Generating end-of-year cryptocurrency tax reports with CryptFolio
Over the last few weeks, we have been developing software to help New Zealand residents and businesses to complete their income tax returns, following the recent IRD guidance of treating cryptocurrency as property.
We’re very excited to share with you a preview into how you can use CryptFolio, right now, to assist you with your 2017 FY tax returns.
(Note: This is not financial advice, and is a work in progress. The tools and services listed below may change at any time. We are not accountants or advisors, and this article has been written with New Zealand law in mind. You should contact your own accountant(s) or another suitable professional service, in your own country, for personalised advice.)
1. Set up your portfolio
The first step is to register on CryptFolio, create a new portfolio, and then add to that portfolio all of your cryptocurrency assets, exchanges and wallets. Our awesome Getting Started wizards will help you get set up quickly, and (at writing) we support 19+ account types.
For more information on how to add different types of wallets to CryptFolio, check out our support center.
2. Review your inventory
Once you’ve set up your portfolio, you can click on Browse Balances to view your portfolio balances and inventory.
Each of the currencies in your portfolio, that are either reporting currencies, or have a non-zero balance, will be listed here.
You can then drill down into each of the currencies to view their inventory report. This is a list of all of the transactions for a particular currency, categorised into one of four transaction types:
- Purchase: The initial purchase of a currency, which can be through exchange or mining. The purchase price is used to value the currency as new inventory.
- Sale: The sale of a cryptocurrency, which can be through exchange of a cryptocurrency (for another cryptocurrency or fiat currency) or purchasing a good or service. This is considered a taxable event.
- Transfer: Transferring currency between accounts, wallets, or addresses. This is not considered a taxable event.
- None: for anything that hasn’t been categorised. These transactions will be not be included in your reports.
If you’re using our integration tools, then most of your transactions should be automatically categorised into one of these three types.
From this report, you can then view the FIFO report for that currency.
(In the future, we will support other reporting methods such as weighted average, or LIFO).
3. Understand the FIFO report
The FIFO report for each cryptocurrency is in three sections.
Outstanding Purchases (Inventory) describes all of the currency you have ever purchased (i.e. categorised as a Purchase transaction), the calculated value at purchase, and how much of it has been sold (and thus its remaining value). Each inventory item has a unique ID (e.g. “#3”).
Completed Sales shows all of the taxable events (i.e. categorised as Sale) for this currency. For each transaction, CryptFolio calculates the value of the transaction, based on the exchange rates on that date. The initial price (and value) of the inventory sold is also listed (calculated with FIFO, e.g. “#3”). With all of this information, the realised gain can then be calculated for each transaction.
It’s this realised gain value (for a given financial year) that you would then potentially use in your New Zealand income tax returns.
Finally, Unrealised Gains (Inventory) shows you all of the currency you have ever purchased that has not been completely sold, and along with the current value of each currency, you can see your unrealised gains — i.e. how much gain (or loss) you could realise if you were to sell all of your currency (inventory) at the time of report.
4. Export your reports
Once you have completed your reports, you will be able to download them in CSV or PDF format, suitable for importing into third-party software (such as Xero), and these reports can be stored as part of your record keeping process.
(This functionality is still being developed. Watch this space!)
Common issues
Unable to connect sale with inventory
If your FIFO report warns you that a sale “could not be connected with any inventory”, then it’s likely that you haven’t declared the source (and date and value) of that currency, and CryptFolio cannot find a Purchase to connect the Sale with. For example, was this from mining, a gift, an airdrop, or another exchange?
Generally, the more information that you’re able to provide to CryptFolio, the more accurate your reports will become.
Exchanges that no longer exist
If some of your previous trades have been through exchanges that no longer exist, you may have difficulty adding these transactions to CryptFolio.
At any time, you can add new transactions to any of the accounts in your portfolio. You can add new transactions to specify the date (and thus value) of otherwise missing inventory, and add any comments or notes to describe the purposes of each transaction.
You can also define a valuation of each transaction; for example, if you have a transaction where you’ve already worked out its equivalent value.
If you are unsure about how to account for these trades correctly, please get in contact with your accountant, who will be more experienced in how to treat these exceptional circumstances.
Missing composite rates
If your report warns you that it “could not calculate a composite rate on this date”, this is likely because CryptFolio does not yet have enough data to calculate the exchange rate.
We are continually updating our sources of data and importing historical data to fill in the gaps. (For example, our USD/NZD rates are being imported as we speak.)
Foreign exchange reporting
In this article, we’ve talked about using FIFO reporting tools to report on your cryptocurrency taxable events. Generally these do not apply to fiat currency, which are considered different type of assets (a financial arrangement).
Once your cryptocurrency is exchanged into fiat, other rules and responsibilities may apply. At this stage, CryptFolio is designed to generate reports for users who do the majority of their trading in cryptocurrency, and not in fiat currency.
The tax rules around financial arrangements are complex, and you and your accountant should need to refer to Section EW of the Income Tax Act 2017 to correctly integrate CryptFolio reports into your returns.
Get in contact with your accountant
While we are trying as hard as we can to provide tools and services that are accessible to everybody, the complexity of cryptocurrency and taxation is still a very new and emerging field. Everyone has different situations and circumstances, and no two tax treatments will be the same.
We recommend that you use CryptFolio with the expertise and advice of your own accountant(s), who will have more experience in bridging the gaps between cryptocurrency and fiat taxation, so that you can confidently and correctly complete your tax responsibilities.
This article covers our very first release and as such, we’ll be iterating and releasing new tools and interfaces to help you with your tax reporting. To stay in the loop, follow our site updates or subscribe to our mailing list.
