Crypto trading bots like Bitsgap and similar platforms designed to automate your trading strategy have grown in popularity as the cryptocurrency market has matured. Tools like these can be extremely effective for compounding your crypto gains; however, tax reporting can become tedious — especially for traders with dozens, hundreds, or thousands of trades across multiple exchanges. In this guide, we discuss tips for record keeping and tax reporting for your automated crypto trading strategy.
💵 Understanding The Tax Implications of Cryptocurrencies
Generally speaking, governments around the world treat cryptocurrencies like bitcoin as an asset or investment. Similar to other investments like stocks, when the value of your crypto increases and you sell it for a gain, you are subject to a capital gains tax on that income.
Specifically in the U.S., the Internal Revenue Service identifies cryptocurrencies as property. Just as mentioned above, capital gains and losses tax reporting rules apply to cryptocurrencies in the same way they apply to other forms of property like stocks, bonds, and real estate.
If Craig buys $1,000 worth of ETH and sells it four months later for $1,300, Craig incurs a $300 capital gain which he must report on his tax return.
Depending on the personal income tax bracket of Craig, he will pay a certain percentage of tax on this gain.
For more in-depth analysis, refer to this complete guide for cryptocurrency taxes.
💡 Tax Reporting for Automated Traders
In the simple example above, it’s easy to calculate the $300 capital gain that would be associated with Craig’s trade; however, for traders using automated strategies or trading across multiple exchanges, these calculations can become much more difficult.
Each crypto-to-crypto trade triggers a taxable event (as discussed in the official IRS Virtual Currency Guidance), meaning you realize either a gain or loss in the cryptocurrency you are disposing of (trading away). As you might expect, tracking the US dollar (or whatever your home fiat currency is) value of your gain and loss across all of your crypto-crypto trades is difficult. Thus, proper record keeping is important for algo traders who want to simplify their tax reporting at the end of the year.
📑 What Records You Should Be Keeping
The most important record that you should be keeping is your trade history for each exchange you traded on throughout the year. Most cryptocurrency exchanges make this easy for you as they give users the ability to export a CSV (or Excel) file that contains records for every trade and transaction the user made throughout the year.
This is the file you should keep and store to make your tax reporting and capital gains/losses calculations significantly easier.
Be cautious, if you are using decentralized exchanges, you may not have access to a downloadable trading history report. In these cases, manually keeping track of your trades may be necessary.
At the end of the year, you can import your trade history files from your exchanges into your preferred cryptocurrency tax software tool or simply crunch the numbers with a spreadsheet editor.
📃 What Forms Do You Need to Complete?
Of course, each country and jurisdiction has their own specific tax forms relating to capital gains and/or losses that need to be filled out. In the U.S., that specific form is known as IRS Form 8949.
Using the data from your trading history records, you can fill out form 8949 and include your capital gains and losses for each cryptocurrency trade that you made throughout the course of the year. Total all of these gains and losses from each trade up to arrive at your net capital gain or loss for the year. If you had a net capital loss for the year, this will actually reduce the amount of taxes you owe!
🤖 Cryptocurrency Tax Software
Today, many companies have built software tools to automate the entire cryptocurrency tax reporting process. It may be helpful to use one of these tools to handle all of the number crunching and tax form creation on your behalf.
Cryptocurrency tax calculators like CryptoTrader.Tax integrate with all cryptocurrency exchanges so that users can import their historical trades and transactions and generate associated tax reports with the click of a button.
🤔 In Conclusion
Crypto tax reporting is a fairly straightforward process, but it gets more tedious with higher transaction volume across multiple exchanges. However, there is no reason to worry, as proper record keeping will enable seamless and easy reporting at year end.