Less than a month before the 2022 deadline for tax extension filers in the US, CoinTracker offered a Q&A webinar to help these crypto users reconcile their taxes on time. 2021 was a momentous year for crypto, and many entered the space without fully understanding their activities’ tax implications. The session was recorded, and the following is a recap of some of the most commonly asked questions in the session:
If I move coins from an exchange to a hard wallet, do I still need to claim a sale for tax purposes?
No, transferring assets between accounts and wallets that you own is not taxable. The cost basis of the assets is shared, so if you sell from your hard wallet, the capital gains are calculated from the original purchase price. If you have connected all wallets and exchanges involved in your crypto activity, CoinTracker will automatically detect which transactions are transfers.
Are NFTs I’ve created and sold taxed as regular income or capital gains?
Profits from NFTs you’ve made yourself will be taxed as ordinary income because you are in the business of selling and creating NFTs. If there are subsequent royalties that you’ve built into your smart contract, these are ordinary income as well. For more, read our NFT Tax Guide.
How do I classify margin trades in crypto tax software?
The final difference between profit and loss when you close out your margin contracts is what is subject to capital gains tax. CoinTracker allows you to tag margin trades so you are not taxed on every transaction. Read more about margin trading. It is best to consult a qualified tax professional, as the IRS has offered no explicit guidance on cryptocurrency derivatives.
Where can I find a first-time user demo for CoinTracker? My accountant is struggling.
Watch our CoinTracker Demo on YouTube and read our guide on How to Serve Your First Cryptocurrency Tax Client for CPAs. Our YouTube channel also offers walkthroughs on tasks such as uploading CSVs or connecting exchanges to CoinTracker. For crypto users trying to understand the accounting logic behind the platform, check out our Cryptocurrency Tax Guide.
Is staking Ethereum a taxable event?
Staking ETH is most likely not a taxable event. There is no clear guidance from the IRS, so this is a grey area. Liquid forms of staking, like converting to stETH or cbETH, could be considered a sale, and the conservative approach would be to treat these as taxable. Read our ETH 2.0 Tax Guide for more details.
If I have lots of DEX trades across many different wallets, do I really need to report all of these transactions? I suspect it’s easiest to only report the amount converted to cash.
You should be reporting all of your gains and losses to the IRS, whether they occur on a decentralized or centralized platform. Using CoinTracker is the easiest way to compile all these transactions into one tax report. Keep in mind that you won’t want to miss out on reporting the losses as well. The IRS has methods to determine where transaction information is missing, and you will only hurt yourself in the end. Omitting data from your tax return leaves you vulnerable to the IRS keeping an audit period open longer for you.
Are there any risks associated with using Specific ID or another method besides FIFO when reporting your crypto transactions to the IRS?
No, the IRS has given explicit guidance about which crypto cost basis accounting methods are acceptable, including FIFO, LIFO, HIFO, and Specific ID. Your taxable income may be wildly different depending on which method you choose. For more information on these methods, check out our blog on Which Cost Basis Method is Best.
If I buy small amounts of an asset regularly (i.e., dollar-cost averaging), how will the IRS know my capital gains when I sell?
Capital gains are calculated from each specific lot. For example, suppose you are using HIFO (Highest In, First Out). In that case, the assets you acquired at the highest price are sold first, meaning smaller capital gains immediately but potentially larger capital gains if you later sell your assets initially acquired for a lower price. With FIFO (First In, First Out), the coins you acquired first are sold first. The inverse is true for LIFO (Lowest In, First Out).
If I select FIFO for my first crypto tax reporting, can I change this for future years, or am I locked into that accounting method permanently?
The IRS allows you to calculate crypto taxes using different methods each year. Remember, however, that your chosen accounting method will impact the cost basis of your remaining assets that you may choose to dispose of in future years.
Today, CoinTracker allows you to change your cost basis method – though that change will also propagate to previous years and may require amending historical tax reports. We are aware that users may want to change their method on a yearly basis and hope to implement that functionality in the future. If you find this feature compelling, please feel free to leave your feedback on this post to better inform our product experience: Change cost basis method by date.
If you have any other questions about crypto taxes or extensions, please let us know on Twitter @CoinTracker.
CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ blockchains, and makes bitcoin tax calculations and portfolio tracking simple.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.