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Crypto Tax Software Sees Surge in Demand Amid IRS Crackdown

Nov. 13, 2019, 9:46 AM

Startups providing cryptocurrency tax software have proliferated in recent years, and the tools will become even more popular going into the 2020 filing season, industry professionals said.

Demand for the software, which calculates cryptocurrency traders’ taxable gains, grew in the wake of the assets’ exponential increases in value in 2017 and, more recently, spiked after the IRS signaled in July it would crack down on tax-evading traders.

These software products are becoming particularly important now, amid Internal Revenue Service scrutiny of traders who pay taxes on their crypto gains incorrectly or not at all. The agency in October released its first cryptocurrency guidance since 2014.

“We’re seeing significant growth because the market is demanding it,” said Katya Fisher, a lawyer who has represented clients in the cryptocurrency industry. She said an increasing number of clients are using or looking for software to help them meet their crypto tax obligations—and she’s finding an increasing number of options for them to choose from.

“One of the biggest complaints I get from crypto traders is, ‘I have all these trades with different cryptocurrencies—how am I supposed to keep track of it?’” she said.

At least two of these software providers—BitcoinTaxes, owned by Seattle-based CoinsTax LLC, and Munich-based CoinTracking—formed in 2013. At least five more were founded in 2017, and another four cropped up last year.

Some, like CryptoTrader.Tax and ZenLedger, have partnered with Intuit Inc., allowing traders to import crypto gains directly into TurboTax.

‘More People Paying Attention’

Representatives of several companies said they saw spikes in the number of traders signing up to use their products in late July, after the IRS sent thousands of letters to virtual currency traders warning them that they may not have properly paid taxes.

Dario Kachel, founder and CEO of CoinTracking, said in an email that monthly registrations average out to 10,500 users, with 27.3% stemming from the U.S., and and average monthly page views top out at 2.4 million, 29.1% from the U.S.

Between July 26 and Aug. 25, however, registrations nearly tripled to 29,700, with almost half of those users in the U.S., and page views jumped to 7 million, with 42.2% coming from the U.S., Kachel said.

In the days following the letters, and after the October guidance, traffic to BearTax more than quadrupled to 1,300 visitors, and new signups roughly tripled to more than 130 from a daily average range of about 40 to 50, said Vamshi Vangapally, its CEO and co-founder. Both spikes petered out after a period of four to five days, he said.

The scare pushing people toward crypto tax software wasn’t limited to traders contacted by the IRS.

“Not everyone even got the letters,” said Zac McClure, a co-founder of TokenTax, which saw similar spikes. “It was just news reports about the letters.”

The IRS has begun accepting the tax positions of some of the individuals whom it pressed for details.

The guidance itself—by making transactions like airdrops and hard forks taxable as they happen, an IRS position widely but not universally anticipated—should draw in even more traders, by forcing them to go back and ensure they paid their taxes on those transactions, said Chandan Lodha, a cofounder of the tax software CoinTracker.

“It’ll lead to more people filing, more people in compliance, more people paying attention,” he said of the guidance.

The Software

At least two blockchain-focused accounting groups are compiling taxpayer guides, based on the sophistication and assets of the customer, according to members of the Accounting Blockchain Coalition and the Blockchain Accountant Association.

Their proliferation could even herald the entry of more mainstream tax software providers into the market, said Max Stein, an associate consultant at ConsenSys Solutions who’s leading the creation of the Accounting Blockchain Coalition’s guide.

“Up until now, the crypto tax software market has been mostly dominated by niche startups,” Stein wrote in an email. “As this market grows, we may begin to see legacy tax software providers acquire some crypto tax software startups.”

The software generally starts at around $50 a year and can rise to several hundred dollars, depending on the complexity and size of the trades. Traders can upload their trading data using an application programming interface, a set of code that lets different software programs or systems interact, or a CSV file, a file format used to store tabular data in plain text. The software then spits out a filled-out form reporting sales and exchanges of capital assets, which must be sent to the IRS.

The extent of the data is important, as tracking a trader’s basis—what’s subtracted from the asset’s sale price to compute the gain subject to tax—tends to be far more difficult in cryptocurrency trading than in traditional securities trading.

Cryptocurrency traders are often trading one currency for another, “which requires us to have incredibly large pricing databases to drill down the exact value at the time that these transactions occurred,” said Justin Woodward, who co-founded the software TaxBit with his brother Austin.

Traders have both sought out the company to make sure they do their current-year taxes correctly and approached TaxBit with audits for previous tax years—something the company hasn’t encountered until this year, Austin Woodward said.

Lingering Challenges

Still, some exchanges are leaving tax software providers with gaps in trading data, professionals said. Some exchanges simply shut down, taking the data with them. And in such a new industry, the software itself is ripe for improvement.

Some programs can’t properly handle gifts of cryptocurrency, or its use as payment for things like coffee and groceries, said Sharon Yip, founder of Crypto Tax Advisors LLC and a founding adviser of the forthcoming Blockchain Accountant Association.

“They don’t include transfers—they have to rely on data provided by the exchanges,” she said, referring to situations in which traders take their holdings—and all the historic trading and basis information needed to compute their taxes—to another exchange, which may not keep track of all of the trading data from the previous one. “This is really frustrating for the clients and us.”

But there’s a lot of value for software companies to capture going forward, said Joshua Azran, a CPA and founder of Azran Financial in Los Angeles.

“I think we’re really still in the early part of the wave,” he said.

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com