5 Common Crypto Tax Tool Problems (& How to Fix Them)
While crypto tax tools have become increasingly popular for simplifying this process, they aren’t without their own set of challenges. The most common crypto tax tool problems include inaccurate data import, missing transaction details, and gray areas in crypto taxation.
In this practical and insightful guide, we will tackle each of these common problems head-on and provide solutions to ensure your crypto tax reporting is seamless and trouble-free.
Table of contents
1. Spam Airdrops or Honeypot Airdrops
In most countries, like the US, these surprise tokens, called airdrops, are taxed as regular income based on their value when you receive them. However, anyone can airdrop crypto into your wallet without your permission, opening the door to “spam airdrops.”
So, why would someone spam your wallet with free coins? There could be various reasons – maybe they’re promoting a new project, executing a hard fork, distributing tokens, or, unfortunately, trying to steal your funds through phishing attacks, also known as honeypot airdrops.
Now, this is where things get complicated. Crypto tax tools can’t always tell if a crypto you receive is the real deal or just another “shitcoin.” As a result, it might include these airdrops, even the fake ones, in your taxable income, making your tax bill higher than it should be.
Solution: Manually Weed Out Spam Airdrops
Yes, it might sound pretty straightforward, but you need to roll up your sleeves and manually sift through your airdrops to separate the spam airdrops from your total tax liability. The time it takes will depend on how often you receive airdrops.
Other than that, you can take the following preventative steps to avoid these unwanted airdrops in the first place:
- Don’t publicly share your wallet addresses. Even if you do, use a disposable wallet address.
- Don’t participate in unnecessary activities and events for rewards.
- Turn off automatic token addition in your crypto wallet settings.
- Use separate wallet addresses for different purposes, such as one for personal transactions and another for public interactions.
- Use a secure and reputable crypto wallet.
2. Inaccurate Data Import
One of the most frustrating crypto tax tool problems investors and traders encounter is inaccurate data import.
Sometimes, the numbers on your tax tool don’t match what you expect to see. You might find missing transactions, missing costs and fees for deduction, incorrect timestamps, or mislabeled assets. This happens when the tax tool fails to correctly import transaction data from exchanges and wallets.
For instance, different crypto exchanges have unique data formatting or transaction labels. If a tax tool is not designed to interpret the language of a particular platform correctly, it may misinterpret transactions, leading to inaccuracies. More on missing transactions and costs in the next section.
Why does this matter? Well, inaccurate data import can lead to miscalculated tax liabilities, compliance issues, and, in some cases, even legal troubles. And no one wants that.
Solution: Verify and Double-Check
So, what do you do when your crypto tax tool imports inaccurate data?
At this point, there isn’t much you can do other than take the data your tax tool gives you and cross-reference it with the transaction history of your exchanges and wallets. Yes, it might take some time and be a bit of a headache, especially if you have loads of transactions and the tax deadline is creeping up.
To make the process easier and less burdensome:
a) Get help from an accountant – they can sort out your crypto taxes as a one-time job.
b) Ask for a tax extension – this gives you more time to get things straight.
However, you must always aim to prevent the problem from happening in the first place.
How would you do that?
Regularly look over your transaction logs on exchanges and wallets. Make it a habit to export those records and compare them with what your tax tool shows.
3. Missing Transaction Details
Inaccurate data imports and missing transaction details are similar crypto tax tool problems, but the latter requires a separate section. Missing transaction details can be a real headache when using crypto tax tools. This typically happens when you forget to connect all your wallets and exchanges to your tax tool, leading to incorrect tax calculations.
For instance, your tax tool may incorrectly classify a self-transfer between your own wallets as income if you have not connected all your wallets. Also, if you have been investing in crypto for a while but only just started using a tax tool, you might have gaps in your cost basis data, making it difficult for the tax tool to calculate your gains and losses.
It’s one of the main reasons we suggest you start using crypto tax software like Bitcoin.Tax early on. When you integrate all your wallets and exchanges right from the beginning, you can always come back and track the transaction history for any digital asset in your portfolio.
Solution: Manually Upload CSVs
If you’ve got just a few wallets and trades, fixing those missing transaction details should not be a problem. Just head over to your wallet or exchange, grab a CSV file with your transactions, and upload it into your crypto tax tool.
But what if you’re knee-deep in wallets and trades? In that case, consider paying for blockchain data analysis services. These are experts who specialize in tracking down all your crypto transactions and the relevant information you need.
4. Lack of Integration
If you’re not using a quality tool like Bitcoin.Tax, a common crypto tax tool problem you might face is the lack of seamless integration between tax tools and various crypto platforms.
When a tax tool lacks integration, users are forced into manual data entry, which is – a) more prone to errors and b) time-consuming, especially for those with diverse crypto portfolios or frequent trading activity.
Solution: Choose Integration-Friendly Tools
Integration-friendly tools can automatically pull transaction data, saving you time and reducing the risk of errors. So, just be sure the tax tool you choose supports the exchanges and wallets you use.
Some tools might not be compatible with lesser-known or regional exchanges. And that is okay because you can always manually upload your transaction data using CSV files.
For instance, Bitcoin.Tax can integrate loads of exchanges and wallets, including Coinbase, Gemini, Binance, Bitstamp, Kraken, Bitfinex, KuCoin, Crypto.com, and more. And if your go-to platform isn’t on our list, you can always ask us to add support.
Lastly, even with integration, frequently sync your data to stay on top of your tax obligations and ensure up-to-date and accurate tax reporting.
Bonus Tip: Some portfolio tracking apps can connect with your tax tools, allowing you to track your crypto holdings and transactions seamlessly. These apps can automatically export data to your tax tool, simplifying the reporting process.
5. Gray Areas of Crypto Taxation
Crypto tax software is pretty good at handling the simple stuff, like when you buy or sell crypto, get paid in crypto, or calculate cost basis and deductions. But when it comes to the following gray areas, these tools might not always be the most reliable:
Different Tax Laws: Different countries treat crypto differently. While some consider them property, others classify them as currency or commodities. This results in varying tax implications that these tools may not always be aware of. Check out your local tax guidelines here.
Frequent Regulatory Changes: Relying solely on tax tools may not be the best idea in a landscape where crypto tax regulations are constantly evolving. For instance, there are multiple ongoing legal battles between the SEC and various crypto firms on whether to classify crypto as securities. Here is the complete story.
Cross-Border Transactions: Calculating tax liabilities when moving assets across international borders can get complicated, especially when using tax tools not specifically designed to handle these scenarios.
Check out our guide on crypto taxes for US expats and non-US citizens.
Handling Unique Transactions: The lines on some crypto transactions can get blurry – taxes on liquidity pool and staking rewards, whether certain NFTs should be treated as collectibles or property, and the crypto wash sale rule.
Check out our in-depth guide on navigating these gray areas of crypto taxation.
These events have varying tax implications, which can even change depending on where you live. Tax tools may not always provide clear guidance on accounting for these transactions, as too many nuances and intricacies go into figuring out taxes for these activities.
So, what do you do?
Solution: Consult a Crypto Tax Professional
While using tax tools can be a good start, they may not always cover all the nuances and complexities of crypto taxation. That is where the experts come in – tax professionals who know all the ins and outs of crypto taxes.
These experts understand the ever-changing tax rules where you live and can give you personalized guidance. They help you stay compliant while ensuring you don’t pay more than you should.
Still not sure if you need a crypto tax expert? Check out our complete guide on crypto tax professionals that dives deep into when and how to hire one.
Additional Tips for Smooth Crypto Tax Reporting
Managing your crypto taxes doesn’t have to be a headache. In fact, with a little bit of planning and organization, you can make the process a whole lot smoother. Here are some extra tips to help you breeze through tax season:
Keep Detailed Records
Document every buy, sell, transfer, and transaction fee. Note down dates, amounts, and details of each trade. Despite all the crypto tax tool problems, these tools are extremely helpful in automating record-keeping and calculations. But it’s crucial to regularly verify and double-check your logs and transaction details for accuracy.
Stay Informed About Tax Regulations
In most countries, crypto is taxed as both capital gains and income. Capital gains tax applies when you sell crypto for a profit, while income tax applies to mining, staking rewards, and crypto received as income.
Tax rates and regulations are constantly evolving and may vary by country. That is why you must know the basics of how crypto taxes work in your country. Check out our crypto tax guides for different countries to know how crypto is taxed in yours.
Plan Ahead for Tax Season
Don’t wait until the last minute. Plan ahead, explore tax-saving strategies, such as tax-loss harvesting and crypto donations, and consult a tax professional if needed. The earlier you start, the less stressful tax season will be.
Check out our in-depth guide on planning crypto taxes for maximizing tax savings and a smooth tax reporting process.
FAQ
What is a crypto tax software?
A crypto tax software is a specialized tool designed to help crypto users calculate, report, and manage their tax obligations. It automates the process of tracking transactions, calculating gains and losses, and generating tax reports, simplifying the often complex task of crypto tax reporting.
Which tax software is best for crypto?
Bitcoin.Tax is a popular choice for many crypto users due to its extensive integration options, user-friendly interface, and affordable pricing.
However, the “best” tax software can vary based on individual goals, needs, and preferences. Check out our curated list of the best crypto tax tools to explore different options and choose the one that aligns best with your specific requirements and comfort level with technology.
How do I track my crypto taxes?
Manually tracking your transactions can be incredibly time-consuming and prone to errors. Crypto tax tools automate the process, saving you valuable time and ensuring accuracy by integrating with your exchanges and wallets to record transactions and calculate tax liabilities.
This not only simplifies tax reporting but also provides a comprehensive overview of your crypto financials.