Benchmarking the Crypto Gains Services
Our firm has been using these services since 2018, and we have an in-house team of cryptoanalysts and forensic accountants that perform capital gains calculations.
Our forensic accountants pulled all transactions from the blockchain and manually analyzed each transaction to determine the value in USD and the tax implications. Our results are shown below as a Forensic Analysis. No transactions were left unresolved in our analysis. We could confidently defend our analysis in the event of an IRS audit.
We then entered the same blockchain addresses into the crypto tax calculation services to compare their results and we were shocked! We thought their analysis would be much more accurate. (See the article "How Accurate is DeFi Income Calculation by Crypto Tax Software?").
Our three clients were DeFi traders:
- Client 1 did about 2000 transactions primarily using Curve.
- Client 2 did about 2000 transactions, primarily using Yearn Finance.
- Client 3 did about 6000 transactions, mostly with Yearn Finance and lots of exotic coins.
The results vary significantly depending on the trader's investments. For example, TokenTax was very high for Client 1 and 2, but very low for Client 3. CryptoTaxCalculator was very high on Client 3, but not on 1 and 2.
All these services are still immature in accurately calculating DeFi gains and income. We believe all of these companies are working hard to improve their algorithms. (See our article "Why DeFi gains are hard to calculate?").
Traders are Afraid of Being Audited
Investors use these services because they are afraid of being audited. We have defended a few dozen traders in IRS audits of their crypto reports. None of these services produced the reports we needed to defend the crypto income reports. We believe there are several reports that these services need to provide. This shortcoming is a critical area where all of these services need to improve. (See our article, "What I Expect of a Crypto Gain Service")
We have compared these products to meet the needs of an individual investor, not a business or commercial investor. Companies like TaxBit and LukkaTax are geared more towards the business market. We expect several of these companies to release significant enhancements over the next six months, so we will update these benchmark results and ratings several times throughout the year.
Interpreting the Quadrant Chart
The key elements of vision in this analysis are:
- Fullness of centralized exchange calculation
- Comprehensive DeFi and NFT calculation
- Breadth of reporting
Leaders should execute their vision well. So far, no company has met the need for comprehensive audit defense reports.
Accointing received slightly higher marks for accuracy of results. Our DeFi comparisons for private clients found that Accointing comes closest to the client's expected results nearly 40% of the time, not because their application was superior. We believe that new market leaders will emerge in 2022 that will raise the bar for all competitors.
Visionaries are trying to address the complexity of DeFi and better reporting. CoinTracking provides cost basis/source of funds and closing position reports, which is critical for audit defense. All visionaries wrestle with significant accuracy issues. However, we would caution all services not to overstate their DeFi capabilities. They should clearly point out to the client when their trading pattern will cause unreliable results. They need to be more forthright because clients trust them to calculate their taxable income.
Challengers today execute well or may dominate a large segment but do not understand market direction. Bitcoin.tax, one of the original services, offers like-kind exchange method and a closing position report. They offer DeFi via Zerion import (which has weak tax classifications).
Niche Players tend to successfully focus on a small segment, or they lack the focus and innovation to outperform the competition. TaxBit and CryptoTrader have honestly portrayed their DeFi offerings as limited or beta. TaxBit has focused on the business-to-business market, where the company is innovative and has substantial venture capital funding. CryptoTrader.tax has always had a robust CeFi product and promises an improved DeFi product in the future. These two niche players could quickly move into the visionary or market leader category with the release of a powerful DeFi product if it included audit defense reports.
In summary, most of these services are making the additional investment required to support the advanced DeFi and NFT markets. Many of them must be successful. We suspect that the price of these services will rise once they deliver a market-leading product. As the number of crypto investors around the world continues to surge, there is room for many market leaders.
About the Author
Clinton Donnelly is the founder of Donnelly Tax Law and CryptoTaxAudit. He is a leading expert on income taxes for crypto traders in the US. He has been preparing crypto returns since 2018, and most of his clients are large traders. Clinton has defended traders over 24 times in IRS audits of crypto income. He has authored five books and is a popular speaker.
CryptoTaxAudit provides tools for the average crypto trader to protect their wealth from the IRS. CryptoTaxAudit.com's Audit Defense membership guarantees that our experts will defend the member if they are selected for an IRS audit of their crypto income reporting. They also offer a DeFi Tax Benchmark service for individuals, as shown in this report.