Cryptocurrency tax rules are constantly changing and can be difficult to interpret. At CoinTracker, we strive to keep you up to date on these changes by monitoring regulations and feedback from our partners and users.
CoinTracker recently released important upgrades to our accounting engine. Our accounting engine processes every transaction you add to CoinTracker, one-by-one, so you can understand your cost basis, capital gains, and taxable income across your crypto activity.
As part of this update, CoinTracker has transitioned users in the US from the "universal" cost basis tracking method to the "per-wallet" cost basis tracking method. To learn more about this change and its implications, review the FAQs below.
What is a cost basis tracking method?
Cost basis is the total fair market value, or amount paid for, of an asset at the time you received it. When you sell or trade an asset, your original cost basis determines the capital gains or loss.
There are different ways to keep track of cost basis depending on your region-specific tax rules. The two most common tracking methods are “universal” and “per-wallet”:
- Universal: Under the “universal” tracking method, there is a single queue for each coin that aggregates across every wallet you have connected to CoinTracker. In other words, when you sell a coin from Wallet A, the cost basis of the disposed asset may or may not come from Wallet A for accounting purposes.
- Per-wallet (also known as by-wallet): Under the “per-wallet” tracking method, there is a separate queue for each coin in each wallet you have connected to CoinTracker. In other words, when you sell a coin from Wallet A, the cost basis of the disposed asset will only come from Wallet A for accounting purposes.
You can learn more about cost basis tracking here.
What changed with the accounting engine release?
With our accounting engine release, CoinTracker has both migrated existing users and defaulted new users to the “per-wallet” cost basis tracking method to ensure that the cost basis of disposed assets always comes from the same wallet in which the sale occurred.
The “per-wallet” tracking method enables more accurate gain and loss calculations. This change helps match CoinTracker reports with the crypto tax forms provided by your exchanges.
What does the Infrastructure Bill mandate for crypto?
The Infrastructure Bill (Sec. 80603 on pg. 127) requires that all US digital asset brokers report crypto gains and losses. Centralized exchanges are recognized as digital asset brokers and could start issuing these forms as soon as 2024 (for the 2023 tax year). These forms are expected to be similar to the tax forms you receive from securities brokers, anticipated that such reporting will be done pursuant to a new IRS Form 1099-DA. As in traditional finance, centralized exchanges will also automatically report crypto gains and losses to the IRS.
Exchanges only have visibility into the assets you hold within their exchange, either by acquisition or transfer-in. In other words, exchanges don’t know which assets you hold outside of their platform.
When exchanges run accounting and tax calculations, they can therefore only use the cost basis of assets visible to them (what you acquired or transferred into the exchange). In other words, they will produce these mandatory IRS forms under “per-wallet” tracking (not with “universal” tracking).
When will centralized exchanges start reporting to the IRS?
Centralized exchanges could start issuing these forms and reporting to the IRS as soon as January 2024 (for the 2023 tax year).
Please note that accounting calculations from one year can impact subsequent years. We therefore proactively migrated users to “per-wallet” now, in anticipation of upcoming regulation. This change helps ensure that our calculations sync with calculations on exchanges.
We closely monitor regulation for any impact on our methodology.
What happens if I don’t follow per-wallet?
Please note that CoinTracker does not provide tax advice. Reporting gains and losses inconsistent with 1099 forms issued by exchanges could lead to inquiries from tax authorities. In addition, “per-wallet” tracking helps ensure that the cost basis of disposed assets always comes from the same wallet in which the sale occurred.
CoinTracker automatically defaults all users in the US to “per-wallet” tracking.
Can I switch from “per-wallet” to “universal” tracking?
The “universal” tracking method is available on CoinTracker via your settings page. We suggest users stay on the “per-wallet” tracking method for greater accuracy and alignment with upcoming regulations. Please note that other accounting engine improvements, such as the tax implications of fees and transaction balancing, will still impact your transactions from all tax years. You may continue to see changes in capital gains calculations in past years as a result.
Why did this change apply to transactions from prior years?
Please note that this question only applies to users who used CoinTracker for capital gain and loss calculations for tax year 2021 or prior. For such users, the “per-wallet” migration is applied retroactively because of the following scenario, which results in reconciliation problems:
Suppose you used “universal” tracking until the 2021 tax year, and then switched to “per-wallet” tracking which is only applied to your 2022 tax year and forward. Suppose that you are on HIFO (highest-in, first-out), but the same applies to any method including FIFO and LIFO.
In 2022, you acquired 1 XYZ on Exchange A for $100 and 1 XYZ on Exchange B for $200. Both of these acquisitions are added to a single “universal” cost basis queue for the XYZ asset.
In 2022, you sold 1 XYZ on Exchange A for $500 using the HIFO method. Under the “universal” tracking method, HIFO pulls the cost basis of your disposed asset as $200, sourced from the XYZ you acquired on Exchange B. Your 2022 reported capital gain is therefore $300 (from $500 – $200).
You then move to “per-wallet” which is applied only to the 2022 tax year and moving forward. (Note that this example is meant to highlight why this creates a reconciliation problem, and why our “per-wallet” migration applied to all transactions).
At this point in 2022, all remaining XYZ assets are put into wallet-specific queues (one for Exchange A, one for Exchange B, etc). Note that at this time, you only have 1 XYZ left which is put in the Exchange A queue for XYZ.
In 2023, you sell 1 XYZ on Exchange B for $600 (still using the HIFO method). However, upon checking the Exchange B t queue for XYZ, there are no more assets in this queue left for disposal. Due to “universal” tracking queues in years prior, this transaction cannot be reconciled.
On a separate note, in the 2023 tax year, Exchange B could send you a Form 1099-DA showing a gain of $400 (from $600 – $200) and report this amount to the IRS. Without retroactively using “per-wallet” tracking, your gains, losses, and cost basis on CoinTracker may not sync with the amounts reported to the IRS by exchanges.
This example highlights why our “per-wallet” migration applied to transactions from all years.
How does the tracking method affect my gain and loss calculations over time?
The gain and loss impact of “universal” and “per-wallet” should automatically reconcile over time. Building on the example from the previous question, you have $800 of total gains over time, regardless of the tracking method used for accounting. See below for more details.
|
Tax year |
“Universal” tracking |
“Per-wallet” tracking |
|
2022 |
Exchange A: $300($500 – $200) |
Exchange A: $400 ($500 – $100) |
|
2023 |
Exchange B: $500($600 – $100) |
Exchange B: $400 ($600 – $200) |
|
Total gains |
$800 |
$800 |
“Universal” or “per-wallet” tracking can affect when you experience gains or losses, which could be sooner or later based on where you hold and dispose of your assets. The tracking method does not change your overall capital gains when aggregated across tax years.
In some cases, the switch to "per-wallet" could affect whether a capital gain is considered short-term or long-term.
Should I amend previous tax returns I filed with “universal” tracking?
Please note that CoinTracker does not provide tax advice. Your tax advisor best understands your tax profile and can provide guidance based on how your calculations changed under “per-wallet” tracking. You may also share this information with your tax advisor for further guidance to identify any tax adjustments based on new calculations.
Are transfers between my wallets taxable now?
No. Per guidelines from tax authorities, transfers between wallets that you own are not considered taxable events. CoinTracker still automatically detects these transfers in alignment with IRS guidelines.
Note that fees paid for transfers could have tax implications as described in Example 1 here.
Can I still do HIFO under “per-wallet” tracking?
Yes. You can use any cost basis method applicable for your region. In the US, subject to applicable tax law, the available options are HIFO, FIFO, and LIFO.
CoinTracker defaults to HIFO. You can also learn more about these methods here.