Cryptocurrency taxation has become one of the important concerns crypto holders are currently dealing with. The filing of such taxes can become a daunting process due to a variety of factors. These can include handling multiple wallets and exchange accounts, transactions from different platforms, and many more. Thereby, making it difficult for crypto trades and other related transactions to be consolidated for purposes of tax filing. Because of these complications, it’s easy for traders like you to commit mistakes when filing cryptocurrency taxes.
Here are five mistakes you should avoid when you file cryptocurrency taxes:
Treating crypto as a currency and not as a property is one of the common mistakes you can commit when filing your taxes. Although it’s reasonable to consider cryptocurrency as a currency for being a digital currency, the IRS (Internal Revenue Service) classifies them as property.
This means that the tax rules and regulations pertaining to property transactions should apply as you file returns. Since crypto should be considered as a property, you should be liable for paying the capital gains tax and not taxes pertaining to currency.
Generally, the profits you generate from crypto trading are taxable. That’s why it only makes sense to include all the profits in the tax reports and set aside the losses. However, if you have no idea how crypto taxation actually works, your failure to file your losses is also one of the fundamental mistakes you can commit in terms of tax filing.
When you include your crypto losses in your tax reports, you can save money by using it to reduce taxable income. For instance, you can use the losses to offset your capital gains, lowering your tax obligations during the year. However, it’s important to note that offsetting shouldn’t exceed USD$3,000 from your other taxable income every year.
On the other hand, if you need help in handling your taxes pertaining to losses and offsetting, you can work with tax experts to assist you throughout the process. They can provide a smart cryptocurrency tax plan that you can follow, helping you avoid mistakes when filing your taxes.
Another common mistake to avoid when filing cryptocurrency taxes is not including your transaction history from the previous years. You may be wondering why you should include your transactions from other years when paying taxes for a specific fiscal year. But as per the guidelines provided by the IRS, you need to consider the transactions conducted from the past years to compute the gains or losses from the transaction. This will then determine the right amount of crypto taxes to pay.
For example, it’s important to account not just the date of the sale of the crypto in 2018 but also the purchase date in 2016 to get your calculations right. That way, you can save yourself from trouble when it comes to crypto taxation.
As someone who’s holding cryptocurrency, you need to determine which is received as income or trade profit. That’s because both of them are treated differently in terms of tax filing. Typically, crypto received as income are those you’ve obtained as compensation for a job or service. Hence, if you neglect the cryptocurrency received as income when filing taxes, it can result in a mistake. Thereby, leading to incomplete tax reporting.
When this happens, the IRS has the right to impose additional charges or penalties. Especially if the incomplete tax paperwork leaves you owing money to the said government agency.
To avoid this situation, creating a personal balance sheet can be an excellent idea. It can help you keep track and manage your crypto assets in one document, making it easier for you to file taxes.
When you file cryptocurrency taxes, it’s also essential to include the trading fees and other charges to calculate the basis for your crypto assets. Failure to do so can be a huge mistake to make as a crypto holder. When you don’t include the trading and transaction fees in the computation, the basis for the computation will decrease. Hence, you’ll miss out on the chance to reduce your taxes.
Because of this, it’s best to include the fees to save money on your crypto tax payments in the long run.
Indeed, filing taxes related to crypto trades and income can be an overwhelming process. This is especially true if you commit some mistakes that can cause you some trouble. While some errors are minor enough to only require you the payment of penalties, there are serious mistakes that can result in prison time.
Therefore, keep these mistakes in mind to avoid any of the consequences mentioned above. You can also hire an experienced lawyer or accountant to educate you on everything about crypto taxes.