Crypto taxes have been a grey area for a while; with many crypto traders being confused about how to file returns when it comes to crypto profits. However, in the past few years, the IRS has clarified most ambiguous issues around crypto taxation. In fact, it has now started cracking down on crypto tax evaders in a big way and as many as 10000 crypto investors recently received letters from the IRS. That’s why rookie mistakes when filing crypto taxes are just not an option anymore. Here are some of the most common mistakes and how you can avoid them:
#1 Treating crypto as currency, not property
This is one of the most fundamental mistakes a taxpayer can make. While it seems intuitive to consider crypto as a currency for tax purposes (it is a digital currency after all), the IRS actually classifies cryptocurrency as property. So the same provisions that apply to property transactions apply to crypto transactions as well. In other words, profits from crypto transactions are liable for capital gains tax. If the currency is held for less than a year, then Short Term Capital Gains Tax needs to be paid; otherwise, Long Term Capital Gains tax is payable.
#2 Ignoring your transaction history from previous years
This is another common mistake. You’re paying taxes for FY2018 so why would you need to have your transaction history from other years? Well, let’s say you sell bitcoin in 2018 but had purchased it in 2016. To calculate your gains/loss from the transaction, you need to know the price at which the bitcoin was purchased back in 2016. This means that it’s important to have all your transaction history when you’re filing your returns. If you haven’t been keeping records, you can use crypto tax software to get your calculations right.
#3 Forgetting that crypto received as income is different from crypto trading
Now you may have received some cryptocurrency as part of your salary, or through mining. Many people tend to either ignore this completely or treat it in the same way as they would treat their crypto trades. However, crypto received as income has to be reported as part of your income when you receive it. In order to do this, you need to figure out the fair value of the crypto on the day that it was credited to your account, and add it to your taxable income. Also, keep in mind that you will have to pay capital gains tax when you sell the cryptocurrency later on.
#4 Only considering transactions where crypto is converted into fiat currency
This is another common mistake that can get taxpayers into a lot of trouble. Many taxpayers are under the impression that they only need to pay crypto taxes when they “cash-out”, or in other words, when they sell their cryptocurrency for fiat currency (like USD). However, as per IRS regulations, every single crypto transaction creates a tax obligation. So if you sell your Bitcoin for Ripple, and then use the Ripple to buy Ethereum, you will have to pay taxes on the profits that you make on each of these transactions. So let’s say you purchased Bitcoin worth $1000 and traded it for Ripple worth $1500 during the year — you will need to pay capital gains tax on your profit of $500.
#5 Ignoring crypto losses while filing your returns
This is another basic mistake but a rather costly one for taxpayers as you are not making use of a solid method of reducing taxable capital gains. It’s important to remember that crypto losses work exactly like other property losses. This means that if you’ve suffered any losses in any crypto transactions during the year, you can use those losses to offset your capital gains, thereby paying lower taxes overall. You can even use these losses to offset your future gains. In fact, not only can you offset your entire capital gains, but you can actually use those capital losses to offset up to $3000 of ordinary income.
The bottom line
With the IRS doubling down on crypto investors, now is the time to get your house in order. Not only do you need to file current and future returns correctly, but it’s probably worth it to look into returns from previous years and file an amendment if required. If all the crypto tax regulations still seem a little daunting, you might want to hire a bitcoin tax accountant. While it may result in some upfront expenses, it will probably save you more money in the long run.
