The world of cryptocurrency has rapidly grown in popularity, leading many investors to face unique challenges, especially when it comes to taxes. Tracking crypto transactions across multiple exchanges and wallets can be overwhelming, making crypto tax software a necessity.
However, no single tool may perfectly meet every investor’s needs, which is why some choose to combine multiple crypto tax software programs. In this article, we’ll explore how and why you might want to use multiple crypto tax software together, and how it can simplify your tax reporting process.
What is Crypto Tax Software?
Crypto tax software is a tool that helps you manage and report your cryptocurrency transactions for tax purposes. These programs integrate with various exchanges, wallets, and blockchains to automatically track, categorize, and calculate taxable events like gains, losses, and income from your crypto investments. This software can generate tax forms like Form 8949 and other reports that you need to file with the IRS.
Why Use Multiple Crypto Tax Softwares?
Crypto tax software typically supports a wide range of exchanges and wallets, but there might be cases where one software doesn’t cover all your needs. Here are some reasons why combining multiple crypto tax software can be beneficial:
- Increased Compatibility: Some software might support specific exchanges or wallets, but not all. Using multiple platforms ensures you don’t miss any transaction history.
- Accurate Calculations: Each software might use different methods to calculate gains and losses (such as FIFO or LIFO). By combining tools, you can cross-check data and improve the accuracy of your tax reporting.
- Enhanced Features: Some software may excel in certain features, like handling DeFi transactions, staking rewards, or NFTs. By combining multiple programs, you can leverage the strengths of each tool.
- Backup and Redundancy: Using more than one software can serve as a backup. If one tool fails or provides inaccurate data, you can compare it against the other to ensure you are reporting accurately.
How to Combine Multiple Crypto Tax Software
Combining multiple crypto tax software can be done strategically to optimize your tax reporting process. Here are the steps to follow:
Identify Your Crypto Platforms and Transactions
Start by listing all the exchanges, wallets, and platforms where you hold or trade cryptocurrency. Make note of all the types of transactions you perform, such as:
- Spot trading
- Staking
- Lending
- DeFi activities
- NFT trading
Each of these activities may require specific support from your crypto tax software. For example, DeFi transactions can be complex, so finding software that specializes in this area is key.
Choose Complementary Software
Once you know your needs, research and select crypto tax software that complements each other. Look for software that supports different exchanges or transaction types. Some popular crypto tax tools include:
- CoinTracking: Great for tracking large volumes of trades across multiple exchanges.
- Koinly: Easy-to-use software with broad support for DeFi transactions.
- TokenTax: Focuses on accurate tax reporting and offers CPA assistance.
- ZenLedger: Known for its integration with exchanges and NFT tracking.
For instance, if you find that CoinTracking does not support a particular exchange, Koinly might fill that gap.
Integrate and Sync Your Data
Once you’ve selected the software, the next step is integrating them by uploading your transaction data. Many crypto tax tools allow you to import data via:
- API integrations: Linking directly to exchanges and wallets for real-time data sync.
- CSV files: Manually importing transaction history by downloading files from your exchange and uploading them to the software.
Make sure to carefully sync all your data in each platform to avoid missing transactions.
Reconcile and Cross-Check Your Data
After syncing your data, review the calculations in each software. Compare reports to ensure that both tools are calculating the same taxable events correctly. Look for discrepancies in gains, losses, and income reporting.
- FIFO vs LIFO: Make sure both platforms are using the same accounting method (like FIFO or LIFO) for consistency in reporting.
- Reconciliation of Missing Data: Some software might fail to capture certain transactions, especially with decentralized wallets. Combining multiple software allows you to spot any missing data and make manual adjustments.
Generate and Review Tax Reports
Once you’ve reconciled the data, generate tax reports in each software. Most crypto tax software generates Form 8949, which reports your capital gains and losses, along with income reports for staking and other taxable activities.
- Compare the reports from both software to ensure consistency.
- If there are discrepancies, revisit your transactions to determine if one software has captured additional data that the other missed.
Benefits of Combining Crypto Tax Software
Improved Accuracy
By using multiple tools, you can ensure that no transaction goes unaccounted for. This is especially important for complex activities like staking, DeFi, or margin trading, which may not be supported equally by all software.
Minimized Errors
Combining multiple platforms reduces the chances of errors. If one software fails to import a transaction correctly or miscalculates gains, the other can serve as a backup for validation.
Comprehensive Reporting
Each tax software has its strengths. One might excel in handling NFT transactions, while another is better suited for staking rewards. By using multiple tools, you get the best of both worlds, leading to a more comprehensive report.
Filing with Confidence
When dealing with the IRS, accuracy is key. By cross-checking your reports and ensuring that all transactions are accounted for, you can file your taxes with confidence, reducing the risk of audits or penalties.
Challenges of Using Multiple Crypto Tax Software
While there are benefits to combining crypto tax software, it also comes with some challenges:
Increased Complexity
Using multiple platforms requires more time and effort. You’ll need to manage data imports across different tools, cross-check results, and reconcile differences. This process can be time-consuming, especially if you have a large number of transactions.
Cost
Most crypto tax software comes with a subscription or fee. Combining multiple tools can become costly, as you may need to pay for both software packages.
Data Overlap
Using multiple tools could result in overlapping or duplicate data. This can cause confusion if the same transactions are reported multiple times, leading to inaccurate tax calculations.
Best Practices for Combining Crypto Tax Software
- Keep Accurate Records: Ensure that all your transactions are properly recorded across platforms, exchanges, and wallets.
- Stick to One Accounting Method: Be consistent in using either FIFO (First-In-First-Out) or LIFO (Last-In-First-Out) across all software.
- Reconcile Regularly: Regularly review your data across all platforms, especially if you frequently trade on multiple exchanges or perform complex transactions.
- Seek Professional Help: If managing multiple software becomes too complex, consider consulting with a tax professional or CPA who specializes in cryptocurrency taxes.
Conclusion: Should You Combine Crypto Tax Software?
Combining multiple crypto tax software can be a smart strategy for investors who want to ensure accuracy and maximize the benefits of each tool. While it requires extra effort, the enhanced compatibility, improved accuracy, and comprehensive reporting make it worthwhile, especially for those with complex portfolios. If you find that one tool isn’t meeting all your needs, consider adding a second software to ensure you’re fully compliant and confident when filing your crypto taxes.