Your Guide For Tax Day 2022
Deep dive for tools/tips for preparing your investment & crypto taxes
Dear Sunday Investors:
Welcome to this week’s “Farewell Coach K” Edition of the Sunday Investor! To our new members, the format of this weekly newsletter will be a deep-dive into one investment-topic. This week, we will be going into everyone’s favorite topic of the year… taxes. We will start by sharing background on taxes, how to file them yourself, and how to ensure you are getting the most money back. Then we will go into the software I used, and then the tips and tricks on how I filed my taxes which included 10+ crypto wallets and exchanges.
Read, enjoy and share with any friends. Let’s build wealth together.
Weekly Market Recap
Let’s dig into some of the most important events that happened in the markets in the last week:
The S&P 500 wrapped up its first losing quarter in 2 years on Thursday. Set against piping hot inflation, rusty supply chains, rising interest rates, the theater of war, and a two-year-old pandemic, most analysts are looking forward with caution.
U.S. Employers Added 431,000 Jobs in March The 431,000 added jobs fell short of market expectations (450,000); however, the unemployment rate fell to 3.6%
MetaMask Adds Apple Pay Support! On 29th March 2022, MetaMask announced some crucial updates to its mobile version 4.3.1. Click to find out what they are.
US to release 1M barrels of oil per day from reserves to help cut gas prices. International Brent crude oil futures for May fell 4% to trade at $108.89 per barrel on the news. U.S. crude futures slid 4.7% to $102.84.
What Are Taxes?
According to Investopedia, taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national. Tax revenues finance government activities, including public works and services such as roads and schools, or programs such as Social Security and Medicare.
According to Annuity.org, the average American family pays around $15,748 dollars in federal, state and local taxes. That was based on an average $51,666 household income, according to USAFacts. Taxes are not only important because of how much of your income they take, but also because of what you get in return.
How Are Federal Taxes Used?
Most of the taxes collected by the federal government go to national defense, Social Security, Medicare and other health or social programs. See the following graph below for more on this:
Every year since 1955, Tax Day has typically fallen on or just after April 15. Tax Day was first introduced in 1913, when the Sixteenth Amendment was ratified. This year, Tax Day is coming up in around two weeks on April 18th so it is important to get your taxes done right before then!
Your tax return will depend upon a variety of factors including income, investment gains/losses, donations and other tax breaks to name a few. We will now dig deeper into the options for filing taxes on TurboTax including some trickier topics like crypto taxes.
Filing Taxes Yourself:
We have multiple options every year when deciding how to file taxes including using an accountant who does everything for you, or using online software like TurboTax or H&R Block to file taxes yourself. There are also hybrid options where you are able to file your taxes yourself and then have them “looked over” by a CPA.
Let’s look at the options for filing taxes over at the most popular place to file taxes online at TurboTax as an example:
Option 1: File Yourself With No CPA Support
Option 2: File Yourself With CPA Support/Help To Look Things Over
Option 3: Let a CPA File Your Taxes For You
As we can see, the more you need help or more you do not want to do your taxes, the higher the cost of filing taxes. I enjoy the hybrid model shown in option 2 where you still complete your taxes yourself, but you also get a verified CPA to look things over for you before you actually finalize and file your taxes.
Filing on TurboTax is typically a seamless process as they take you through all of the potential information in terms of income, tax credits, and investments you need to fill out to successfully file your taxes. Where things get more complicated are the crypto taxes portion where the technology is still being created to report taxes correctly.
Investment Taxes & Crypto Taxes:
With any taxable investment account, you will be mailed or emailed the appropriate tax forms by the brokerage to report on your taxes every year. Virtually every brokerage including TD Ameritrade, M1 Finance, Robinhood and much more can be searched in TurboTax to natively populate your tax forms without any manual input. It looks a bit like this below:
So, this looks very easy for any typical brokerage account holding stocks, ETFs, mutual funds, bonds or other investments which it is. Is this the same with crypto taxes…..? Unfortunately not.
Crypto tax software needs to be bought and used outside of the TurboTax or H&R Block tax filing platforms on other sites first where you will need to input all of your crypto transactions and other tax information. After completed, the crypto tax software will provide you the necessary tax forms or natively integrates with TurboTax or H&R Block to complete this section of your taxes. Many crypto exchanges have partnerships with the leading crypto tax software solutions which we will go into below:
Best For Simple Crypto Tax Returns: CryptoTrader.Tax
Features:
Calculate taxes due on all cryptocurrency transactions
Works with 45+ exchanges and wallets including the most popular ones like Coinbase, Voyager, Gemini, BlockFi & more
Integrates with TurboTax and TaxAct for easy tax filing
Pricing $49-$299:
What Could Be Better:
DeFi/NFT integrations are very limited with this, if you are using decentralized exchanges or participating in NFT trading don’t use this
If you are utilizing DEXs, P2E gaming, or NFT trading with multiple blockchains like Ethereum, Avalanche, Solana, or Harmony then CryptoTrader.Tax will not be the best option for you
Best For Complex Crypto Tax Returns: CoinTracker
Features:
Tracks your entire cryptocurrency portfolio in one place including both exchanges and decentralized wallets like MetaMask
Ability to accurately track your taxable events related to DeFi and NFTs
Supports multiple blockchains including Ethereum, Polygon, Avalanche, Solana and popular L2 chains like Optimism
Also integrates with H&R Block or TurboTax
Pricing $0-$199:
What Could Be Better:
Pricing on CoinTracker is on the high-end, if you have 1,000+ transactions on all of your wallets/exchanges like myself it would cost an additional $199 to use this software which is on top of what TurboTax costs to completely file your taxes
Even after integrating all of your wallets, some DeFi protocols or exchanges may not be fully supported which causes you to have to manually sort through transactions. Example: On my taxes this year, I had to manually sort through 242 transactions to find the cost basis for DeFi activities on the Avalanche blockchain.
Other Important Things to Note:
Airdrops: Taxed as ordinary income based on their fair market value at the time they are received. Ex. Popular decentralized exchange Uniswap airdropped 400 UNI tokens in 2020 which now would be worth over $7,000 but you would only be taxed at the $1,200 it was worth when received.
DeFi Interest: All interest that you earn on DeFi interest accounts like BlockFi or Voyager earning 8%+ on a stablecoin like USDC is taxed as ordinary income, making it equivalent to money that you earn working at your day job. As a result, the tax rate can vary depending on your individual situation.
In the end, crypto tax software will continue to evolve and maybe one day it will be as seamless as integrating an investment account from TD Ameritrade. Until then, using either of the options above and getting the proper tax forms is the only option Uncle Sam is giving us.
Memes of the Week:
Next Article
Will be keeping my eye out for new content to write about these next few weeks. Be sure to send in any questions directly to me or comment below on this post what you’d like me to write about or answer next!
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Not financial or tax advice. The content in this newsletter is for informational purposes only. Every investment and trading move involves risk. Do your own research when making a decision.