How to Handle Cryptocurrency Tax Reporting When You Own Multiple Wallets and Exchanges

How to Handle Cryptocurrency Tax Reporting When You Own Multiple Wallets and Exchanges

Cryptocurrency investing has exploded in popularity in recent years. With over 200 million crypto users worldwide, digital assets like Bitcoin, Ethereum, and Dogecoin are becoming mainstream. But with this increased adoption comes confusion around how to handle crypto taxes, especially if you own multiple wallets across different exchanges.

I feel you. Dealing with crypto taxes is a headache even for seasoned investors. From keeping track of cost basis to calculating capital gains and losses across exchanges, reporting all your crypto activity to the IRS can be a major pain. But don’t worry – I’m here to help make crypto tax reporting as easy as possible.

Do You Need to Report Crypto Taxes?

First things first – do you even need to report your crypto activity to the IRS? The short answer is yes. While the IRS has been slow to issue clear guidance, most experts agree you should report all crypto transactions, just like you would for stocks or other investments. This includes:

• Buying or selling cryptocurrency
• Trading one crypto for another (i.e. Bitcoin for Ethereum)
• Earning crypto as income (mining, staking rewards, airdrops, etc)
• Spending crypto to buy goods or services
• Gifting crypto to someone else

Even if you just transferred crypto between your own wallets, it’s a good idea to keep records in case the IRS decides to crack down on this in the future. Better safe than sorry!

Get Organized and Track Your Crypto Transactions

The first step for crypto tax reporting is gathering all your transaction records across wallets and exchanges. For each tax year, you’ll need:

• Records of all crypto you purchased or sold
• Income received from crypto activities like mining or staking
• Records of crypto you spent or gifted
• Transfers between your own wallets and exchanges

Comb through your account statements, transaction histories, and any other records to compile this info. Pro tip: export CSV files from your exchanges to easily import transactions into tax software later.

If you made hundreds or even thousands of crypto transactions across multiple platforms, this data collection process can be tedious and time consuming. That’s where crypto tax software like CoinTracker comes in handy – it connects directly to your exchanges and wallets to auto-import all transaction history.

Calculate Your Crypto Capital Gains and Losses

Once you’ve gathered all your transaction records, it’s time to calculate capital gains and losses for tax reporting. This involves:

1. Determining your cost basis for each crypto – this is usually how much you paid for it initially.
2. Subtracting cost basis from the sale price to calculate capital gain or loss for each transaction.
3. Summing up all capital gains and losses across all transactions and exchanges.

For example, say you:

• Bought 1 BTC in 2018 for $6,000
• Sold 0.5 BTC in 2021 for $25,000

Your capital gain would be ($25,000 sale price – $3,000 cost basis) = $22,000 capital gain.

If you sold at a lower price than your purchase price, that’s considered a capital loss instead.

Things get more complicated if you’ve made hundreds of crypto transactions across multiple exchanges and wallets. You’ll need to track the cost basis and sale price for each individual trade to accurately calculate your net gains and losses.

How to Report Crypto Capital Gains on Your Tax Return

Once you’ve calculated your net capital gains or losses, it’s time to report this on your tax return. Here’s how it works:

1. Report short-term crypto capital gains (held 1 year or less) on Form 8949 and Schedule D.
2. Report long-term crypto capital gains (held over 1 year) on Form 8949 and Schedule D.
3. Total up all capital gains and losses from Form 8949. Report this number on Schedule 1 Line 7 of Form 1040.
4. If you have a net capital gain, this amount flows to Line 6 of Form 1040. A net capital loss is limited to $3,000 deductible against ordinary income.

Form 8949 is where you list details of each crypto sale transaction – date sold, proceeds, cost basis, gain/loss. Schedule D summarizes capital gains/losses by short-term and long-term.

If you received crypto as income from mining, staking, airdrops, etc, this is reported on Schedule 1 Line 8 as other income. The fair market value of the crypto when received becomes your cost basis.

Beware the Cryptocurrency Audit Risk

With crypto tax rules still unclear, some investors are tempted to not report crypto activity or fudge their capital gains. This is risky business. The IRS is ramping up enforcement and audits of crypto holders thanks to new tracking tools.

For example, the IRS can request transaction data directly from exchanges to look for unreported activity. Failing to report crypto taxes comes with steep penalties – up to 25% of unreported income plus interest!

The best plan is to fully report all crypto transactions. Maintain detailed records connecting purchase/sale prices between wallets and exchanges. And consider using crypto tax software to eliminate errors and generate an audit trail.

Crypto Tax Software Makes Reporting Easier

Trying to manually calculate capital gains and complete crypto tax forms across multiple wallets and exchanges is an administrative nightmare. The good news is cryptocurrency tax software automates this entire process for you.

Here’s how it works:

1. Connect your exchange accounts and import all transaction history.
2. The software calculates capital gains/losses for you.
3. It generates completed IRS forms 8949, Schedule D, etc.
4. You review the auto-generated tax reports and file.

This eliminates the manual work of compiling, organizing, and crunching numbers yourself. Leading crypto tax platforms like CryptoTrader.Tax and Koinly make reporting across multiple exchanges a breeze.

Some benefits of crypto tax software:

• Connects directly to exchanges to import transactions
• Automatically calculates capital gains and losses
• Generates completed tax forms
• Creates an audit trail documenting your taxes
• Supports LIFO, FIFO, HIFO, and other costing methods
• Handles DeFi protocols, NFTs, staking, and more

For active crypto traders, tax software is almost essential to accurately report taxes across multiple platforms while minimizing the administrative burden.

Final Tips for Crypto Tax Reporting

Handling cryptocurrency taxes across multiple wallets and exchanges takes work. But you can simplify the process by following these tips:

• Use crypto tax software to eliminate manual work
• Export transaction history from all exchanges
• Maintain detailed records connecting purchases and sales
• Report all crypto transactions – not just profits
• Keep an audit trail to verify your tax reporting

Cryptocurrency tax rules are still evolving, so take advantage of software that adapts to the latest IRS guidance and protocols. The bottom line is reporting all crypto activity accurately is essential, even if it spans multiple wallets and exchanges. Following these best practices will help you stay in compliance and sleep better at tax time!