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When crypto first came out, crypto investors probably had to record all of their Bitcoin and Ethereum transactions by themselves with their own bare hands. Not to mention, during those times, crypto was not completely recognized as a "thing" which just complexified the situation even more. Now, as interest in crypto has expanded over various institutional, private, public, and government-related sectors, it is now getting the financial recognition it deserves.
But, what about taxes? What if a person had lots and lots of transactions? Trading some of the most attractive cryptos during the period of days or even hours might result in a transaction recording nightmare for the day trader. For example, one minute you might have been looking at Shiba Inu and then thinking, "maybe I'll get some of that along with Dogecoin, Baby DogeCoin, Floki Inu, and anything else that has the word 'dog', 'cat', or 'inu' in it". If you did lots of buying and selling to get across different pet-themed assets, you might find yourself swamped with tons of things to keep track of.
The first, and the most worrisome thing is - what is the cost basis of something so new that it hasn't even been recognized by coin price charting software? The coin might sound like it could go to the moon, but the lingering worry of taxes, transactions, and fiat currency equivalencies (and changes over short-term/long-term holding periods) can hover like a dark cloud in the bright world of crypto.
Fortunately, there are solutions that are now coming into the online market. If you use software like TurboTax, there are apps and platforms such as CoinTracker that can extract your transaction activity across various exchanges and wallets and transfer this data to the proper tax forms (e.g., Schedule D and Form 8949 if you live in the United States). It could also find the cost basis of cryptos in the market to make your tax life a lot easier. Another popular software that individuals have used is Koinly.
However, as with all kinds of software and app technologies that we've experienced in the past, there are always areas that could be improved. There are fixes to bugs, user experience improvements, and critical upgrades. One thing I'm curious about is how efficient third-party crypto activity recording apps can recognize the cost basis of coins that were purchased on a pre-sale or coins that are very obscure in the market. What happens in the rare scenario that a cost-basis cannot be recovered or if a transaction somehow could not be extracted from blockchain data? Some have even ponded about how to recover records for increases in the value of a 'staked' token that had changed rapidly in a short period of time because of multiple "rebasings" which were not recorded on the blockchain? These issues could potentially result in missing or erroneous transaction recordings which could affect the realized and unrealized gains calculations - ultimately resulting in incorrect tax payment calculations.
Nevertheless, I think these apps will become more robust over time and will probably be the leading helpful tools that individuals can use to help prepare their taxes in the decentralized world of the future. Who knows? In the distant future, blockchain apps might become so advanced that your transactions, assets, depreciation, and tax estimations might be automatically calculated without you having to do anything.
What are your thoughts on the use of blockchain apps to help in transaction recording and tax preparation?
(Disclaimer: I am not a financial advisor nor am I providing any financial advice. I am simply providing my opinions which can be subject to change at any time. Please do your own research in any kind of finance-related venture.)
