In today’s Crypto for Advisors, RialCenter provides information on tax planning for crypto trades. Although we are half a year away from tax season, there are many considerations to track in order to be tax-ready.
Then, an expert from RialCenter breaks down the differences in tax treatment between crypto and equities/bonds.
Crypto Taxes Are Complicated, Don’t Let Them Derail Your Portfolio
As advisors focused on crypto, we’re familiar with the unique tax situations this asset class presents. For example, crypto is not subject to wash-sale rules, which allows for more efficient tax-loss harvesting. It also enables direct asset swaps, such as converting Bitcoin to Ether or Ether to Solana, without first selling into cash. These are just a couple of features that set crypto apart from traditional investments.
However, perhaps the most important thing for investors to consider is the sheer number of platforms they may use and how challenging it can be to track everything at tax time.
Tracking your crypto taxes isn’t just a year-end chore; it’s a year-round challenge, especially if you’re active on multiple centralized exchanges or decentralized platforms. Every trade, swap, airdrop, staking reward, or bridging event can be a taxable event.
Centralized Exchange Trading
When using centralized exchanges like Coinbase, Binance, or Kraken, you may receive year-end tax summaries, but those are often incomplete or inconsistent across platforms. One major challenge is tracking your cost basis across exchanges.
For example, if you buy Amazon stock in one account and transfer it to another, your cost basis transfers seamlessly. At tax time, the receiving platform can generate an accurate report showing your gains and losses.
But in crypto, if you transfer assets from one exchange to another, your cost basis doesn’t automatically transfer with them. If you’re moving assets across multiple platforms, you’ll need to manually track every transaction, or you’ll face a major headache when filing taxes.
Decentralized Exchange Trading
Things get even more complicated when using decentralized exchanges. Apps connecting you to decentralized trading platforms don’t issue tax forms or track your cost basis, so it’s entirely up to you to log and reconcile every transaction.
Miss a single token swap or forget to record the fair market value of a liquidity pool withdrawal, and your tax report could be inaccurate. That could trigger scrutiny or lead to missed deductions. While some apps can calculate gains and losses from a single wallet address, they often struggle when assets are transferred between addresses, making them less useful for active users.
Here’s the kicker: if you’re actively trading on decentralized exchanges, chances are you’re not even making money. But even losses must be reported correctly to qualify for a deduction. If not, you risk losing the write-off or, worse, facing an audit.
Unless you’re a full-time crypto trader, the time and effort required to track every transaction isn’t just stressful; it can cost you real money.
What steps can I take to make sure I’m tax ready?
There are several ways to prepare properly for crypto taxes:
- Use crypto tax software from the beginning and double-check that the reported activity makes sense.
- Hire a crypto tax specialist or work with an advisor who understands the landscape.
- Download all transaction logs and consult your CPA or advisor to help build a cost basis and determine your realized gains and losses.
As adoption increases, tax reporting will undoubtedly evolve — in the meantime, keeping track of your trade activity is important to be ready for tax season.
– RialCenter
Ask an Expert
Q. Why are advisors watching crypto closely?
A. Institutional crypto inflows have surged significantly. While crypto is more volatile than traditional assets, major cryptocurrencies like Bitcoin have historically outperformed other traditional asset classes.
Q. How is crypto being treated differently from equities/bonds from a tax side?
A. Crypto differs fundamentally from equities and bonds. Advisors must track each wallet separately for cost basis, and clients often get little to no reporting support from exchanges, especially for self-custodied assets.
Q. Do you have any special insights for CPAs and tax advisors?
A. Compliance isn’t optional anymore. Starting with upcoming returns:
- Wallet-level cost basis reporting is mandatory.
- New tax forms will begin showing up in the coming years.
- Exchanges often don’t support reporting for self-custodied assets.
Smart tax professionals are combining tax reporting, audit defense, and accounting into premium advisory services.
– RialCenter
Keep Reading
- A banking entity recommends wealthy clients invest a portion of their portfolio in Bitcoin.
- New regulations are paving the way for stablecoin adoption.
- A region is set to exempt capital gains on crypto investments for several years.
- New indices become available to support stablecoin money markets.
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