Should you go all in on a well known crypto asset like Bitcoin, or are you eyeing the opportunities associated with the high market cap of a riskier memecoin?
Are all exchanges the same?
And how does crypto taxation play into all of this?
Great questions.
Even seasoned investors may need some clarity on cryptocurrency before diving into trading. With so many investment options available, identifying your first entry point or a fresh opportunity with cryptocurrency investing can be challenging indeed.
Learn some of the basics (and prep for tax season) with this primer from BlockSentry.
Why invest in crypto?
In short, the opportunity for financial gain drives many investors to venture into crypto. Whether they’re looking to diversify, or they’re anxious to get in on the ground floor of a burgeoning market, the lure is substantial.
Couple the potential for reward with crypto’s inherent connection to next-gen technologies like blockchain and web3, and investors may also feel like they’re participating in a collective future that’s on the leading edge of financial and technological breakthroughs.
But with the opportunity, savvy investors should factor in how they’ll address compliance with local revenue bodies, how they’ll deal with increasing regulations, and how they’ll mitigate the risk of investing in novel assets and opportunities.
How to choose a crypto exchange.
Not all exchanges offer the same experience, so make sure to do your homework and consult a financial advisor for help in identifying the best crypto exchanges for your scenario. In the end, you’ll likely use and navigate several exchanges. Here are a few things to consider:
- Your investment goals
- Access to the kinds of crypto assets you’re looking for
- Liquidity
- Wallet integration and exchange fees
- The number of transactions you expect to initiate
- Your approach to defi vs cefi
- Compliance and tax considerations (some crypto transactions are taxable, and some are not – does the exchange provide a way to track your transactions?)
Of course there are top of mind exchanges like Coinbase and Robinhood, but it’s worth a look at other exchanges that may offer more hands-on approaches to crypto management. Here’s a lengthy list cataloging several options for crypto exchanges.
Does investing in crypto affect taxes?
Absolutely. In the early days, it was unclear that a decentralized financial system, and the assets that circulate within it, should or should not be subject to tax regulations.
That question has now been answered, and jurisdictions around the world seem to be formalizing the way they deal with crypto taxation as they move toward implementing more regulations, not less.
That poses a challenge for the average crypto investor.
As the market evolves, and adoption and regulation continue to expand, it only makes sense for users and investors to put more pressure on exchanges to provide simple, intuitive crypto tax support.
With so many transactions representing both taxable and non taxable events, how do you keep up with and report capital gains when tax season rolls around? Probably the easiest and most logical method would be for the exchanges themselves to help you track, monitor, and aggregate transaction data for you. But some do, and some don’t.
What if all exchanges went one step further in helping you stay tax compliant by not only tracking your transactions, but even generating jurisdiction specific tax forms like the US 8949?
Why is getting a handle on crypto taxation so important?
The main point of investing in crypto is to generate a return. When you start to run the math on the potential of your return, it’s clear that factoring in the role of crypto taxation helps you get a better handle on your potential bottom line.
In the US, the IRS defines cryptocurrency as “a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.”
But understanding the mechanisms surrounding crypto taxation are not as straightforward. It’s always advisable to enlist the help of a financial advisor with experience in crypto, and make sure to consult your CPA about the tax impact of your investment decisions. After all, you want to protect the return on your investment, and being armed with knowledge, the experience of trusted individuals, and access to the right crypto tax software can make the whole compliance process less of a hassle.
Crypto tax software for investors, users, and CPAs.
Finding the best crypto tax software shouldn’t be a hassle either.
There are options, but we think BlockSentry checks the boxes you need to file crypto taxes with confidence. It works with over 30 crypto exchanges, offers a suite of tools for CPAs, and you can start for free and pay only if you need more features.
See it in action for yourself. Schedule your free demo with BlockSentry or get started for free here.