Cryptocurrency income is subject to taxation. This means that you must record any crypto you sold, exchanged, or otherwise disposed of during the tax year in your annual tax return. Remember that there are other ways to lower your tax bills, such as the tax-free allowance and the long-term capital gains tax rate.
If paying taxes on your cryptocurrency seems unfair, the truth is that, except for a few countries, cryptocurrencies are currently taxed in practically every country on the planet. Many crypto investors are unaware that they must declare their capital gains to the IRS each year, so you are not alone!
When it comes to filing taxes for cryptocurrency, there are a few frequent blunders that investors make. We have also mentioned a few tax tips as well.
1. Not Disclosing All The Transactions
With regards to crypto tax filing blunders, the most widely recognized mistake is neglecting to unveil transactions. Most crypto exchanges are done on cell phones and portable stages, without commissions paid much of the time. This creates a game-like atmosphere for crypto trading, with investors moving in and out in the hopes of achieving the greatest “score,” or account balance.
When you consider that most cryptocurrency trading platforms didn’t even publish transactions until recently, it’s easy to see why so many investors don’t reveal their activities. However, because this could have major financial consequences in the future, you must record all of your cryptocurrency earnings and losses. Visit guardian.ng to learn why Bitcoin has become so popular.
2. Disregarding Cryptocurrency Earnings
The receipt of cryptocurrency must be classified as income for tax purposes. Different rules apply to income than just trading cryptocurrency. You should enter this as income along with the date and time you received it if you mined a cryptocurrency or were paid in cryptocurrency for work or services you rendered. Your tax returns will be inaccurate if your income information is omitted.
3. Do Not Report Only Losses And Profits
Some taxpayers make an effort to reduce their tax obligations by only disclosing cryptocurrency losses and leaving out any gains. You may be able to lower your taxable income by up to $3,000 by disclosing your losses.
However, in addition to these losses, you must also disclose any cryptocurrency gains and other transactions. Crypto losses are scrutinized by the IRS more rigorously than other things on your returns. If you simply declare losses, your returns can be flagged for examination or audit, which would subject you to liability for your other conduct as well as interest and penalties.
4. Not Disclosing Cryptocurrency Received Through Splits, Forks, and Airdrops
While new cryptocurrency investors may not be aware of the terms “airdrops,” “forks,” and “splits,” it’s imperative that anyone dabbling in this area quickly become knowledgeable about them owing to their tax consequences.
Although Bitcoin obtained through forks, chain splits, and airdrops are technically free, the taxman is sure to be aware of it. Many investors who gain access to bitcoin as a result of those events fail to keep track of windfalls from forks or airdrops.
You’ll almost probably pay more in taxes if you don’t classify cryptocurrencies obtained through airdrops and forks as such. Another common error done by traders who have lost track of the tokens they received as a result of splits, airdrops, or forks is doing this.
Imagine you’re using cryptocurrency tax software to generate your tax returns on the fly. The software will require you to show it how you obtained the tokens in that situation. In your account or wallet, they will appear to have materialized out of thin air if they are not recognized as forked/airdropped coins. The program will alert you that you are trying to sell something you don’t own when you attempt to trade or sell the coins.
5. Not Filing Any Crypto Taxes
When it comes to taxes and cryptocurrencies, this is by far the most important error that people make, and it may be intentional or unintentional. The idea of government-free, privacy-focused digital money first drew in a lot of crypto enthusiasts. While it has been challenging to track down cryptocurrency, this does not relieve cryptocurrency traders of their tax obligations.
It’s wise to file an amended return and start making payments right away if you’ve previously missed paying taxes. If tax evasion is discovered years later, failure to make a timely payment may result in fines and interest on the remaining debt, which can be significant.
Tip: Use Tax Software
It’s essential to have a reliable method for calculating your crypto taxes available when you first enter the world of cryptocurrencies.
To enable automatic data input, a good crypto tax software should be able to interact with all of the well-known exchanges and wallets. Keeping track of every transaction manually can be challenging if you are a skilled trader. In addition to prices, you should also keep track of dates, the number of coins or tokens you traded, and how long you held them in your wallet.
Additionally, the software you select must be usable in your nation because taxes vary based on where you live. The software you select should adhere to local tax regulations. These programs can save you hours by automatically adding all your trades, even if you are not a professional trader and have fewer transactions each year.
Over the last several years, cryptocurrency trading has grown in popularity, and more and more experienced traders are entering the market. Given the significant distinctions from the equities markets, both beginning and experienced traders should be aware of the four major crypto tax blunders mentioned above when trading to reduce their tax exposure.
Thankfully, tax software makes it simple to automate many of the cost basis and capital gains computations and to establish an audit trail in case the IRS has any objections. Many of these solutions can even help you figure out how to reduce your tax obligations by tax-loss harvesting and other means.