How To Do Your Kraken Taxes — Building Your Crypto Tax Forms
Kraken has grown to be one of the largest cryptocurrency exchanges that is based in the U.S. Many traders use Kraken because it operates and complies within the strict regulatory environment present in the United States. However, when it comes to doing your Kraken taxes and building out your required Kraken tax forms, many challenges arise.
This article dives into these issues and explains the easiest way to build out your required Kraken tax forms.
Cryptocurrency Taxes — The Basics
The IRS treats cryptocurrencies as property for tax purposes, not as currency. Just like other forms of property-stocks, bonds, real estate-you incur a tax reporting liability when you sell, trade, or otherwise dispose of your cryptocurrency for more or less than you acquired it for.
In this sense, cryptocurrency trading looks similar to trading stocks for tax purposes.
For example, if you purchased 0.2 Bitcoin for $2,000 in April of 2018 and then sold it two months later for $4,000, you have a $2,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain.
On the flip side, if you sold your cryptocurrency for less than you acquired it for, you can write off that capital loss to save money on your crypto taxes.
You can read our complete guide for a deeper understanding of how crypto taxes work.
Kraken Taxes — Breaking Down the Problem
Kraken actually can’t provide users with necessary tax reports commonly received in the world of trading stocks for a number of reasons.
The first issue is that many trades on Kraken are quoted in cryptocurrency. Because you need to be calculating the fair market value in your local FIAT currency at the time of your trades, this becomes very problematic, and Kraken does not track original cost basis/ fair market value data across trades.
The second problem (and the much larger one), comes about from the core nature of cryptocurrency. Because you are able to send crypto into and out of the Kraken network-i.e. Me sending bitcoin from an outside wallet into my Kraken wallet-Kraken has no way of knowing at what cost (cost basis) you acquired that crypto for. Cost basis is essential data you need in the calculation of your crypto taxes.
We discussed this problem in much more depth in our blog post, The Cryptocurrency Tax Problem.
Image Taken From the Kraken Website
So Kraken Can’t Provide Me With Necessary Tax Reports?
So even if Kraken wanted to provide you with accurate tax reports to detail your capital gains and losses, they actually physically do not have the ability to because of the cryptocurrency tax problem. This is true of all major exchanges as well.
So if Kraken Can’t Give Me My Necessary Tax Forms, How Do I Get Them?
To properly build out your necessary crypto tax forms, you need to pull together all of your cryptocurrency data that makes up your buys, sells, trades, air drops, forks, mined coins, exchanges, and swaps across all exchanges that you use.
You can do this by hand by exporting all of your trade history files from your exchanges and doing the capital gains and losses transaction for each trade. Each tax event should be recorded on Form 8949 and your net gain should be transferred onto your 1040 schedule D. We walk through the manual reporting process in our article here: how to report cryptocurrency on taxes.
Cryptocurrency Tax Software
Alternatively, you can use crypto tax software like CryptoTrader.Tax to automate the entire tax reporting process.
When using crypto tax software, you simply import all of your trading and transaction history from all of your exchanges into the platform. The software will automatically sort and cleanse this data and produce your required tax forms with the click of a button.
You can give these generated tax reports to your tax professional, file them yourself, or upload them into your favorite tax filing software like TurboTax for cryptocurrency or TaxAct using the CryptoTrader.Tax partnerships.
Originally published at https://www.cryptotrader.tax.