t just trading either. We’re lending out our crypto, staking it, depositing to liquidity pools, etc.
All of that activity is not only taxable, but it also affects our cost basis for when we do eventually sell. If we aren’t properly tracking that basis, we could significantly overpay on our taxes once we eventually do sell the token.
This is why it is almost required that you use a robust crypto tracking software.
At some point we might do more in-depth reviews comparing the different tracking software programs (so far we have liked CoinTracker and Koinly, but most of the top tier ones operate similarly). The key to whichever one you choose being effective is for it to be AUTOMATIC. They need to pull and categorize these transactions for you.
While it’s theoretically possible for you to do all of this on your own (or with a software that requires more manual entry), the more manual the process is the less likely it is to actually get done. And the much more likely it is to have errors.
Those errors will cost you more than the software ever would – both in terms of overpaying your taxes and from unwanted letters from the IRS. Invest in a tool to help you avoid those unnecessary headaches.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
