Hey guys, it’s me, Bette Hochberger, CPA, CGMA. As cryptocurrencies gain popularity, so does the complexity of filing taxes related to them. Many taxpayers find themselves navigating a maze of regulations and obligations, leading to potential mistakes that could be costly. In today’s blog, I’ll go over some common pitfalls to avoid when filing your crypto taxes, ensuring a smoother process and compliance with tax laws.
Failing to Report Crypto Transactions
One of the most significant mistakes individuals make is not reporting all cryptocurrency transactions. The IRS treats cryptocurrencies as property, meaning that any sale or trade must be reported on your tax return. This includes not only selling crypto for cash but also exchanging one cryptocurrency for another. Even small transactions can add up, so it’s essential to keep detailed records of every trade.
Ignoring Taxable Events
Not all crypto activities are taxable, but many are. Taxable events include selling crypto for fiat currency, trading one crypto for another, and using crypto to purchase goods or services. On the other hand, simply holding cryptocurrency does not trigger a tax obligation. Understanding the difference between taxable and non-taxable events is crucial. Make sure you are aware of what actions require reporting to avoid unexpected tax liabilities.
Miscalculating Gains and Losses
Calculating capital gains and losses can be tricky, especially if you have made multiple trades throughout the year. It’s vital to track your cost basis (the original value of the asset) accurately, as this will determine your gain or loss when you sell. Many people mistakenly use the average cost of their cryptocurrencies instead of the specific identification method, which can lead to incorrect calculations. Using reliable software or tools designed for cryptocurrency tracking or a CPA that specializes in crypto can help ensure accurate reporting.
Not Keeping Good Records
Poor record-keeping is a common mistake that can lead to complications when filing taxes. You should maintain a detailed log of all your cryptocurrency transactions, including dates, amounts, involved parties, and the purpose of each transaction. This documentation will be invaluable if you’re ever audited by the IRS. Additionally, storing records in a secure and organized manner will make it easier to compile the necessary information during tax season.
Overlooking Tax Deductions
Many crypto investors are unaware that they may qualify for tax deductions. For example, if you donated cryptocurrency to a qualified charity, you might be able to deduct the fair market value of the donation. Similarly, if you incurred losses from trading, you could offset those losses against your gains. Familiarizing yourself with potential deductions can help reduce your taxable income and maximize your refund.
Filing crypto taxes can be complex, but avoiding common mistakes can make the process more manageable. By reporting all transactions, understanding taxable events, maintaining accurate records, and utilizing the right tools, you can navigate the complexities of cryptocurrency taxation with confidence. Feel free to schedule a meeting with us if you need help with your crypto taxes?
As always, stay safe, and I’ll see you next time!
