Cryptocurrencies have gained a substantial amount of momentum in the present era as investors and business heads have started showing trust in its potential. With the evolvement of profits and income accrued from digital currencies, there has been a grown concern for crypto tax filing as well from the regulatory bodies.
There has always been a sense of doubt amongst the traders and investors about the filing of crypto taxes. In an attempt to tighten the grip on crypto-concerned entities and enthusiasts, the IRS has tried to throw light on the most crucial issues related to taxation. Also, to curb illicit practices, the IRS has started slapping down the people who are involved in crypto tax evasion. Recently, nearly 10,000 investors received official letters from IRS.
The strict rules and regulations have made it alarmingly important for investors to consider tax filing as an important issue. This article will highlight some of the most common mistakes and will also guide you on how to avoid them easily.
- Counting Crypto As Currency And Not Property:
Contrary to the general belief, IRS classifies cryptocurrencies as property and not a currency. This turns out to be the base for the most elementary mistake as people consider crypto to be digital currency in a more general sense. As IRS considers crypto to be property, the provisions of capital gains tax will apply to crypto transactions. If the currency is held for less than a year’s time, then it will accrue Short Term Capital Gains Tax otherwise Long Term Capital Gains tax is needed to be paid.
- Failing To Take Notice Of Previous Years Transactions
It is crucial for an investor to keep records of his transactions of the previous years as well while filing the current year tax. For example, if a person is selling his bitcoin purchased in 2016, in the current year 2018, then it is important to know the price at which the crypto was purchased back then. By knowing the purchase price, the person can ascertain the profit/loss for his transaction. In case you have failed to keep records of your previous year transactions; you can employ crypto tax software for easy calculations.
- Accounting Crypto Received As Income And Crypto Trading Similarly
Sometimes a person earns cryptocurrency as a part of salary or through mining and eventually tends to ignore this completely or counts it in a similar manner as crypto trades. However, the crypto received as income should be accounted for like a portion of income at the time when received. For doing this, one needs to find out the fair value of the digital currency on the day it was credited in the account. It should be then added to the taxable income. Later, at the time of selling this cryptocurrency, one needs to pay the capital gains tax.
- Only Considering Transactions Where Crypto Is Converted Into Fiat Currency
There is a misconception amongst the crypto traders that they have to pay crypto taxes when they trade their cryptocurrency for fiat currency. However, in reality, as per the IRS regulations, every single crypto transaction raises a tax obligation. For example, if you purchased Bitcoin for $1000 and traded it for $1500 Ripple during the year, you need to pay capital gains tax on $500, which turns to be the profit.
- Ignoring Crypto Losses While Filing Your Returns
Crypto losses should be traded like common property losses as they help in reducing taxable capital gains. This implies that if a person has suffered any loss in a crypto transaction, one can use the loss to offset the capital gains. One can use these capital losses to offset up to $3,000 of ordinary income.
The Concluding Tip
With the growing strictness of the IRS over tax evaders, it is crucial for the crypto investors to file current and future returns in a correct manner. Also, it is necessary to file an amendment, if necessary, concerning the returns of previous years. In case if you feel reluctant to abide by the crypto tax regulations, you can hire a bitcoin tax accountant who, in turn, will save more money in the long run.