While advances in technology have reduced the likelihood of making errors when filing your cryptocurrency taxes, there’s still the possibility that you’ll make a mistake. But this is expected as the filing of cryptocurrency taxes is often a hectic and cumbersome process. This happens because the filing of cryptocurrency taxes entails a lot, including crypto buys, sells, transfers, mining income, air-drops, trades, wallet transactions, forks, and many other activities spread across various exchanges and platforms. Due to this, gathering all this information is usually complicated.
The filing of cryptocurrency taxes is also time-consuming, which further increases the chances of making a mistake. But what are some of the mistakes you need to know about? This guide is an overview of the most common mistakes you need to avoid when filing cryptocurrency taxes.
1. Not Reporting Cryptocurrency At All
While it’s understandable that filing crypto taxes can get complicated, you must never fail to report cryptocurrency because of this. This is considered a serious offense regardless of whether you failed to report the cryptocurrency internationally or unintentionally. The hardcore cryptocurrency fans do this as they believe that filing crypto taxes goes against the core philosophy of cryptocurrencies in the first place. They see cryptocurrencies as decentralized; hence, they can’t be overseen by a centralized tax agency. While this reasoning has some truth, taxes are still essential now as they’re the core to sustaining the economy.
Another reason why some people often ignore filing their cryptocurrencies because they think that the internal revenue services (IRS) don’t know about their cryptocurrency trading. But this isn’t true as the IRS can quickly know of your past crypto activities by going over the 1099 reports subpoenas and Schedule 1.
2. Treating Cryptocurrency Like Currency Rather Than Property
Virtual currency such as cryptocurrency is usually considered as property and not currency for federal tax purposes. This means when taxing cryptocurrency, the general tax principles are observed when taxing property transactions are applied to each of the transactions. Therefore, you’re required to generate capital gains or losses from your cryptocurrency transactions and not foreign exchange gains or losses.
The tax calculations of cryptocurrency are also classified into short-term and long-term amounts, depending on the case after selling stocks. Therefore, any suffered capital losses are subtracted from the capital gains. For capital losses that exceed the deductible capital gains, they’re deductible to a maximum of $3,000 each year.
3. Incorrectly Reporting Cryptocurrency Losses
Many crypto investors mistake by only reporting their cryptocurrency gains to the IRS yet overlooking the losses. However, this is a great mistake as losses are also transactions like any other. In fact, crypto losses can help you entirely counterbalance how much tax you’re expected to pay back, which is advantageous to you. Therefore, you should never ignore including losses when calculating how much capital gains tax is owed.
4. Not Including All Trade From Each Exchange
For the IRS to have a detailed tax profile, they need to have data from each exchange you transacted instead of only one despite seeming counterintuitive. These means including exchanges that don’t need identity information and international exchanges. With the IRS closely examining every trade by cryptocurrency traders, you should never make this mistake.
5. Not Preparing And Maintaining Proper Records
Like with the exchange or sale of other taxable goods, it’s your duty as a taxpayer to determine an asset’s basis by having and maintaining ample records when calculating your gains or losses. You also need to observe this as a cryptocurrency trader. Otherwise, you might find yourself paying for taxes after selling cryptocurrency as though the assets didn’t have any basis. And while you might be tempted to believe that you would access all these records when the times to fax them comes as they’re stored electronically.
6. Not Mentioning Cryptocurrency Received From Air-drops, Splits, And Forks
Any cryptocurrency you get from forks, air-drops, and splits are usually considered to be “free” because they’re tokens. Nonetheless, the IRS still wants to know about these cryptocurrencies even though most investors don’t mention them. When doing your cryptocurrency calculations using the crypto tax software, this is highly likely to happen as you automatically generate the tax reports. Therefore, you need to explain to crypto software how these tokens were derived, or else they’ll appear to have found their way into your wallet out of nowhere. And when you try to sell or trade the coins, you’ll get a notification of attempting to sell something which doesn’t belong to you.
Filing crypto taxes is often daunting as it’s time-consuming and takes up a lot of your time. As a result, you’re highly likely to make some mistakes and avoid any conflict with the IRS. Reading this article has highlighted the mistakes to know about when filing your crypto taxes to avoid any issue down the line.