How to use crypto: How to use crypto tax services

  • Tax Services as SaaS
  • Different ways to import data
  • Getting ahead of your crypto taxes
  • What crypto tax services cost

With so much talk of prices going to the moon it can sometimes feel that crypto is a little removed from the real world, especially if you’re lucky enough to have seen your stack increase in value. One thing, however, that can bring you crashing back down to earth is the realisation that you may have to share your profits with the taxman. To help hodlers face their tax obligations are a growing number of online services, but how do crypto tax services work?

Please note that this article is not tax advice. Consult a qualified tax accountant/professional or contact your local tax authority for clarification of how rules on crypto taxation  may apply to you.

If you’re reading this article and getting a chill down your spine because you had no idea that profit you make from crypto might be taxable, read the previous article in our knowledge base section, a primer on crypto taxation

Each country will take a different approach to how they treat crypto from a tax perspective, and given that it is a relatively new asset, regulations are evolving. 

It might be that you live in a country that takes a progressive approach to crypto tax - like Portugal or Singapore - or that your crypto activities fall below thresholds for reporting. 

What is important is that you at least acquaint yourself with the appropriate rules for where you reside and understand the difference between personal taxation and what might be considered professional or business activities. 

Some important clarifications up front. This article is not tax advice, you should get that from relevant professionals and the tax authority where you live.

Once you’ve summoned the courage to understand your crypto tax commitments you may face a different apprehension - how the hell do you make sense of exchange transactions, wallet activities, airdrops, and staking proceeds in order to complete the tax form?

It doesn’t take much to rack up several hundred exchange transactions and if you’re actively using DEFI and or CEFI that adds another level of complexity. For many crypto enthusiasts the task of picking through rows of transactions is so daunting that they just stick their hand in the sand. Luckily help is at hand. 

Where there is a problem there is an opportunity, and a growing number of online crypto tax services have appeared to offer solutions. Here’s how they work.

Tax services as SaaS

You may have come across the term SaaS before, and ignored it as commercial jargon. It stands for Software As A Service and essentially means the delivery of service - such as crypto tax reporting - entirely via software over the internet. A lot of services central to our lives are now delivered in this way. 

Historically, tax accounting might involve visiting an office with a ring binder, or shoe box of paperwork, which would be manually sifted through by your accountant with a disapproving glare. 

SaaS crypto tax services do much (but not all) of that heavy lifting for you. You start with a familiar online registration process that only requires username, password and country. It is important that you are honest about where you live simply because the accounting reports generated will be tailored to the specific rules in that country.

Once registered you need to give the service digital access to all your crypto transactions; not just for the tax year in question, but as far back as you can go. 

If you have a very light crypto footprint - limited to one exchange for example - this process can literally take minutes, which is how many crypto tax services promote their service, because of the wonders of API access. If your activity extends to self-custody, CEFI, DEFI, NFTs and beyond, be warned that despite the marketing rhetoric, it will take considerably longer.

One burning question you likely want answered up front is whether crypto tax services share details with tax authorities? The answer they give is no, they simply offer a service to help calculate your crypto tax liabilities. What you choose to do with that information is up to you.

API access to Exchanges

When you create an account with a cryptocurrency exchange you’ll usually get access via desktop, mobile and app as standard. What the average user isn’t aware of is that you also get what is known as API access. 

An API is a data feed that can give an external service access to your account. for example, to actively manage your trading automatically via a bot, benefiting from speed and logic defined in code.

Crypto tax services utilise this API access to automatically pull your historic trading data into their accounting system. The process is very straightforward. Within the settings of your exchange account you click/tap a button to create a new API key, give it a label for the crypto tax service, then make a note of the API secret this generates. 

You then add the Exchange - selecting from a dropdown list - within the crypto tax service, name it and input both those bits of detail - API key and secret. It will then digest your trading activity.

Unlike the trading bot, tax services only require Read access. Most exchange API settings are set to Read only by default because giving an external service the ability to deposit, trade or withdraw is clearly very risky.

You’ll need to repeat the process for each exchange where you have an account and have had trading activity. The service will compute your tax liabilities automatically based on the data within the API feed in a matter of minutes. 

We emphasised ‘within the API feed’ because as with most things in life, there are exceptions. Some exchanges exclude certain types of transaction e.g deposits, withdrawals or derivatives. So when you select the exchange in question from the list provided by the crypto tax service, look carefully at the details provided for potential exceptions. We’ll discuss below how to handle those.

Wallet Transactions

The API route makes crunching your exchange transaction data relatively smooth, but isn’t an option for wallets, and because cryptocurrencies work in different ways, there is no way to simply absorb all wallet transactions in one go. 

You’ll need to approach wallets on a case by case basis and the options may vary depending on the crypto tax service you choose, but will likely fall into one of this categories:

  • HD Wallets & xpub addresses
  • Importing public addresses
  • Exporting/Importing/Generating CSVs
  • Manually Inputting transactions

HD Wallets & xpub Addresses

For HD wallets, and coins that follow Bitcoin’s UTXO approach to transactions, the process is fairly simple because they are designed to nest all addresses you’ve ever used within something called your xpub address. This will generally include Bitcoin, Bitcoin Cash, Dash, Dogecoin, Litecoin, Zcash.

An xpub address is an extended public address from which all child addresses can be derived. By sharing this one address with the crypto tax service they can see all the associated addresses and transactions, so this isn’t information you would regularly hand over for privacy reasons.

If you’ve held Bitcoin since pre-Segwit days you’ll need to import the Legacy xpub otherwise all transactions prior to that change will be missing.

Importing Public Addresses

Though Bitcoin is the dominant crypto, there are far more transactions happening on other blockchains for which you’ll need to share your public address.

For Ethereum based wallets like Meta Mask it is as simple as providing your Ethereum address and the software does the rest for all supported ERC20 tokens.

In fact for most wallets you can simply add the address for each applicable coin and the software will process it. One important tip is to use a good naming convention. The number of imported wallets can quickly get to double figures, and without a clear name it will be impossible to figure out what they are.

The same is true for the main Ethereum based DEFI services like Compound or Uniswap; you provide your Ethereum address and the software can do the rest, but given the explosion in DEFI, NFTs, CEFI and beyond there is a good chance that a service you’ve used simply isn’t supported, which means your going to have to get your hands dirty.

Importing CSVs & manual transaction entry

So far the news about crypto tax services is all very positive. They can do a lot of the heavy lifting for you which will be a huge relief, but they cannot do all of it. There is no way to put a figure on it, but a sensible estimate would be that crypto tax services can process 70% of the average crypto users’ transactions automatically, leaving 30% as a grey area.

Where you use a service that isn't just sending/receiving, but providing some value added, providing public addresses won't work. The product may allow you to download transactions as a CSV and import them into the software, which is fine so long as the formatting matches that used by the selected crypto tax service.

Where it doesn’t, you are going to have to get your hands dirty and try and amend the data to be presented in the required format. This can be hugely frustrating and time-consuming as anyone who has tried manipulating complex date/time formats will tell you.

Some wallet or DEFI services won’t even offer downloadable transactions so you may have to use block explorer services to produce a JSON output, which you then convert to CSV, and apply the correct format.

Where none of the above work, your only remaining option is to manually enter the transactions, which is not only tedious but requires that you fully understand the difference between a trade, transfer, send and receive transaction and any appropriate tags.

Getting that wrong can make a big difference to the final analysis so make full use of any guides, knowledge base materials or community forums. Don't expect to get responsive customer support. The 2021 bull run and increasing vigilance of tax authorities mean that all the popular providers are swamped.

Getting ahead of your crypto taxes 

At this point, you may feel like sticking your head back in the sand is the better option, but you then run the risk of the taxman catching up with you, which could be much worse.

The important thing is to get ahead of the issue. The longer you leave it, the harder the process of remembering all those wallets you created, phones you lost and transactions you made. 

You have to realise that tax isn’t discrete, with each year one distinct block unconnected to the previous. If you’ve been in crypto for a while, what you did several years ago may have an impact on your taxation now.

Omitting one address, wallet or exchange can have a huge impact on your potential liabilities as transfers aren’t taxed, just disposals, so getting as complete a picture as possible is essential. It may help lift your spirits to realise that losses can potentially count against your tax liability and if you are clever enough you can employ tax harvesting measures which realise trading losses to minimise any potential bill.

However, even when you think that you’ve cracked it, and having accounted for your whole crypto transaction history and synced your crypto tax account, ready to high-five yourself, you’ll likely be faced with the horrors of ‘Need Review’ transactions.  

This then requires a painstaking Sherblock Holmes approach to combing back through transactions to figure out how you’ve angered the crypto tax gods.

The truth is that no matter what they promise, no crypto tax service is ever going to be 100% foolproof and nor will they provide a concierge type service unless you pay top dollar, because naturally crypto tax services aren’t free.

What does it cost?

Most of the crypto tax services on the market offer a free portfolio tracker service, with tax accounting as a natural value-added. That is useful, but not unique, as there are plenty of Portfolio Tracking Apps out there offering that for free.

Some services will throw in tax reporting for free when transactions are below a very low threshold (e.g 50) given the likelihood that will increase in future years and turn you into a paying customer. 

Others will calculate your taxes, but tease you with a hint at your liabilities - getting the full report will require a choice of subscription, which is payable for each tax year you want data for.

The reality is that the majority of crypto users will produce more than 50 transactions in a financial year, which means paying a subscription to get crypto tax reporting. This generally starts at around $/€50 and ramps up from there with higher transaction thresholds.

Once you’ve paid for a subscription you’ll get full access to the relevant tax reports for that year. This will normally mean summary reports, the associated transaction details and the calculation logic. 

If you’re submitting your own taxes you’ll need to use this information, which should be formatted to match your tax authority, based on the country of residence provided during registration.

We aren’t going to recommend any particular service, we just encourage you to do your own research and read customer reviews. Most of services work in a similar way and are differentiated by user experience and the length of time they have been operating. 

Crypto.com - the multi-product platform - have recently announced a totally free tax service, presumably as a way to acquire customers. It is too soon to learn how their free service compares to established services that charge a fee, what they do with your data. At the moment it is only available in the UK, US, Canada and Australia.

Pay attention to security because though these services don’t have access to your funds, they might be targets of hackers trying to identify users and the value of their portfolios.

You can mitigate some of the cost by referring friends to earn a referral fee if your experience is a good one but the cost of getting an accurate and painless assessment of your crypto tax liabilities is peace of mind, which you cannot put a price on.