You absolutely cannot "do your crypto tax in minutes" as they claim. Well maybe you can, but I can almost guarantee it will be wrong. In this blog post we help shed some light on what issues might cause your client to pay too much tax.
Here are my top 5 reasons why you cannot (and should not) rely on the crypto tax software.
Each software provider is different.
Uncategorised transactions are your clients worst enemy.
Ensuring you complete historical transactions.
Look out for spam and spoof transactions from scammers.
How can you be sure the data is complete and accurate?
Each software provider is different.
You might think they are all the same right? You'd be very wrong. One key decision overlooked is which software best suits the crypto activities that your client is involved in. If they have only bought and sold on a main exchange (like CoinSpot) then this decision won't matter. But anything more complicated then that and this decision is crucial. Did you know that Koinly treats certain transactions that the ATO deems non-taxable as a disposal for CGT purposes crystalising a gain when it shouldn't be the case?
Then there are the portfolio and tax settings for each software and understanding how to use these to your client's advantage.
Uncategorised transactions.
Uncategorised transactions are your client's worst nightmare and the ATOs best friend. Most crypto tax software providers ignore uncategorised transactions and therefore allocate a ZERO COST BASE to that transaction. That means that when the client sells that crypto asset, not only will the software default to a gain on 100% of the proceeds but it will ignore any potential CGT discount as well!
Completing historical transactions
When completing crypto tax for a client for the first time, it is almost always beneficial to complete the reconciliations for any prior years because:
Uncategorised transactions: If they have held any cryptocurrency purchased in prior years, the software will not allocate a cost base as discussed above.
Capital Losses: Often clients have chosen not to have prior year reconciliation completed if they lost money buying and selling cryptocurrency (especially in FY2022). These clients may have an amendment window available to amend prior year tax returns to record the capital losses so that they can be utilised in the future and may be unaware of the value of these losses.
Spam/Spoof transactions.
SCAM TOKENS: Scammers are pretty smart these days. Once common phishing scam involves "fake" cryptocurrency tokens being sent to crypto wallets without the client's knowledge. Sometimes these tokens have an inflated (fake) value trying to entice the client into thinking they have received an AIRDROP and attempting to sell them. Often the smart contracts built for the token provide the scammers access to the wallet of the client and if they hold any real cryptocurrency assets (like Bitcoin) these can be stolen from the wallet.
To make it worse, the tax software (or the accountant/client who doesn't know any better) may categorise this as a taxable airdrop resulting in the client paying tax on something that they shouldn't be.
SPOOF TRANSACTIONS: A more sophisticated scam called "address poisoning attacks". The scammer creates a fake transaction with an imitation token with a $0 value but makes the transaction look like a real transaction. The receiving address is most often very similar to the client's real address in the hope that the client, in future, will copy the fake address and send real crypto tokens to the scammers address by mistake.
To make it worse, the tax software often doesn't recognise or doesn't make it clear that the transaction is a spoof transaction. The accountant or client may categorise it as a legitimate transaction leading to an inflated capital gains tax calculation.
How do you know the data is accurate and complete?
APIs are not perfect. We've all been there when a XERO data feed drops out for 24 hours and we can't work out why the bank doesn't reconcile. Crypto tax APIs are no different and rely on blockchain explorer websites to provide a working and accurate API. But let me tell you, this is not always the case.
Recently, the blockchain explorer Snowtrace (block explorer for a popular blockchain Avalanche) was sold to a new investor. They made some changes and broke the API. ALL crypto tax software providers are affected worldwide. Let me tell you that working with crypto tax software companies to fix this does not seem to be high on their priority list! This issue has resulted in:
Triplicate transactions - That's right, transactions coming through 3 times!
Incomplete transactions - Only picking up one side of a trade. Imagine buying some BHP shares on ComSec and the report only shows you the dollars leaving your account but no info on what asset you purchased! And then you need to search through ASX registers to find the details and manually enter it into your system. Crypto tax done in minutes? How about hours!!
With every job we do, we ALWAYS reconcile the crypto tax holding balances back to the wallet using the blockchain explorer. This is the only way we know that the software has picked up all of the transactions completely and accurately.
Crypto tax software certainly makes the process easier. Most people push a few buttons and cross their fingers and hope the ATO will accept that as a get out of jail free card. I'm here to tell you they won't. And your professional indemnity insurer won't either. It has taken us years to gather the experience to get crypto tax right and it will only get more complex as more blockchains come online and more innovative investment opportunities arise. Just remember we are here to help.
