The best crypto tax software is a tool that is tailored to your needs and effectively helps you fulfill your goals.

Here are the best crypto tax tools based on various preferences:

– Coverage: ZenLedger
– Features: CoinTracker
– Integrations: Koinly
– Pricing: CoinLedger
– Free Tier: CoinLedger

A crypto tax software is necessary to navigate the landscape and streamline the process in which you calculate and report taxes on your digital asset activities.

Without a crypto tax tool, you would need to manually track and categorize your cryptocurrency transactions that took place in the current tax year. You would also need to calculate the cost basis of these transactions to determine your capital gains and losses. After that, you or your accountant would have to file your annual tax returns.

Filing your taxes would present little to no problems in a traditional environment where you have access to bank statements that summarize all your activity on your accounts at a financial institution. But in the cryptocurrency world, this process becomes much more complex as your transactions are scattered across numerous wallets, exchange accounts, DeFi protocols, NFT marketplaces, and blockchains.

Manually hunting them down, categorizing them, and calculating your crypto taxes can easily become a formidable task, which leaves much room for human error. And to avoid potential fines and penalties, it is crucial to ensure that your tax filings are error-free and reflect reality.

On the other hand, by connecting your addresses to the platform, a cryptocurrency tax software solution automatically tracks and categorizes your digital asset transactions across various wallets, exchange accounts, marketplaces, protocols, and blockchains.

Upon ensuring that everything is in the right place, the tool can use this data to calculate your digital asset taxes, identify opportunities to decrease your tax liability, and generate tax reports.

Crypto tax laws vary by jurisdiction. But, as a rule of thumb, you must pay income taxes on the revenue you generate through various cryptocurrency activities minus deductible expenses.

Such endeavors include receiving payments for products or services in digital assets as a sole proprietor, generating income as a business, mining and staking crypto, participating in airdrops, as well as other ways you can earn coins as both an individual and an organization.

After calculating this income and deducting its respective expenses, you must file your income taxes on your annual tax returns.

Besides income taxes, you also become liable for capital gains taxes (CGT) if you generate a profit from the disposal of digital assets. CGT is calculated by subtracting the cost basis (the original price you paid for an asset plus any commissions and fees related to the transaction) from the price you sold the asset. If the result is negative, you incur a capital loss, which is not liable to taxes.

On the other hand, if your capital gains are higher than your capital losses in a tax year, then you are liable to CGT, which you must report and file with your jurisdiction’s tax authorities.

You must report and file crypto taxes both on the revenue and capital gains that are related to digital asset activity.

In the US, you can file your crypto income taxes by reporting it as ordinary income on Form 1040 Schedule 1 or as earnings related to self-employment or your business via Form 1040 Schedule C. In the UK, you must report this income as part of your Self Assessment Tax Return (SA100).

To file your crypto capital gains taxes (CGT), you must fill out and submit Form 8949 and Form 1040 Schedule D to the IRS in the US or declare your capital gains or losses in the Self Assessment: Capital Gains Summary (SA108) in the UK.

In many jurisdictions, you can offset your other taxable capital gains by selling (a part of) your cryptocurrency holdings at a loss. Let’s see an example to better understand this process.

Suppose Alice is a US-based investor and sells Ether (ETH) at a loss during 2023’s bear market, resulting in $30,000 of capital losses. But she also made another trade by buying Bitcoin (BTC) at the dip and disposing of her stash by the end of the year when its price had increased significantly due to news about BTC ETFs. This trade incurs $50,000 of capital losses.

As both were short-term capital gains/losses, Alice can use her ETH trade’s $30,000 of capital losses to offset her BTC investment’s $50,000 of capital gains. After subtracting the losses from the gain, she is only liable to $20,000 of CGT.

Currently, as most cryptocurrencies are classified as property in the nation, US investors can technically sell their digital assets at a loss during market dips and repurchase the same assets in another trade to offset their capital gains.

However, it is a risky strategy, as it is very likely that the government and financial watchdogs will implement the same wash sale rules for cryptocurrencies as for securities in the future to prevent taxpayers from claiming artificial losses.

Many crypto tax software solutions operate on a freemium model. As a result, a basic version of the service with limited features is offered to customers for free.

Examples of such may include a restricted number of transactions, exchange and wallet integrations, tax report functionality, automatization, portfolio tracking, and more. This free version could be a good fit for those who only had a few crypto transactions in a year and are satisfied with limited platform functionality.

At the same time, the same service providers offer crypto tax software with extended functionality for a price, usually covered as a one-time purchase per tax year. This is a suitable option for those with a considerable number of cryptocurrency transactions and who’d like to enjoy the full experience while calculating and reporting their taxes.