By Filing your cryptocurrency taxes can be a nightmare if you have anything more than a handful of transactions. As trading in crypto usually involves multiple wallets and exchange accounts, transactions from mining, forks, airdrops, and other cryptocurrency activity can easily become overwhelming and challenging to track. That said, it is essential to file your returns in compliance with IRS regulations.
Check out these ten surprisingly common mistakes that many people make when filing their cryptocurrency taxes.
1. Failing to include each trade year
This is an understandable mistake. When you are submitting your taxes, it makes sense only to include the past year. However, when it comes to getting the job done properly, it is essential to cover every year of trade.
Imagine, for example, you bought a crypto asset during a particular year and made some trades. That asset then gave you a profit. When determining the cost basis for it, you will have to include the cost of that original purchase. Therefore, be sure to include the trading history of each of your assets right from when you made the first purchase.
2. Not adding data from all the exchanges you traded on
When trading in crypto, people will frequently try their hand at different exchanges. However, plenty of individuals end up using just one or two exchanges. When filing your cryptocurrency taxes, you must include your trading history from all the exchanges you have utilized.
While this may seem like an unnecessary step, it is nearly impossible to get an accurate tax profile without including data from all the exchanges that you have used, for the same reasons as point #1 above.
3. Not filing your crypto losses
The gains that you make from trading in crypto assets are taxable. Typically, investors will only include the gains in their tax reports and ignore the losses. What numerous people do not realize is that the losses from crypto trading can help you save money. This is because these losses are used to reduce taxable income. Capital losses are deducted from the gains and, incase the losses are higher than the profits, you can deduct up to $3000 from your other taxable income – each year!
4. Not reporting your crypto trades on Form 8949
According to the IRS, cryptocurrency is considered property, rather than currency. This means that cryptocurrency is subject to the same tax principles that are applied to property transactions.
Instead of using foreign exchange currency gains and losses, cryptocurrency transactions generate capital gains and losses – these should be categorized into either short-term or long-term gains. Long-term gains have lower taxation rates and are generally more pocket friendly. Capital gains are declared on Form 8949 as well as on Schedule D.
5. Not declaring cryptocurrency received from Forks, Splits, and Airdrops
This mistake is especially prevalent among traders who have failed to keep track of their transactions involving forks, splits, and airdrops. Many exchanges such as Binance, Bittrex and Bitstamp do not export these transactions when you download your transaction history.
If you receive coins via these methods and fail to account for them then your cost-basis will be wrong when you sell the coins. This can result in overpaying on your taxes! Coins received via hard-forks and certain types of airdrops may also be subject to regular income tax. It is best to consult a crypto tax guide or a CPA for the proper tax treatment of crypto you received from elsewhere.
6. Neglecting cryptocurrency received as Income
This is a typical error that leads to incomplete tax reporting. Crypto that is received as income is treated differently to crypto from trading. Income crypto refers to crypto that you have received as compensation for a job or service. It also refers to crypto that you may have gained from mining.
When filing your cryptocurrency tax returns, be sure to specify such crypto as income and not trade profit. You must also include the date and time of receipt of the cryptocurrency assets.
7. Assuming that taxes are paid only after cashing out to fiat currency
Many traders make the wrong assumption that cryptocurrency is tax-free until it is turned into fiat currency. However, trading from one coin to another, such as Bitcoin to Ethereum, could lead to a taxable event. This is because such a trade can trigger a capital gain or loss.
Bear in mind that the like-kind exchange rule does not apply to cryptocurrencies. The IRS has clarified that it only applies to real-estate.
8. Failure to include trading fees
When filing your cryptocurrency taxes, you need to calculate the basis for your crypto-assets. To do this, you need to include any fees and commission that are related to the purchase price. Ensure that you include these values in the exportable CSV file from your exchanges.
Often, traders do not include all trading and transaction fees. By doing so, the trader will miss out on the chance to increase their basis, which will eventually help to reduce their taxes.
9. Choosing the wrong accounting method
As we have already mentioned, capital gains on cryptocurrencies need to be categorized as either short-term or long-term. The IRS allows two accounting methods to be used to handle cryptocurrency capital gains – these are FIFO and LIFO.
FIFO (First In First Out) is the most conservative and also the default accounting method. Here, assets that were bought first are sold first. FIFO helps to reduce the risk of underpayment and is especially relevant for long-term assets. LIFO (Last In First Out) is a better choice for short-term gains because it helps reduce the risk of a higher tax bill.
10. Ignoring transactions for goods and services
A taxable event also occurs whenever cryptocurrency is used in the transaction of goods and services. As long as crypto was used to either buy or sell specific products and services, there is a chance for a capital gain or loss.
Say, for example, you bought a bitcoin at $100. However, you decide to spend the coin on a particular service, and at the time of spending, the coin was worth $150. The $50 difference is a capital gain, and you will need to include it in your tax report.
Final words
Filing taxes for your cryptocurrency trades and income can be a daunting task. While some minor mistakes may not lead to significant penalties, some other, more grave ones, may lead you to a prison cell. The best way to avoid these mistakes is by educating yourself on everything you can concerning cryptocurrency taxes. Alternatively, consider hiring a lawyer or CPA familiar with crypto tax rules.
By Robin Singh
Robin is the co-founder and CEO of Koinly.io – a cryptocurrency tax platform that automatically generates crypto tax reports for USA, Canada, Sweden & other countries.
Also, take a look at 6 ways you can lower your crypto tax liability
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