CoinTracker.io, a startup that helps people calculate their taxes on crypto holdings, is introducing a free tier of service for users with less than 200 crypto transactions in a tax year as the IRS turns its attention to investors in “virtual currencies.”

Based on 150 million tax returns filed per year, some 12 million, or 8 percent, of American adults hold some amount of cryptocurrency, according to the chief counsel of the IRS, Michael Desmond.

“Less than 1 percent of those Americans are actually tax compliant,” Chandan Lodha, co-founder and chief operating officer of CoinTracker, told Cheddar. “We expect less than 100,000 crypto holders are actually filing their cryptocurrency taxes. Historically it's been really tricky, difficult, and confusing, both for users who are hobbyists and aren't super tech savvy and also for advanced users who often have many transactions, many platforms, DeFi services, or maybe are doing high-frequency or algorithmic trading, things like that.”

CoinTracker’s new service, like a TurboTax or Credit Karma but for the crypto portion of your tax filing, lets users connect their accounts at different crypto exchanges and wallets, gives them portfolio insights around the assets they hold, and provides the tax forms they need to be tax compliant for users in the U.S., Australia, the UK, and Canada. It integrates with “hundreds of different exchanges and thousands of different cryptocurrencies,” Lodha said.

The launch comes ahead of the 2019 tax filing season, which begins Jan. 27. But unlike in previous years, now that bitcoin and the new digital asset class are almost 12 years old, cryptocurrencies are a much bigger focus for the IRS. Last summer the agency sent audit notices to 10,000 taxpayers who had potentially failed to report their crypto holdings and pay taxes on them; then in October it issued updated guidance on the tax treatment of cryptocurrencies. And in December it released a new form for the 2019 tax season, which asks at the very top: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

“Reporting crypto transactions is extremely important,” said Daniel Winters, president of Global Tax Accountants, a Bridgewater, N.J.-based provider of international and bitcoin tax services. “As a new asset class, it is going to be, and already is, regulated by government institutions like the IRS, the SEC, and the CFTC. Tax reporting is one piece of the regulation and it is of prime importance that we have robust and even better tools so cryptocurrency investors can accurately calculate their income and report it back to the IRS.”

Lodha launched CoinTracker with CEO Jon Lerner in 2018 and tripled its revenue to $1 million in 2019. It now has 10,000 users and tracks $1 billion in crypto assets.

The company, based in San Francisco, was founded in 2017. In 2018 it graduated from Y Combinator and received $1.5 million in seed funding from Initialized Capital, the fund co-founded by Alexis Ohanian, Serena Williams, and Plaid CEO Zach Perret. Other star backers include former Coinbase CTO and Andreessen Horowitz partner Balaji Srinivasan, Blockstack co-founder Ryan Shea, Protocol Labs CEO Juan Benet, and Paul Buchheit, the creator of Gmail.

The field for companies seeking to automate cryptocurrency tax calculations and reporting is getting competitive. TokenTax, Bitcoin.tax, and ZenLedger, as well as CoinTracker, are among the more established ones, but many others exist. Earlier this month a company called TaxBit raised $5 million in seed funding from Winklevoss Capital and others.

Typically these websites import and consolidate users’ information from crypto exchanges and generate a report showing their income, whether that’s capital gains, mining, or revenue received in cryptocurrency. Investors need not hire an accountant to use them, and their lowest pricing tiers range from $50 to $70.

In addition to the free tier, CoinTracker also has a premium tier that costs $179 for the tax year for users with up to 3,000 transactions and features for more sophisticated crypto investors, and an individually-priced Unlimited tier for super traders.

“We have more advanced users who have more transactions or do more advanced things in crypto,” Lodha said. “We hope our business will continue to grow along with those users, but we want to make sure that others at least have a foot in the door and that there's not a huge barrier to becoming tax compliant.”

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