How We Built the World’s Most Easy-to-Use Cryptocurrency Tax Software

How We Built the World’s Most Easy-to-Use Cryptocurrency Tax Software

by William Carlsen · Updated Sep. 19, 2020

Hi there! Do you remember 2017? That year where we had the mega crypto bull run that caught everyone’s attention. Oh yeah, that year…

Today, three years later, it feels almost just like a flash from the past. It was the year when people were throwing their hard-earned money at every single new project or coin they would come across, making significant gains, and feeling invincible (myself included). It was indeed a lot of fun while it lasted, sometimes seeing your $100 investment turn into $1,000 and even more overnight.

The following year was not equally fun, though. Not only did peoples investments lose most of their value (including my own), but suddenly the tax man knocked on the door and required people to report and pay taxes on their crypto gains. Personally, I had thousands of transactions on multiple exchanges, invested in ICOs, and lost complete track of everywhere I had either spent or traded cryptocurrency. In fact, I didn’t even know where I had all my coins saved!

Bitcoin price during 2017 bull run and 2018 bear market

Even though the year following the 2017 bull run was in several ways very challenging, the idea for building Coinpanda came as a direct result of this.

Read on to learn more about our story and how we built Coinpanda, which today is loved by more than 7,500 crypto traders, and also how we are continuously striving for being the world’s most easy-to-use cryptocurrency portfolio tracker and tax software.

How to Become an Excel Jedi

April 2018. The crypto bubble has burst, the price of bitcoin has fallen from $20,000 to nearly $6,000. My altcoin investments have lost even more value. The tax deadline is less than a month away, I have no idea how much crypto I have sold, or even how to calculate my capital gains.

Then, from a lack of better options (and probably some desperation!), I turn to Excel and say to myself:

“Let’s just get done with this crypo tax stuff, how hard can it be?”

Well, it turned out I could not be more wrong. A week later, my spreadsheets had so much data and complex formulas even I couldn’t understand them anymore. Calculating and getting your crypto taxes done right is in fact very challenging, and I would argue almost impossible to do manually in a spreadsheet if you have more than a few transactions on a single exchange.

After realizing that using Excel would not be a long term solution for my crypto tax problem, I searched the Internet for other options. After spending days searching and talking to other crypto traders, and trying every single tax software for bitcoin and cryptocurrencies that already existed (not very many at that time), I came to the conclusion that there are actually no really good options out there.

Websites like Cointracking and Bitcoin tax provided a horrible user experience, and if you were missing some transactions it gave basically no guidance or help to fix the problem. Even their support was not able to assist just a few weeks from the tax deadline! That was the moment I decided to develop a crypto portfolio tracker and tax software that was not only easier to use than the other websites, but also enjoyable to use for casual crypto traders and investors from every country.

Building the first MVP

Later that year, I reached out to other people in the crypto industry to learn more about how to solve the tax problem for both traders and casual investors. After putting together a team of highly skilled developers with extensive knowledge and experience with cryptocurrencies, we wrote the first line of code towards the end of 2018 and launched a simple minimum viable product (MVP) in early 2019.

Our first users were ourselves and other friends for the 2019 tax season. We also posted a link to the website on some Facebook groups and forums to get any initial feedback from other users, and we were quite surprised to receive daily emails from people using the tool to figure out their crypto taxes in just a matter of days. This included, as expected, lots of bug reports and feature requests like integration with other exchanges, but we were also receiving lots of positive feedback from our earliest users!

Our motto has from the beginning been to deliver the most easy-to-use website and friendly user experience for tracking your crypto portfolio and generating tax reports. Here are our four core pillars which have been fundamental when building Coinpanda:

  • Automatic import and synchronization of transactions across ALL exchanges, wallets, and applications (Read more about integrations)
  • A user-friendly interface that everyone can understand how to use in under 10 minutes
  • The most accurate and complete tax reports in the industry (Read more about tax reports)
  • Best-in-class support available through both email and Live Chat

We think personally that focusing on the user (yes, that’s you!) from the early beginning is the main reason for our success and positive feedback so far.

Coinpanda today

Since our early launch in 2019, we have been working every single day to improve the website and functionality, make the overall user experience even better, and talk to our users. Our main goal is to hide the complexity of calculating capital gains and ensuring the accuracy of the tax reports for our users so that you can spend time doing what you love instead of doing taxes.

There are several other crypto portfolio trackers and tax solutions available today, so we are focusing a lot on innovation and bringing new features first to the market. We think also we have the best support team available today, and the feedback received and word-of-mouth confirms that we’re on the right track.

Here are a few highlights from the Coinpanda application today:

1) Free portfolio tracker and tax preview

Our portfolio tracker is 100% free forever and lets you track your cryptocurrency portfolio performance over time and across all exchanges, and in your local currency (we support more than 50 fiat currencies). You can also see a free tax preview for each trade you ever made. Are you planning to make a trade and want to see the tax impact first? No problem!

2) Import transactions automatically from 350+ exchanges

Coinpanda has direct integration with and can import transactions automatically from more than 350+ exchanges, wallets, and blockchains today. New exchanges are added almost every week. Have you traded on an exchange or platform we don’t support yet? Send us a message in the Live Chat and we will normally add API-integration within 3-5 days.

3) Identifying internal transfers

If you have sent cryptocurrency between two of your own exchanges or wallets (for example from Coinbase to Binance), Coinpanda will automatically detect this and show this as a single transfer instead of two separate transactions. This feature also helps you to identify missing transactions from other exchanges.

4) Correct handling of fees and costs

Did you know that you can reduce your capital gains (and therefore tax burden) by including any associated transaction costs in the cost basis? No one wants to pay more tax than they need to, that’s why we have ensured Coinpanda tracks this correctly.

5) Support for more than 65+ countries

Cryptocurrency is truly a global phenomenon, and that’s why we have built the software to be used by people from all over the world since the first day. Tax rules differ in various countries, and so we have hired several tax experts to make <<sure our tax reports are according to local laws and regulations. We have support for special cost basis methods like Share Pooling (United Kingdom) and Adjusted Cost Base (Canada). Most other countries use either FIFO, LIFO, or ACB which we also support of course.

The Journey Continues

In the world of cryptocurrencies and blockchain, one day can feel like a whole month or even a year in the “normal” world sometimes. New technology, trends, and products are emerging at the speed of light, and this forces us to continue innovating every single day.

Today, our team has grown to more than 20+ people working from different parts of the world with a single goal in mind: provide crypto traders and investors with the best tool for tracking their portfolio and tax reporting.

We are extremely passionate about what we are doing here at Coinpanda, and we try to make the product even better every single day. New updates and functionality is released on a weekly basis, and you can expect both relevant and educational content on our blog published regularly.

As of the time of writing this article (September 2020), it looks like we are just starting the next major bull run in the cryptocurrency world. We are extremely optimistic about the future of bitcoin, cryptocurrencies, and blockchain technology, and for all the challenges and opportunities ahead.

Any feedback (both good and bad!) is highly appreciated and can be emailed to us, or send us a message directly in the Live Chat.

Thank you for reading!

– William Carlsen, CEO and Founder

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

TRY US

Need help with your crypto taxes?

Join Coinpanda today and generate your tax reports in under 20 minutes.

Crypto Taxes in Canada: Adjusted Cost Base Explained

Crypto Taxes in Canada:
Adjusted Cost Base Explained

by William Carlsen · Updated Sep. 16, 2020

The Canadian Revenue Agency (CRA) has published a detailed tax guide for the taxation of cryptocurrencies and digital assets such as Bitcoin. The CRA treats cryptocurrencies similarly to commodities, and the implications are that individuals in Canada need to calculate and report their capital gains when they sell or trade a virtual currency.

In this article, we will explain everything you need to know about calculating cost basis in Canada for your crypto transactions according to Adjusted Cost Base including the Superficial Loss Rule. We will do this in detail by using a few practical examples and easily understandable terms.

Read this article to learn about:

What exactly is Adjusted Cost Base?

The Superficial Loss Rule and its consequences

Practical examples & calculations

How to report your crypto taxes in Canada

How to calculate Capital Gains

In almost every country today, individuals have to calculate and pay capital gains tax if dealing with cryptocurrencies and other assets. For Canadian individuals, the CRA has defined clearly which type of actions are considered a taxable event:

  • if you sell or gift cryptocurrency to someone else
  • trading of cryptocurrency (eg. BTC → ETH)
  • selling of cryptocurrency in exchange for fiat (eg. BTC → USD)
  • paying for goods or services with cryptocurrency

The consequence of this is that most people that have either sold, traded, or dealt with virtual currencies in one way or another are required to report this to the CRA.

Now, the question is how do you actually calculate this capital gains for your cryptocurrency transactions. The general formula for calculating capital gains is:

capital gains = selling price – purchase price

The selling price is the market value of the cryptocurrency sold on the date of the transaction, and the purchase price is the original purchase cost when you acquired the asset in the past. The purchase price should also include any reasonable acquisition costs like fees and commissions. This is often referred to as the cost basis.

As already mentioned, the cost basis needs to be determined according to rules for Average Cost Base in Canada. In the next section, we will explain how this works in more detail, together with what the Superficial Loss Rule is and how it affects the cost basis for cryptocurrencies.

Adjusted Cost Base w/ Superficial Loss Rule

To calculate the cost basis according to the Adjusted Cost Base, you need to keep track of the total purchase price and your total holdings of each asset at all times. To calculate the cost basis when you sell any cryptocurrency, simply multiply the total average cost with the number of coins sold or disposed of.

Now, this might not seem too complicated in and by itself, but the CRA has also put in place the Superficial Loss Rule which can make the calculations a lot more difficult to get done correctly by disallowing capital losses under certain conditions.

Let’s assume that you have bought and sold many different cryptocurrencies during the year. When the end of the year is approaching, you realize that you have significant net capital gains which means you need to also pay capital gains tax. At the same time, you also still own some assets that have fallen in price which are now at a loss.

Now, you might think that if you sell these assets today you will reduce your net capital gains and pay less tax as a result. Because you want to still hold those assets, you plan to buy back the same coins 1-2 days after selling them. This might sound like a very strategic plan on paper, but unfortunately, it’s not that easy in reality.

The Superficial Loss Rule has been put in place by the CRA to prevent exactly this. This rule comes into action when both of the following conditions are met:

  • You acquire identical cryptocurrency during the period beginning 30 days before and ending 30 days after the disposal
  • You either own or had a right to acquire the cryptocurrency at the end of that period

If both conditions are met, you are not allowed to claim the capital loss from selling a cryptocurrency.

To get a better understanding of how this Superficial Loss Rule actually works, we will look at a few practical examples in the next Sections.

Example 1

Our fictive character Mark has bought Bitcoin on two occasions in 2019 and then sold all his coins on the 5th of June, 2020. Later that year, he bought 1.2 BTC again. All his transactions can be seen in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700(?)(?)
4Buy2020-09-231.2 BTC$8,200$8,200

For Mark to calculate the capital gains he needs to first find the ACB of his Bitcoin holdings prior to the sale on the 5th of June.

Adjusted Cost Base:

1,820 + 4,320 = $6,140


ACB per coin:

$6,140 / 0.8 BTC = $7,675 per BTC

Since Mark sold all his coins, the cost basis is equal to his ACB ($6,140).

The resulting capital gains for Mark is therefore found as:

Capital gains:

$5,700 – $6,140 = ($440)

Mark has now realized a loss of $440 by selling his BTC at a lower price than what he originally paid. Note that the Superficial Loss Rule does not kick in because the first criteria above were not fulfilled: Mark did not purchase BTC during the period starting 30 days before and ending 30 days after the disposal on the 5th of June.

Example 2

In this next example, Mark bought the 1.2 BTC a few days after disposing of his holdings. This means that the Superficial Loss Rule has been triggered and Mark is therefore not allowed to claim the capital loss of $440 as found in Example 1.

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700(?)(?)
4Buy2020-06-071.2 BTC$7,000(?)

What Mark needs to do is add the capital loss ($440) to the ACB of the BTC bought on the 7th of June, 2020. The ACB for 1.2 BTC bought becomes:

Adjusted Cost Base:

7,000 + 440 = $7,440


ACB per coin:

$7,440 / 1.2 BTC = $6,200 per BTC

We can now summarize our findings in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700$6,140($440)
4Buy2020-06-071.2 BTC$7,000$7,440

Compared to Example 1, Mark was not allowed to claim the $440 loss because he bought the same asset (BTC) only two days later which triggered the Superficial Loss Rule.

Summary and Takeaway

We have in this article explained how capital gains and cost basis calculations for cryptocurrencies should be done in Canada according to guidance released by the CRA. We have also looked at the Superficial Loss Rule and under which conditions you are not allowed to claim a capital loss. Lastly, we looked at two practical examples where we worked out the cost basis and capital gains calculations for our fictive character Mark.

For more information about cryptocurrency taxation in Canada, we recommend that you read our free and in-depth tax guide that is updated regularly:

This guide covers not only how to work out the ACB, but also possible tax implications if you have received cryptocurrency from airdrops, staking rewards, hard forks, or participated in mining activities.

If you are looking for an easy and user-friendly solution to calculate your crypto taxes, we recommend that you check out Coinpanda. This tax solution has in a short time become very popular and has helped generate tax reports for more than 7500 cryptocurrency investors and traders so far.

You can easily import all transactions from exchanges like Coinbase and Binance automatically. The team is currently working on adding support for the Superficial Loss Rule so that you can file your next tax return with ease and confidence. Click here to read more or sign up directly for a free account.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

TRY US

Need help with your crypto taxes?

Join Coinpanda today and generate your tax reports in under 20 minutes.

Crypto Taxes in the UK: Share Pooling (HMRC) Explained

Crypto Taxes in the UK:
Share Pooling (HMRC) Explained

by William Carlsen · Updated Sep. 14, 2020

Her Majesty’s Revenue and Customs (HMRC) has published guidance for the tax implications of selling and trading cryptocurrencies such as Bitcoin and Ethereum and other digital assets. The policy paper, which was last updated on December 20, 2019, goes into detail how individuals in the United Kingdom should calculate their crypto taxes and which rules apply for calculating the cost basis.

In this article, we will explain everything you need to know about calculating cost basis according to rules for pooling, the same-day rule, and the 30-day rule as set out by the HMRC. We will do this in detail by using a few practical examples and easily understandable terms.

Read this article to learn about:

What exactly is pooling according to HMRC?

What the same-day and 30-day rule is

Practical examples & calculations

How to report your crypto taxes in the UK

What is Capital Gains and Cost Basis

You might have heard the terms capital gains and cost basis being thrown around. While it might sound complicated at first, it is actually pretty straight forward to understand.

The general rule is that every time you sell, trade, or purchase any goods or services with a cryptocurrency, you need to calculate the capital gains for that transaction. This is also referred to as the disposal of a crypto asset.

The general formula for calculating capital gains is:

capital gains = selling price – purchase price

The selling price is simply the value of what you sold (disposed of) at the time when you made the transaction. The purchase price is what you originally paid when you acquired the coins earlier and is also referred to as the cost basis. The cost basis should also include any associated costs such as trading fees.

The capital gains tax rate and tax-free allowances depend on a few different factors and will not be covered further in this article.

If you only have a few transactions it will be quite easy to calculate your cost basis, selling price, and resulting capital gains. However, if you have more than 10-20 transactions it will quickly become very difficult to keep track of the correct cost basis for each disposal of your crypto assets.

A simple method to calculate and keep track of the cost basis is to first find the total average cost of all your holdings, and then simply multiply this value with the number of coins sold or disposed of. This cost basis method is commonly referred to as the Average Cost Basis (ACB) and is also applicable for individuals in the UK, but with a few exceptions which we will explain next.

Share Pooling rules by HMRC

It has been common practice in the past to sell shares that are at a loss in order to reduce the total tax liability, and then simply repurchase the same shares back shortly after. This is also referred to as wash sale and is actually still allowed in many countries today.

In the UK however, the HMRC has published official rules to avoid individuals selling shares and benefitting from the reduction in taxes if the same shares are purchased back within a short timeframe.

These rules, often simply referred to as Share Pooling rules, can be summarized as the following:

Rule 1: if you buy and sell the same asset on the same day, then the cost basis of the disposed asset should be calculated as the average cost of the asset purchased the same day. This is also referred to as the same-day rule. If you have sold more of an asset than you purchased on the same date, then the next rule below should be applied for the remaining amount.

Rule 2: if you buy back the same asset you have sold within the next 30 days, the cost basis of the disposed asset should be calculated using FIFO cost basis method. This is also referred to as the 30-day rule. If you have sold more of an asset than you purchased within the following 30 days, then the next rule below should be applied for the remaining amount.

Rule 3: calculate the average cost basis for all assets bought prior to the disposal date. To find the cost basis of the remaining assets, simply multiply the average cost with the number of assets/coins sold (ACB cost basis).

More information and details about these rules from the HMRC can be found here.

Even though these rules are fairly easy to understand, it becomes a big challenge relatively quickly if you are trying to calculate the cost basis for hundreds of cryptocurrency transactions while adhering to all three rules.

The team behind Coinpanda has developed a very user-friendly and popular crypto tax software that can calculate the cost basis for crypto traders and investors according to Share Pooling rules by HMRC for individuals in the UK. You can get started by signing up for free here or read more about how the Coinpanda software works.

To explain more in detail how to actually calculate the cost basis and resulting capital gains according to the Share Pooling rules, we will look at three basic examples in the next Sections.

Example 1: Share Pooling (ACB)

Our fictive character John has bought Bitcoin on three occasions in 2019 and 2020 and then sold part of his holdings later in 2020. All his transactions can be seen in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 BTC£6,200(?)(?)

Now, John needs to work out his cost basis and resulting capital gains. Because John did not buy back any Bitcoin during the same day he sold, or within the 30 days following, we can calculate the cost basis directly using ACB of his total bitcoin pool.

Total amount in pool:

0.2 + 0.6 + 0.3 = 1.1 BTC


Total cost in pool:

1,810 + 4,320 + 1,350 = £7,480


Average cost:

£7,480 / 1.1 BTC = £6,800 per BTC

We find the cost basis for 0.8 BTC sold simply by multiplying the amount with the average cost:

Cost basis:

0.8 BTC * £6,800 = £5,440

The resulting capital gains for John is therefore found as:

Capital gains:

£6,200 – £5,440 = £760

Example 2: The Same-day Rule

In this example, we will replace our fictive character John with Emma instead. For simplicity, we will assume Emma has bought and sold Bitcoin on the same dates as John, but she did also buy Bitcoin on the same date she sold. Emmas transactions can be seen below:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 BTC£6,200(?)(?)
5Buy2020-06-050.4 BTC£3,000£3,000

Because Emma bought 0.4 BTC on the same date she sold 0.8 BTC she needs to account for the same-day rule when working out her capital gains:

Cost basis 0.4 BTC (same-day rule):

£3,000


Cost basis 0.4 BTC (ACB):

0.4 BTC * £6,800 = £2,720


Total cost basis:

£3,000 + £2,720 = £5,720

The resulting capital gains for Emma is therefore found as:

Capital gains:

£6,200 – £5,720 = £480

We can see that Emma’s capital gains are in fact lower than John’s. This is because the average purchase price (acquisition cost) from 2019/2020 was lower than the purchase price on the date Emma sold 0.8 BTC and later bought back 0.4 BTC.

However, if the price of Bitcoin was lower on this date than the average purchase price, the same-day rule would not allow Emma to realize her losses by buying Bitcoin back on the same day. As already mentioned, this would be classified as a wash-sale and is the reason behind why the HMRC has put these rules in place.

Example 3: The 30-day Rule

In our last and final example, we will replace our fictive characters John and Emma with Kevin. Kevin has made the same transactions as Emma, but he also bought another 0.2 BTC seven days after selling some of his Bitcoin holdings:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 BTC£6,200(?)(?)
5Buy2020-06-050.4 BTC£3,000£3,000
6Buy2020-06-120.2 BTC£1,480£1,480

Because Kevin bought 0.4 BTC on the same date he sold 0.8 BTC, he also needs to account for the same-day rule when working out his capital gains:

Cost basis 0.4 BTC (same-day rule):

£3,000

Kevin also bought 0.2 BTC seven days later, which means he now has to consider the 30-day rule as well:

Cost basis 0.2 BTC (30-day rule):

£1,480


Cost basis 0.2 BTC (ACB):

0.2 BTC * £6,800 = £1,360


Total cost basis:

£3,000 + £1,480 + £1,360 = £5,840

The resulting capital gains for Kevin can be found as:

Capital gains:

£6,200 – £5,840 = £360

Conclusion

We have in this article explained how capital gains and cost basis calculations should be done in the UK. We have also looked at how the same-day rule and 30-day rule must be accounted for together with the Average Cost Basis according to the Policy Paper by the HMRC. In the end, we looked at three practical examples that showed all calculations required for working out your crypto tax gains according to Share Pooling rules in the UK.

It should be clear now that cryptocurrency tax calculations can be quite complicated, but the most important thing to do is keeping track of all your transactions on different exchanges. Most people that have bought any cryptocurrency chose to use a cryptocurrency tax solution to automate the process of calculating and reporting their capital gains.

Coinpanda is one of very few crypto tax solutions that have full support for Share Pooling rules. This tax solution has in a short time become very popular in the UK and is used today by several thousand individuals to make calculating and reporting crypto taxes quick, easy, and affordable. You can easily import all transactions from exchanges like Coinbase and Binance automatically and generate your crypto tax reports with the click of a button.

You can sign up for a 100% free account here, or view a cryptocurrency sample tax report first.

If you want to learn more about how cryptocurrencies such as Bitcoin are taxed in the UK, you can refer to our in-depth tax guide that is updated regularly:

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

TRY US

Need help with your crypto taxes?

Join Coinpanda today and generate your tax reports in under 20 minutes.

Cryptocurrency Tax Calculations: What is FIFO, LIFO, and HIFO?

Cryptocurrency Tax Calculations: What is FIFO, LIFO, and HIFO?

by William Carlsen · Updated Sep. 12, 2020

You might have come across the terms FIFO, LIFO, and HIFO when reading about cryptocurrency tax calculations. These terms are sometimes also referred to as different cost basis methods. Every time you sell a coin or token, for example selling BTC and receiving USD in return, you have to determine which coins from your holdings are actually being sold to work out your capital gains correctly.

If this sounds complicated, there is no need to worry as we will in this article explain everything in detail using easily understandable terms.

In this article, you will learn the following:

What exactly is FIFO, LIFO, and HIFO?

Practical examples for each cost basis method

Which methods you are allowed to use

How to reduce your crypto taxes and capital gains

Every time you sell, trade, or purchase any goods or services with a cryptocurrency, you need to calculate the capital gains for that transaction. The general formula for calculating capital gains is:

capital gains = selling price – purchase price

The selling price is simply the value of what you sold (disposed of) at the time of the transaction or the value of what you received. The purchase price (acquisition cost) is what you originally paid when you acquired the coins in the past, also referred to as the cost basis.

The general rule is that you can add any associated transaction costs to the cost basis. In the cryptocurrency world, this is usually any fees you paid which is typically between 0.1-2% on popular exchanges today.

To explain more in detail how to calculate cost basis and the resulting capital gains using FIFO, LIFO, and HIFO in practice, we will look at a basic example for buying and selling Ethereum. All transactions can be seen in the table below:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-142.0 ETH$420$4.2$424.2
2Buy2019-10-296.0 ETH$1200$6.0$1206
3Buy2020-03-143.5 ETH$460$460
4Sell2020-06-054.0 ETH$970$9.7(?)(?)
5Sell2020-08-123.0 ETH$1150(?)(?)

In 2020, we sold some of the earlier purchased Ethereum and received USD in return, which means we also need to calculate the resulting capital gains. To do so, we need to first calculate the cost basis which we will now do in detail for each cost basis method.

FIFO Cost Basis

FIFO is short for “First in First out”, which means that we are selling the coins in the same order as they were acquired. In other words, we are always selling the oldest coins first.

  • Transaction 4: Selling 4 ETH. The cost basis is found as the acquisition cost of 2 ETH on August 14th, 2019 (Tx #1) + acquisition cost of 2 ETH on October 29th, 2019 (Tx #2):

$424.2 + (2 / 6 * $1206) + $9.7 = $835.9

Note that we have also added the $9.7 fee in the cost basis calculation.

  • Transaction 5: Selling 3 ETH. After selling 4 ETH previously, we now have sold 2 of the 6 ETH acquired earlier (Tx #2). The cost basis is therefore found as the acquisition cost of 3 ETH from the remaining 4 ETH on October 29th, 2019 (Tx #2):

3 / 6 * $1206 = $603

Now that we have found the cost basis for both Sell transactions, we can easily work out the capital gains this way:

Capital gains, 4 ETH sold:

$970 – $835.9 = $134.1


Capital gains, 3 ETH sold:

$1150 – $603 = $547

Using FIFO cost basis method, the total capital gains is then found as:

$134.1 + $547 = $681.1

LIFO Cost Basis

LIFO is short for “Last in First out”, which in practice means that we are selling the coins in the opposite order as done using FIFO. In other words, we are always selling the most recent acquired coins first.

Now, let’s see how we can calculate the cost basis using LIFO cost basis method:

  • Transaction 4: Selling 4 ETH. The cost basis is found as the acquisition cost of 3.5 ETH on March 14th, 2020 (Tx #3) + acquisition cost of 0.5 ETH on October 29th, 2019 (Tx #2):

$460 + (0.5 / 6 * $1206) + $9.7 = $570.2

  • Transaction 5: Selling 3 ETH. After selling 4 ETH previously, we now have sold 0.5 of the 6 ETH acquired earlier (Tx #2). The cost basis is therefore found as the acquisition cost of 3 ETH from the remaining 5.5 ETH on October 29th, 2019 (Tx #2):

3 / 6 * $1206 = $603

Now that we have found the cost basis for both Sell transactions, we can easily work out the capital gains this way:

Capital gains, 4 ETH sold:

$970 – $570.2 = $399.8


Capital gains, 3 ETH sold:

$1150 – $603 = $547

Using LIFO cost basis method, the total capital gains is then found as:

$399.8 + $547 = $946.8

Compared to the capital gains found using FIFO above, using LIFO does result in higher capital gains which means also an increase in the amount of tax we will have to pay.

HIFO Cost Basis

HIFO is short for “Highest in First out” and works exactly as it sounds by selling coins from highest to lowest cost basis value (purchase price).

This means that HIFO cost basis method will minimize the total capital gains as much as possible by minimizing the realized gain for each transaction. Keep in mind it will also lead to the largest realized losses so you might end up with a net capital loss that can be used to offset other income. (NB! rules for offsetting other income varies from country to country.)

Let’s do the same calculations for our example above using HIFO cost basis method. First, we will add a new column to our table called Avg. Cost which is the average cost basis for each ETH:

Tx No.TypeDateAmountPriceFeesCost BasisCapital GainsAvg. Cost
1Buy2019-08-142.0 ETH$420$4.2$424.2$212.1/ETH
2Buy2019-10-296.0 ETH$1200$6.0$1206$201.0/ETH
3Buy2020-03-143.5 ETH$460$460$131.4/ETH
4Sell2020-06-054.0 ETH$970$9.7(?)(?)
5Sell2020-08-123.0 ETH$1150(?)(?)

Now that we have established the average cost for each Buy transaction, we can use HIFO cost basis method to calculate the lowest possible capital gains:

  • Transaction 4: Selling 4 ETH. The highest cost available is from the purchase of 2 ETH on August 14, 2020, which will be sold first. Next, we will sell the remaining 2 ETH from the lot purchased on October 29th, 2019, which has the second-highest cost basis. As you already might have noticed, this will give the same resulting cost basis and capital gains as using FIFO method above.
  • Transaction 5: Selling 3 ETH. After selling 4 ETH previously, we now have sold 2 of the 6 ETH acquired earlier (Tx #2) which still has the highest cost available. We will therefore sell 3 ETH from the same lot purchased on October 29th. This also gives the same result as FIFO method, so there will not be any difference in the total capital gains using FIFO or HIFO in this example.

This was a very simple example with only five transactions in total, but you can imagine that we can get a very different result with hundreds or thousands of transactions spanning over several years.

Choosing the right Cost Basis Method

Let’s first look at a few key differences so that we understand the general implications a bit better.

FIFO:
Since we are selling the oldest coins first, FIFO can often lead to the highest capital gains in a market that is trending up (bull market), and where your initial purchase price is lower than current prices. On the other hand, in a bear market where prices are declining, FIFO can minimize your capital gains if your initial purchase price is higher than current prices.

LIFO:
Basically the opposite as FIFO: it can lead to significantly lower capital gains in a bull market that is trending up, and higher capital gains in a bear market with declining prices.

HIFO:
This will always lead to the lowest possible capital gains since each transaction considers the highest cost basis available.

Now you might think that choosing HIFO is the obvious decision to reduce your taxes as much as possible, but it’s actually not that simple.

First, you need to consider which cost basis method you are allowed to use in your country. Tax authorities in some countries have released guidance for which methods can be used for cryptocurrency tax calculation purposes, but this is not the case everywhere. You should therefore always check with your local tax authority what is allowed or not.

In the US, you are allowed to use any method available as long as you can specifically identify which unit of cryptocurrency is being sold. This is also often referred to as Specific Identification (see Notice 24 issued by the IRS for more information) and is very beneficial for cryptocurrency traders and investors in the US, and such provides them with great opportunities for tax saving.

But keep in mind that in the US, the amount of tax you pay is also decided by how long you held (or owned) the cryptocurrency before you later sold it and realized the gains. Short term gains from cryptocurrencies owned less than one year are taxed at a higher rate than assets owned for more than six months.

A cryptocurrency tax solution like Coinpanda automatically keeps track of long/short term gains, and you can check your total tax liability for FIFO, LIFO, and HIFO (and even other cost basis methods!) before deciding which method you should chose when filing your tax report.

Take away message

As it should be clear now, cryptocurrency tax calculations can be quite complicated, and terms like FIFO and LIFO can definitely confuse a lot of people. The most important thing to do is keeping track of all transactions you have on all exchanges and wallets. If you have more than 30-50 transactions it will be very difficult (in fact, almost impossible) to use spreadsheets like Excel or Google Sheets. Most people chose therefore to use a cryptocurrency tax software to automate the whole process.

We at Coinpanda have built a tax solution that is used by more than 7500 cryptocurrency traders and investors today. You can easily generate your crypto tax reports using either of the cost basis methods discussed in this article.

Do you want to minimize your taxes as much as possible by running calculations using all different methods before filing your taxes? No problem with Coinpanda! You can sign up for a 100% free account here, or view some of our sample tax reports first.

If you want to learn more about how cryptocurrencies such as bitcoin are taxed, please refer to our in-depth tax guides that are regularly updated:

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

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Coinpanda Referral Program – Earn $15 for every person you refer

Coinpanda Referral Program – Earn $15 for every person you refer

by William Carlsen · Updated September 10, 2020

Did you know that you can easily earn $15 for every person you refer that signs up with Coinpanda and buys any of our tax plans? This credit can then be used to upgrade your Coinpanda tax plan. That’s right, with a few simple steps you can get your crypto tax reports done 100% for free!

In this article, we will explain how the referral program works, where you can find your unique referral code, and how to get signups.

The Basics

The Coinpanda affiliate program is very simple, and can be summarized in three steps:

  1. Get your unique referrel URL
  2. Tell your friends, family and followers about Coinpanda
  3. Receive $15 credit for each referral that upgrades to a tax plan

As an example, if you refer 10 people that signs up and use Coinpanda to generate their crypto tax report, you will receive a total of $150 credit to your account.

There is also no limit to how much you can earn, and your credit never expires. This means you can use this credit even in the future so you never have to pay for your crypto tax reports again.

Now, let’s go through each step above in more detail.

Step 1: Get your unique referral URL

After logging in to Coinpanda, simply click the “Invite Friends” button to open the referral program window:

In this window you will find your unique referral URL. If you wish to get a custom referral code, like your-name instead of 329d90bccbdb as shown below, simply send us a message in the Live Chat and we will set this up for you.

Example: if your name is Mark, you can get your own unique referral link https://coinpanda.io/?ref=mark!

Step 2: Spread the word

Now that you have your own unique referral URL, all you need to do is tell your friends, family and followers about Coinpanda and send them your referral link.

Every person that owns any cryptocurrency like bitcoin does in fact need to report their taxes, so your friends will most likely actually thank you for telling them about how Coinpanda can solve their tax situation.

There are a few ways you can do this which we will mention briefly below:

  • Facebook Messenger: simply send your referral URL to your friends on Facebook.
  • WhatsApp: same as above, just message your contacts and include your referral URL.
  • Email: sending emails is a good way to tell your friends about Coinpanda.
  • Telegram: you are allowed to share the referral link in chat groups on Telegram, but no spamming is allowed.
  • Discord: same as Telegram, you are allowed to share the link in Discord channels.
  • YouTube: do you have your own YouTube channel? Simply include your referral link in the video descriptions. You should mention a few words about why your viewers should sign up.

There are of course also many other ways to get referrals, and the list above is just to give you an idea for how to get started.

Step 3: Receive $15 credit for each conversion

Now that you have told your friends, family, and followers about Coinpanda, and how it can solve their crypto taxes easy and efficiently, all you have to do is check back later to see how many of your referrals have upgraded their tax plan.

You will receive $15 credit for each conversion which you can see in the referral window. The number of converting users will be shown in the Paid Users box, while your available credit is shown in the Credit Received box.

That’s in fact all you have to do! Simple, huh?

Whenever you want to use your credit to upgrade your own Coinpanda tax plan, just send us a message in the Live Chat and we will upgrade your account for you.

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Guide: How to Buy Cryptocurrency

GUIDE

Guide: How to Buy Cryptocurrency

Updated May 3, 2020

Cryptocurrencies made big headlines in 2017 when prices literally skyrocketed. While the market has decreased substantially ever since, people are still buying crypto assets today. In this guide, we will take a look at different reasons why people invest in cryptocurrencies and digial assets such as Bitcoin and Ethereum, and also how you can buy cryptocurrencies from exchanges or with cash.


1. Why Invest in Cryptocurrencies?

Diversification

There is a saying that says “Never put all of your eggs in one basket”. If there are any sort of people that understand this better than anyone else, it must be professional investors. Diversification is an important strategy that every investor should consider, and there are in fact a lot of different approaches that can be used to achieve this.

Today in 2019, more and more investors are looking at digital currencies such as Bitcoin as an asset class that can help them diversify their portfolio. One of the reasons for this is that crypto assets are very different than more traditional asset classes and markets. Including such assets in their portfolios could substantially increase the potential for growth and return on investment.

Even though the global cryptocurrency market has been in a bear market throughout 2018, investors and traders have regained their interest during 2019 as the market has started to turn around again. It is especially the high volatility and potential for massive gains, even as much as 100% or more, that is the reason why many people are attracted to this asset class.

Easier than Ever Before

Buying cryptocurrency today has never been that easy. As prices skyrocketed in 2017, a lot of companies saw the market potential for cryptocurrency exchanges and mobile applications, and today there is a wide variety of options for buying cryptocurrencies.

You can buy cryptocurrencies today using your credit card, debit card, gift cards, or even with cash through physical Bitcoin ATMs that can be found in many countries.

It should be noted that many of today’s cryptocurrency exchanges are charging significant commission and transaction fees. It is always recommended to compare fees between different exchanges before you decide to make a purchase on one of the platforms.

Adoption is Coming

It is no doubt that the cryptocurrency market is still in its infant stage. The total market cap is just a tiny fraction of other global markets such as stocks, bonds, currencies, commodities and real estate. There are approximately 6,000 Bitcoin ATMs around the world today, which is a very low number compared to traditional ATMs.

We should also consider the fact that cryptocurrencies are a very new asset class that has not been around very long. The first Bitcoin was mined in early 2009, and has only become popular in recent years.

There has been a lot of interest around crypto assets and the underlying technology from big international banks, countries and governments the last couple of years, so it is pretty safe to say that the asset class will be around for the foreseeable future.


There exists more than 2,000 cryptocurrencies today, some of which fluctuates significantly in value from day-to-day. For people that are new to cryptocurrencies it is not always easy to understand what the differences are between all of them. There are also many different ways to buy these digital assets.

The most popular cryptocurrencies today are generally also having the largest market cap. It is also more likely that a popular cryptocurrency with a relative high market cap will be around in the future as well. Some of the most popular cryptocurrencies today in addition to Bitcoin are XRP (XRP), Ethereum (ETH), Stellar (XLM), EOS (EOS), Litecoin (LTC), Monero (XMR) and Cardano (ADA).


3. How to Buy Cryptocurrency on Coinbase

Coinbase has been around since 2012 and is currently the largest and most popular US-based cryptocurrency exchange today. Their headquarters are in San Francisco, and have so far served more than 30 million users.

It is quite simple to buy cryptocurrency on Coinbase. The first thing you need to do is to create an account on their website. From your account you will have a place to convert your fiat money such as USD into different crypto assets, in addition to a place where you can safely store your own cryptocurrency.

When your account is created and have been verified, you must connect your bank account before you can purchase your first cryptocurrency. You can also connect your credit or debit card. Coinbase also requires you to verify your account before you can take advantage of all their buying options.

The platform lets you also store your cryptocurrency after you have bought it, so you don’t necessarily need to create another wallet elsewhere. You can view real-time exchange rates of several crypto assets against both USD and EUR from their website.


4. How to Buy Cryptocurrency on Binance

Binance launched in 2017 and has already become one of the most popular cryptocurrency exchanges. In terms of traded volume, Binance is in fact the largest exchange as of today, and has taken quite a lot of market share from other exchanges such as Coinbase.

Binance lets you trade a lot of different cryptocurrencies, and to get started you will need to first make a deposit to your cryptocurrency wallet. The exchange focuses mostly on crypto-to-crypto trading, but has quite recently also rolled out support for buying cryptocurrency with fiat money in selected regions.

If you are not able to buy cryptocurrency with fiat from Binance yet, you can always withdraw either Bitcoin or Ethereum from your Coinbase account and deposit to your Binance wallet, and then trade any of the supported assets they offer.

For example, if you want to buy XRP on Binance, you can do so with Bitcoin, Ethereum or Binance Coin. On the Exchange page you will have full overview of current exchange rates, and you can buy cryptocurrencies using different types of buy orders.

Binance has also issued their own cryptocurrency called Binance Coin (BNB) during their ICO in 2017. By holding this token in your wallet you will be eligible for discount of up to 50% on trading fees.


5. How to Buy Cryptocurrency on Kraken

Kraken is another popular cryptocurrency exchange that was launched in 2011. Kraken separates itself from other exchanges by allowing funding of your account with fiat currencies like USD and EUR. To get started you will first need to create an account.

After creating your account you can make a deposit of fiat currency from the Funding page. You can deposit either USD or EUR by using wire transfer. The actual process of wiring money to your Kraken account depends on the bank that you are using, but in general you will need to provide the displayed information about the wire transfer details on your Kraken deposit page to your bank.

The wire transfer might take 2-3 days to complete, and after this you will be able to buy or sell cryptocurrencies such as Bitcoin and Ethereum on the platform. The process of buying and selling is very similar to Coinbase and Binance explained above.


6. How to Buy Cryptocurrency with Cash

Buying cryptocurrency with cash is different than buying on an exchange for a few different reasons. First of all, buying crypto with cash is a lot more private since you in most cases don’t need to reveal any personal information such as your name. Exchanges, however, often require the user to verify their account by submitting personal documents like their driving license or passport.

Secondly, buying with cash can be a lot faster since you don’t need to wire money which can take up to several days to complete. Getting your account verified can take up to several weeks on some exchanges as well, which might be a concern to you because of the extreme volatility of crypto markets.

Cash transactions, or OTC (over-the-counter) trades, can be done in a few different ways.

If you have a good friend or family member that have previously transacted with cryptocurrencies, you might be able to purchase cryptocurrencies such as Bitcoin directly from them, and avoiding setting up an exchange account all together.

In this case you would typically first agree upon the price before you pay the person by cash or send it from your bank account, and then receive the cryptocurrency to your own crypto wallet. The other person can also scan the QR code on your wallet and transfer the crypto assets directly if you meet in person.

Another way of peer-to-peer transactions is through LocalBitcoins. This platform has been around since 2012 and has become very popular for connecting potential buyers and sellers.

You can get started with LocalBitcoins by visiting their website, select your region and the amount of Bitcoin you want to purchase, and then browse through the search results of people selling Bitcoin for cash in your local area. All further details, such as payment methods, are discussed between the buyer and seller through their messaging service.


7. How to Buy Crypto from a Bitcoin ATM

As previously mentioned, it is also possible to buy Bitcoin and other cryptocurrencies from a Bitcoin ATM. These machines have become increasingly popular over the last few years, and today there are more than 6,000 ATMs worldwide.

The step-by-step process of buying Bitcoin through such an ATM is pretty simple in fact. You can choose to pay with either cash, debit card or credit card, and you will need to provide the QR code of your own wallet for the device to scan. For first time buyers this can be an easy entry into the world of cryptocurrencies.

Some countries are more forward thinking than others. In Switzerland for example, you can find Bitcoin ATMs at most of the railway stations in the country. It is likely that the number of such machines will increase rapidly worldwide in the coming years.


8. How to Buy Cryptocurrency with Square Cash App

The Square Cash App has become very popular and one of the most downloaded applications for mobile devices the last year. It is also possible to buy Bitcoin directly from the app which might be one of the most easy and convenient ways of buying Bitcoin today for US citizens. First step to buy Bitcoin with the Cash App is to have some money deposited in your account. After this is done, you should select “Cash Card”, swipe to the left, and you should see the Bitcoin symbol. You should also see a “Buy” button which will guide you through the buying process.


9. How to Buy Cryptocurrency Anonymously

If you want to remain anonymous while buying cryptocurrency there are a few ways to go about this.

1. LocalBitcoins

As already mentioned in Section 6, LocalBitcoins is a very popular website to find potential sellers of Bitcoin that accept cash payments. You can search for sellers in your local area and agree to meet in person if accepted by both parties.

You can also stay completely anonymous by using an alias email address, but note that most sellers don’t accept transactions with anonymous buyers unless you are meeting in person and paying with cash.

2. Bitcoin ATM

In Section 7 we explained how you can buy Bitcoin and other cryptocurrency through a Bitcoin ATM. Since these machines in most cases accept cash payments, you can stay completely anonymous and don’t need to reveal either your name, address or telephone number.

3. Prepaid cards

A third option would be to buy a prepaid card from a supermarket where you don’t need to provide any personal information. Some exchanges accept prepaid cards which lets you buy cryptocurrency while remaining completely anonymous.


10. Conclusion

It has become much easier to buy Bitcoin and cryptocurrency today than in the past. In this article we explained different payment methods you can use, but there are still a few considerations to make before you select which method is most suitable for you.

If you decide to buy cryptocurrency from an exchange, you should consider factors such as transaction and commission fees, support for payment cards, privacy, security, and support for different digital asset. 

As you should know by now, buying cryptocurrency is just the first step. You also need a secure place to store your assets you have bought. There are many wallet solutions that exist today, and you should take into consideration the level of security required before you make your choice.

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Learn How to Claim Tax Deductions on Crypto Losses

Learn How to Claim Tax Deductions on Crypto Losses

by William Carlsen · Updated May 3, 2020

The cryptocurrency market experienced a brutal bear market during 2018, and many investors have now either realized or unrealized losses from their investments in cryptocurrencies such as Bitcoin or Ethereum. Some people might even have invested in outright scams or lost their funds due to exchange hacks. On the positive side, most countries allow you to deduct some of these losses against income to reduce your tax bill. In this article we will explore how different types of losses can be used to claim tax deductions, and if there are any special considerations to make.

Capital Losses

Most countries calculate your tax based on the net capital gain from the whole tax year. If you sell your cryptocurrency at a lower price than what you purchased it for, this becomes a capital loss. This can be used to reduce your total net capital gains from investing in cryptocurrencies, or in some cases also used to reduce your capital gains in other types of assets like stocks or commodities.

If your total capital losses exceeds the capital gains, you can even roll the amount forward to future tax years. There are some specific differences between countries with regards to this, so it is adviced to always consult with your local tax office to make sure this rule applies to you.

Coinpanda calculates your capital losses automatically after connecting your wallets and exchanges to the platform. You can even export tax reports that help you claim tax deductions on capital losses from cryptocurrencies.

Exchange Hacks

We have unfortunately witnessed several exchange hacks in both 2018 and 2019. In some cases users lost all their funds that were held on the exchange, and are now maybe wondering if they can claim tax dedcuctions on the losses. It is important to be able to document the funds held on the exchange, and also the actual incident of the exchange hack. In most cases, the exchanges sent out an information letter by email to affected users which you can use to document the incident if requested by your tax office or in case of an audit.

Most countries will consider funds lost from exchange hacks as capital losses, which can then be used to offset your capital gains from cryptocurrency or other types of assets.

Casualty and Theft Losses

We do know today that a significant amount of cryptocurrency is lost forever due to lost access to private keys. Some people have stored large amounts of Bitcoin on their laptop computer in the past when cryptocurrency was almost worthless, only to find out later when prices were skyrocketing that they don’t have access to it anymore. Some people have also been victims of theft in their personal home where burglars might have gotten away with access to their crypto assets.

Similar to exchange hacks explained above, you can most likely deduct some of these losses against income to reduce your tax bill. In the US, however, casualty and theft losses are deductible only if the losses are attributable to a federally declared disaster for tax years 2018 through 2025. These rules apply to individuals and not businesses.

Conclusion

As we have seen in this article, there might be several scenarios where you can claim tax deductions on your cryptocurrency losses from either capital loss, exchange hacks, or casualty and theft losses. If you are a victom of this, it is always recommended to contact your local tax office to make sure you follow the latest up-to-date regulations which can change quite frequently.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

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Need help with your crypto taxes?

Join Coinpanda today and generate your tax reports in under 20 minutes.

How to Store Your Cryptocurrency Safely in 2020

How to Store Your Cryptocurrency Safely in 2020

by William Carlsen · Updated May 3, 2020

We covered how to buy cryptocurrency in this guide, but equally important is what you do after you have acquired any crypto assets. Storing your cryptocurrency safely is of utmost importance and something that should be of top priority by every crypto investor. This article will guide you through how to protect your funds, how to choose the right wallet, and what you need to consider to stay secure and prevent theft or losses.

Cryptocurrency Wallets

If you already own any type of cryptocurrency, chances are that you have also interacted with a cryptocurrency wallet. They are essentially a software program that lets you send and receive digital currencies, and stores your public and private keys. You can also use a wallet to monitor your balance of crypto assets.

In general we categorize wallets into either hot or cold.

  • A hot wallet is connected to the internet and can be accessed at any time
  • A cold wallet stores your funds offline, and is thus not connected to the internet

Typical hot wallets are exchanges, online cloud based wallets, and most mobile and software wallets.

The most widely used cold wallets are hardware wallets, but also paper wallets and other offline data storage devices.

People actively trading the cryptocurrency market might prefer to use a hot wallet because of the accessibility it provides, while long term investors and other people that don’t require ready access to their funds usually prefer a cold wallet because of increased security.

Types of Wallets

We can generally put cryptocurrency wallets into four distinctive categories: paper, cloud based, software, and hardware wallets.

Paper Wallets

A paper wallet is most often a physical copy or print of your public and private keys, and is therefore considered cold storage because it is not connected to the internet. You can sometimes generate a paper wallet from a software wallet, such as a digital file you can print or save somewhere safe. To use your paper wallet you can either import the digital file into a software program or scan the QR code with any compatible mobile application to get access to your funds.

There are many different paper wallets that exist today, and for the most popular cryptocurrencies you have probably several options to choose between. MyEtherWallet is a very popular wallet for Ethereum and all supported ERC-20 tokens. If you want to store your Bitcoin on a paper wallet, you can generate one from the Bitcoin Paper Wallet website.

Paper wallets are considered to be cold wallets, but they do come with risk specifically for this type of wallet. If you have your private keys on a physical print you must make sure that it does not get damaged in any way. They are also easy to copy, so you will need to keep them in a safe place that other people don’t have access to. It is good security practice to have multiple copies and store them in different locations.

Some people keep electronic copies of their paper wallet on a computer, but this is obviously a bad idea for several reasons. As long as your computer is connected to the internet, it is essentially a hot wallet. If you store your private keys on a paper wallet you should always make sure it is kept offline.

Cloud Based Wallets

Cloud wallets are always hot wallets. With these types of wallets you can access your crypto assets from basically any computer or device with internet access. You should always consider the risk of having your private keys controlled by a third party before sending your cryptocurrency to a cloud wallet. Some of the popular wallet providers today are:

  • Guarda
  • Coinbase
  • Metamask
  • Blockchain.com

Software Wallets

Software wallets are downloadable programs that you install on your computer or mobile phone. Since your computer or phone is in most cases always connected to the internet, such wallets are considered to be hot. Hackers and computer viruses are becoming more sophisticated every day which is something to consider before you decide to install a software wallet.

This type of wallet has often a very user-friendly interface to manage your digital assets, and some wallets also lets you access your cryptocurrency from different devices at the same time. Some of the popular software wallet providers today are:

  • Jaxx
  • Exodus
  • Electrum wallet
  • Mycelium

Hardware Wallets

Hardware wallets are considered cold wallets and provide one of the highest levels of security today. These wallets store your private keys on an encrypted physical device which might look like a USB memory stick. Some of the wallets today lets you send, receive and manage your cryptocurrency from a web interface or software program on your computer, all while still being considered a cold wallet.

The user experience has become better in recent years, and it is now fairly simple to perform transactions even for beginners. Generally, you just plug the device into any computer or mobile phone connected to the internet, and you are ready to send or receive cryptocurrency. These wallets are considered to be one of the most secure ways of storing digital currencies today.

The most popular hardware wallets on the market today are:

  • Ledger
  • Trezor

It is important to consider from where you buy a hardware wallet. Best practice is to always buy directly from the manufacturer to reduce the risk that your device has been tampered with. Even when doing so you should also always reset the device before you use it.

After setting up the hardware wallet for the first time you will likely be asked to make a backup of your private recovery seed phrase. In case you lose the device, or it gets damaged in any way, you can restore your wallet to a new device using the recovery seed phrase. Most people write the seed phrase down on a piece of paper which they store in a secure location no other people have access to. There are also other ways to secure your seed phrase like indestructible titanium plates for example.

Best Security Practices 101

After reading this article you might consider to take ownership and control of your cryptocurrencies using a private wallet. This is a great step, but you must also consider how to keep your assets secure in the future as well.

These are some of the most important security practices to consider:

  • Don’t keep cryptocurrency on exchanges unless you plan to trade in the near future
  • Always enable two-factor authentication (2FA) if possible
  • Don’t brag publicly about your crypto holdings which could attract thieves or burglars
  • Use a hard to guess pin code with your hardware wallet
  • Make sure to avoid malware and reduce the risk of getting viruses on your computer

We hope this article was a valuable introduction to how you can store your cryptocurrency safely today. Security is something that should be on top of every crypto investors priority list, and it is important to always consider the risk of your wallet being compromised.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

TRY US

Need help with your crypto taxes?

Join Coinpanda today and generate your tax reports in under 20 minutes.