The Importance of Record Keeping for Crypto Taxes

Crypto tax filing is data intensive

If you’re just getting started with your crypto tax journey, you may not know that you need to report every taxable transaction line by line for tax purposes. The IRS considers cryptocurrency as property, which means there is a capital gain or loss associated with each trade from Bitcoin to Ethereum to dollars. Each trade is reported as a separate line on Form 8949: Sales and Other Dispositions of Capital Assets.

You also need to be able to calculate the capital gain or loss across multiple years. This means you need to keep records of the cost at which you bought your cryptocurrency, or the IRS will assume the highest taxable amount for each of your transactions. If you traded several hundred times in the past few years, you can see the need to keep detailed records both to complete your taxes and in case you are audited.

Keep records for taxes in case crypto exchanges shut down

Another important reason to keep back up records is because there is a chance that a platform you use will shut down. For example throughout 2019, we saw the closure of Liqui, QuadrigaCX, Cryptopia and many other large crypto trading platforms. Unfortunately, these past exchange closures have only given clients a few weeks or months to download all of their transaction data — or often no warning at all.

It is possible to back-fill your transaction history, but it is very tedious and time consuming. For 

example, exchanges typically send email receipts or confirmations for each trade you make. While you can back-fill data from these email receipts / trade confirmations, you need to manually enter the information for each trade (the price, date of purchase, date of sale and amount).

Best ways to store your cryptocurrency transaction data

The best way to store your cryptocurrency tax transaction history is with crypto tax software or in a formatted database. If you are using multiple platforms (e.g., for decentralized finance lending), wallets, and exchanges, you will need to format and aggregate all of your transactions into one standardized spreadsheet. Another issue with filing your crypto taxes is the challenge of multi-year record keeping as an individual. You will need a price database along with the database of just your own transactions. The easiest way to accomplish this is via API and software.

Best practices for keeping records based on IRS guidance

The IRS provides guidance on how you should report your crypto holdings. For audit purposes, they suggest you keep records of “receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency” ( Question & Answer 45). Additionally, if you decide to specifically identify your taxable transactions (an accounting technique which is used to track capital gains and losses), the IRS suggests you keep the following records ( Question & Answer 39):

1. “the date and time each unit was acquired”
2. “your basis and the fair market value of each unit at the time it was acquired”
3. “the date and time each unit was sold, exchanged, or otherwise disposed of, and”
4. “the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”

Keep in mind that the typical audit timeframe is usually 3 years, but can be up to 6 years, so you should plan on keeping records in a database or crypto tax software for that time frame.

Additionally, the IRS is increasing its scrutiny of individuals holding cryptocurrency. In 2019 alone, the IRS sent letters to Bitcoin holders, released new guidelines for tax reporting, and added a crypto disclosure checkbox required for all taxpayers. Remember that many cryptocurrency transactions are stored on public immutable ledgers, so it is very likely that the IRS will increase its tracking ability in future years.

Contributors

Zac McClure, CEO of TokenTax, co-founded TokenTax after his career as an international financial accountant at JPMorgan, Imprint Capital and Bain. He has worked in over a half-dozen countries and received his MBA from the UPenn Wharton School.

Barrett Strickland, TokenTax Head of Analytics and Research, built her career as a lead analyst modeling structured finance deals and portfolios at Moody’s and in investment banking. As an MIT-trained economist, she began her career in research at MIT and Yale.

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