Common Errors to Avoid with Crypto Tax Software
Given the recent rise of crypto tax platforms, individuals and businesses are oftentimes drawn in by promises of speed and simplicity. At the same time, even top-rated platforms like CoinTracking depend on competent users to ensure accurate calculations and compliant reports. Although I outlined a few of the common errors associated with crypto tax software in a recent article, a deeper dive is key to knowing what to look out for. By promoting awareness through today’s article, my goal is to help drive action when these situations arise.
Historical Pricing Inaccuracies
One of the most common challenges with crypto tax software involves inaccurate cost basis calculations. In turn, overestimations and underestimations in taxable gains or losses can result. The root cause is oftentimes a discrepancy with the cryptocurrency’s historical price on the date of the purchase or sale. For example, third-party data providers may use different methods to calculate pricing data. As a result, these calculations can vary, leading to inconsistent data with the blockchain. Cross-checking this information is crucial to ensuring accurate crypto tax returns.
Unsupported Blockchain Protocols
Throughout the blockchain ecosystem, the issuance of new cryptocurrencies is a
regular occurrence. As a result, crypto tax platforms face the ongoing challenge of
capturing the full breadth of data within each wallet and exchange. For this reason, the cryptocurrency data captured by one platform can differ significantly from another. While many platforms feature automatic alerts for missing data, conducting a manual review to ensure accurate information is key.
Overstated Taxable Income
Even if both wallets are added to your crypto tax software, you may still find that internal transfers are recorded as taxable events. Here, you could wind up overpaying on your return through overstated taxable income. Swaps also have a tendency to appear either twice or for only one side of the swap, further decreasing accuracy.
Omitted Transaction Fees
During swaps and other transactions, fees are oftentimes necessary to facilitate the exchange. These can arise at either a fixed rate or as a percentage of the total
transaction cost. After an incomplete data import, however, these fees can be missed. In some cases, your crypto tax software may not offer coverage for the fees of a specific exchange. Likewise, the software may simply lack an automated fee categorization capability. Reviewing and manually inputting missing data is an important step to account for these miscalculations.
Limited Complex Transactions
DeFi protocols, airdrops, staking, and other complex transactions are oftentimes
unsupported on basic crypto tax platforms. While platforms like CoinTracking or CryptoTaxCalculator that are built for intermediate and advanced users generally
include these capabilities, simplified DIY platforms may leave these transactions
unaccounted for. As you’ll read in my recent article, choosing the right crypto tax software for your needs is an essential first step for accurate returns.
Regulatory Update Latency
The people behind your crypto tax software matter. Platforms with limited support networks are oftentimes delayed when it comes to regulatory updates. For example, regulations could outline new tax treatment for a specific cryptocurrency transaction type. If the crypto tax software in question is still using the old methodology, the misclassification could slide beneath the radar and lead to non-compliance. Staying up-to-date with regulations and choosing a platform with a robust support network can help mitigate these issues.
Opting for Professional Support
Although these are some of the most common errors facing crypto tax software today, the list above is a small sample of the possible obstacles and situations. As always, the best way to ensure accuracy, compliance, and optimized returns is through a crypto tax expert. I encourage you to visit my services page for a full look at how my crypto tax services can help.