2020 was a great year for crypto even as the world struggled economically due to the coronavirus. Bitcoin’s price closed at just under $5,000 in mid-March 2020. The coin rested at $57,355 a year later. Ethereum rose more than 1,600% in roughly the same timeframe (from about $110 to $1,768).
While surging crypto prices meant many investors turned a tidy profit over the last year, it also prompted tax officials to take a more discerning look at crypto transactions.
The IRS Form 1040 for 2020 now clearly asks taxpayers if “at any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency.”
Many crypto holders find it daunting to figure out tax obligations, especially as government authorities begin to scrutinize digital asset holders more closely.
In the wake of the 2017 ICO boom, Shane Brunette realized there were no tools that could easily account and categorize large amounts of Ethereum network-based transactions. He tried to hire a crypto accountant but received quotes far beyond his budget.
Image: Tim and Shane Brunette, co-founders at CryptoTaxCalculator.io
He decided to rely on a software engineering background to launch Crypto Tax Calculator in 2018. Later bringing on his brother Tim as CTO, the duo built out the platform to help other crypto holders calculate taxes.
The brothers say CryptoTaxCalculator is robust enough to where a normal accountant who does not have crypto specialization could take transaction records and help with tax calculation. According to Shane and Tim, CryptoTaxCalculator supports more than 100 exchanges, DeFi protocols like NFTs, and networks like Binance Smart Chain.
Some Crypto Holders Await A Solemn Surprise Come Tax Time
Unsurprisingly, Shane and Tim’s work on tax software means they’ve spoken with many crypto holders confused about why they were hit with a large tax bill.
The duo explains many are caught off guard by not understanding the differences between income and capital gains tax events, especially since “transactions like staking rewards and airdrops trigger income tax events, and in many jurisdictions, you are limited on how you can discount this income using capital losses.”
Both also stress anyone who disposes of crypto is going to “trigger a tax event, regardless of whether you have cashed out to fiat or not.”
It’s Not Smart To Sleep On Your Taxes Even If Filing Deadlines Get Extended
Some are breathing a sigh of relief as they have a bit more time this year to get tax affairs in order. Many authorities have been extending filing deadlines to help citizens navigate unique challenges posed by the coronavirus.
In light of this, the Brunette brothers add there’s no better time to get a handle on crypto taxes.
They recommend crypto holders interested in turning to tax software “make sure it covers fees paid in cryptocurrency, which can quickly add to large savings.” Both point out how “an error margin of 1% can quickly add up to substantial amounts across hundreds or thousands of transactions, and the high volatility in cryptocurrency can magnify these errors.”
High-volume traders should think about if they want to be categorized as trading as a business, Shane and Tim explain. Doing so can lead to offsetting capital losses against income but often means a taxpayer misses out on the “discounts around capital gains.”
The Brunette brothers agree tax officials should carve out time to offer additional insight into rules and regulations surrounding crypto. They point towards guidance issued in late March from authorities in the UK offering clarity on staking rewards.
According to Shane and Tim, the new guidelines left “many DeFi users with more tax exposure than they expected” and postulate traders might have changed their behavior if they had a better understanding of tax obligations.
Both also point out there’s been “no indication that tax jurisdictions intend to update the rules for digital collectibles.” In their eyes, tax officials could soothe concerns about ambiguity by releasing crypto ‘case studies,’ especially touching on more “exotic” crypto scenarios.
Being Proactive With Taxes Is The Best Strategy For Crypto Holders
The Brunette brothers believe “specialized cryptocurrency accountant should not be a required service for users participating in the digital asset economy. Everything maps back to existing tax laws, and understanding the tax implications of your trading activity can be made easy with the right software.”
Both Shane and Tim understand the coronavirus pandemic has left many worried and concerned about tax obligations, especially as officials signal they will crack down harder on crypto non-compliance.
Still, the brothers draw on their own experience and explain how “tax authorities tend to be much more considerate towards proactively compliant users” and argue record-keeping is much easier with the right software.
They note their own software platform is currently expanding the team to keep up with demand, hoping to ensure compliance with tax officials will be as simple as “adding your public wallet address.”
Overall, while the tax world can be confusing and ever-changing, Shane and Tim Brunette agree building a software startup is a rewarding experience.
Both claim “it’s hard to turn off work when we are together and enjoy each other’s company as brothers instead of co-workers,” but agree that in a fast-paced world “having somebody you can fallback on who you know very well and deeply trust can be incredibly valuable.”
