Cryptocurrency is a virtual possession that is used by the owner to make transactions with no intervention of third party authorities. It is different than the traditional brokerages and much more volatile. Bitcoin is a type of cryptocurrency and is the most sought after for investment nowadays.
As per the IRS’s official guidance on taxation on bitcoin, it will be taxed as “property” or “stock.” If you are doing the transaction using the bitcoin, you are obligated to raise the tax return report to IRS.
Calculating tax on bitcoin investment is not as simple as it seems. For starters, brokerage houses will not issue any consolidated form mentioning your income, loss, or gains. You can expect the form 1099-K indicating your gross transaction, which is not enough to prepare a tax return report.
The calculation of tax involves details about several stocks that you possess, your involvement in trading through bitcoin, features of platforms, exchanges you have been through, and a lot more. You need to calculate the overall income, foreign currency exchanges, gains, losses, and bitcoin tax rate.
This process can be overwhelming and quite challenging to determine the correct figure. You can always reach the tax experts to seek help. However, the charges are very high for relatively simple tasks.
There are different output methods used by crypto exchanges to track trading, making the calculations even harder. Due to the external engagements, it gets difficult for the investor to track the consolidated transaction. Every transaction needs to be recorded individually to determine gains, losses, and costs precisely.
To help investors with tax calculation there are multiple bitcoin tax calculating software available in the market. These automated tools assist bitcoin investors in staying at the top of their tax calculation book. Also, there are tax discount codes available on/ with software tools, to benefit with discounted rates for the services.
What is the need for Bitcoin Tax Calculation Software?
For a crypto investor, it is essential to record trading and investment activities along with an understanding of tax rates based on standard tax regulations within their country. For this, either you have to look for a tax expert or do it by yourself.
Again, the former comes with a hefty price and the latter calls for a tremendous amount of time & understanding. If you are not satisfied with these options, then using a crypto tax calculation software is the best solution for you. Here’s what the software does:
- It imports all your crypto data from exchanges, trading platforms, transactions and calculates the gains and losses, as per IRS guidelines.
- It helps you to keep track of trades and transactions on a real-time basis, along with the loss/gains graphs and overall investment portfolio.
- It comes with a user-friendly dashboard to overview the tax calculations, transaction reports, and portfolio management.
How Does a Crypto Tax Calculation Software Work?
This software comes handy when you want to calculate tax on bitcoin. These softwares function as third party data accumulator that assist in producing detailed reports on gain and loss. These reports are compatible with the IRS guidelines and usually include the Form 8949, Schedule D, and Schedule 1 as per the requirement.
As there are multiple choices available, given below are the aspects you need to consider while purchasing the software for calculating the tax on your bitcoin investments:
Integration is the most crucial part while going for any software. You need to check the number of integrations on which the software is based. The two mainly used integration are:
1. Application Programming Interface (API) import.
It will help in importing and accumulating the data from exchange and wallet into a tax platform. API might look complicated to you or something which calls for technical knowledge. However, this only requires the copy-pasting of the API key from the wallet to software to calculate tax for the bitcoin investment.
2. Comma Separated Value (CSV)
This one is a bit time-consuming. It downloads the transaction history report and updates it in tax software in CSV format. The imported report may require manual editing occasionally to comply with standard format.
It is yet another vital part of the software to consider. There are software platforms that offer cheap subscriptions, do not fall prey to it. You need to purchase the software with high bandwidth to process the significant number of transactions without failure or software crash.
Compliance and Accuracy
Picking a software provider is tricky as you need someone trustworthy to deal with your financial information. Hence, while choosing tax calculation software, look for the team behind it. Ensure that the team is a combination of tax experts and people from regulatory spaces.
As this software will be the source to import all the tax reports and data for losses and gains, the compliance and accuracy should be maintained. Consult with the software provider about the accuracy of the software, whether they have taken the inputs from any finance expert, regulatory bodies, or tax officers.
Check the risk mitigation tools implemented in software for data security. Check if the information on the provider website is updated.
You don’t want to burn your pockets in purchasing software to calculate your taxes. The software prices increase with the number of transactions you are expecting in a tax year. Always go for the premium membership for higher integration, compliance, and bandwidth.
These platforms also provide a free trial account with terms and conditions. You can always negotiate the plans and customize them as per your requirements.
Many software providers offer additional benefits along with the subscription. For example, bitcoin tax discount code, training videos, tax planning tools, tax-saving tutorials, portfolio tracking, etc.
The software also allows you to give access to the dashboard to your accountant without sharing your tool credentials to those involved in the crypto taxation ecosystem.
As you are purchasing the tax calculation software this year, make a list of services you will require. You might get the service with a free trial version or at a lower rate. Anyway, the tax calculation software will cost you much lesser than hiring any pro.
Also, you can keep track of every loss and gain and prepare the correct tax form to file. This software will make your life easier by streamlining your tax filing process.