Preparing your Bitcoin and crypto tax return is a massive pain – so we asked an accountant for step by step instructions on how to prepare a tax return using CoinTracking and MyTax.
Now, this probably won’t come as a shock, but the accountant we asked doesn’t recommend filing a crypto tax return yourself.
Tax laws are extremely complicated and even if you manage to avoid breaking the law, you still might end up missing some deductions you may be entitled to – or paying more tax than you should.
And just to reinforce the disclaimer: this guide should not be relied upon. If you have any questions AT ALL about your tax situation, you should contact a tax professional.
OK, you’ve decided to Do It Yourself
The first thing you’ll need to do is to sign up for CoinTracking.
The service is free for the first two hundred trades which should be more than enough for the average investor.
CoinTracking supports 70 major exchanges including Coinbase, Binance, Huobi, BTC Markets and more – so if all of your trades are on supported exchanges you’ll be able to import the data via API or csv exports.
Even if you don’t want to do your own taxes, Cointracking is a handy way to keep track of all your trades. Your accountant will be glad you’ve kept proper records.
That said, keeping it up to date requires a bit of diligence, especially if you need to enter trades manually.
We’re up to date for the past year
Let’s assume you’ve been able to import your trades for the past year, or have already been using the system since last year.
US residents are able to get a tax report at the touch of a button.
However, for Australians, there’s a bit more work to be done. You’ll need to get a report that simply works out our capital gains and losses, which you have to enter into your tax return.
“We’ve noticed that with CoinTracking, if there are ticker codes with more than three characters like WAVE, sometimes CT doesn’t pick up all the trades,” he says. “It was giving a $0 cost base.”
“Also we noticed the same coin might have different ticker codes on different exchanges. On some exchanges Bitcoin Cash was BCC and on other it was BCH”
If the ticker codes don’t match, then CoinTracking can’t match up the trades, leading to significant errors in your report.
Change settings to produce the tax report
Once you’re happy with the data (don’t worry, there are more opportunities to check or alter it) head to ‘tax report‘ and click ‘open settings and create a new tax report’.
Change the ‘tax year’ setting to ‘custom’ as it defaults to calendar year. You’ll need to change this to the past Australian financial year.
The ‘filter’ option lets you exclude various trade types such as income or mining or various exchanges. Most people should leave all these options on.
The ‘consider all previous trades’ option takes into account previous tax reports so leave it on. While you can turn off ‘group all purchases by day’ it’s not recommended as you’ll end up with a massively long report.
Most users won’t need to muck about with the ‘advanced options’ either.
Technically speaking the ATO would prefer the conversion setting to be ‘transaction prices’; (the actual price recorded by the exchange) but you’re able to select ‘best prices’ too, which as the name suggests gives more favorable prices from the average price across exchanges when converting into Australian dollars.
The method tab is a tricky one. First in, First Out it is the default option and is recommended for most people (and is the only option for traders).
There are other options too that enable you to select various ‘parcels’ of shares bought at particular prices: if you have large capital losses from previous years, you may wish to select ‘lowest cost, first out’ (especially in a declining market) which increases your capital gains so you can write off your losses against it.
But if you’re mucking about with these settings, you’re probably best off talking to an accountant for advice rather than doing it yourself.
Leave the ‘long term after 365 days’ as is. This setting will identify the trades you’ve made that are may be eligible for the 50% capital gains discount, which is can be applied once you’ve held a coin for more than a year before selling.
Now click on ‘generate a new tax report now!’
Don’t get excited, you’re only halfway through
Now you have to go through the report and work out if anything looks dodgy.
Click on ‘detailed calculation’ which will bring up the individual trades and how each one was calculated.
“If you see red writing anywhere, stop and have a look because that indicates it couldn’t find a cost basis for that parcel,” Boyle said.
If so, you’ll need to manually enter the correct details and run the report again.
Once you’ve worked out if all the trades are correct (and you’ll want to be very sure or else you’ll be submitting an incorrect tax return) then you can export the data as a CSV.
Boyle says he has simple advice for what to do at this point: “My answer is to give it to your accountant. But if not, you’ll need to work it all out”.
Essentially what you need to do is to work out:
- the short term (less than 12 months) gains
- the long term (more than 12 months gains)
- any losses.
You can apply the losses against the short term gains, and any leftover can be applied to the long term gains, which may be eligible for the 50% discount.
For example: “If you’ve got $1000 in short gains and $2000 in long gains and $1500 in losses, the $1500 can cover the short gains, and $500 towards the long gains, leaving $1500. Then you can apply the 50% discount to that.”
My head hurts
Let’s take a very basic example:
- You made $100 short term gains on Ethereum
- You made $100 short term gains on Dogecoin
- You made $100 long term gains on Bitcoin
- You lost $200 on VeChain
In this scenario, you have $200 short term gains, $100 long term gains and $200 losses.
The $200 worth of losses can write off the $200 short term gains, meaning you only need to pay tax on the $100 long term gains from Bitcoin. Which is probably eligible for the 50% capital gains discount.
On your tax return
In the unlikely event you’re filling out a paper tax return:
- Net losses are entered at 18V (We don’t have any net losses in our example)
- The overall capital gains are entered in 18H ($300 in our example, made up of the $200 worth of short term gains plus $100 long term gains – we ignore losses here)
- The net capital gains after the discount have been applied go in 18A ($100 X 50% = $50)
How to enter the figures in MyGov’s online tax return
Tick the box that says you had Australian interest or other income/loss
Tick the box for Capital Gains and on the next screen scroll to Capital Gains or Losses, click Add/Edit.
MyGov doesn’t use return labels, so 18H is labelled “Total current year capital gains”
18A is labelled “Net capital gain” If this number goes negative, enter $0 here and the balance at “Net capital loss carried forward to later income years.”
18V is labelled ‘Net Capital Loss carried forward’. In our example we won’t add anything in here, but if you lost $20,000 on crypto and only made $5000 in profits, you could enter $15,000 here which you can use to minimize your tax bill next year.
Important to note
It’s important to note that if you have any other capital gains events, like selling shares, you’ll also need to include the short term gains, long term gains, and losses to carry forward in these sections of your tax return.
Add the various figures TOGETHER with the corresponding figures from your crypto portfolio.
And that’s it. Again, if you have any questions you’ll need to consult a tax professional. If you think any of this information is in error, contact me on [email protected] and I’ll seek further clarification.