Cryptocurrency Tax Mistakes That Could Hurt You
With regulations still rather confusing when it comes to cryptocurrencies and trading in digital assets, you could end up making mistakes while reporting your taxes. And cryptocurrency tax mistakes could actually end up costing you as much as $250,000 in fines. Worst case scenario – you could even end up in prison. Just before tax season started, the Internal Revenue Service sent out a strong reminder to cryptocurrency holders to declare all income generated from cryptocurrencies.
Top Cryptocurrency Tax Reporting Problems
The biggest challenge that you will face when declaring your earnings from cryptocurrencies is figuring out your cost basis. This is basically the original value of your digital asset for tax reporting purposes. The problem is that there is no official reporting mechanism in place for this kind of information, the way there is for regular stocks. You would therefore need to figure out that critical cost basis on your own. When you have held stocks for a long time and your brokerage no longer has that information at hand, you can find out historical prices and dividend payouts to figure out what your original cost basis was. It’s not that simple for cryptocurrencies.
This is because there are more than 190 cryptocurrency exchanges and the exchange price can change from one exchange to the next. The matter gets even more complicated if you traded in coins without going through an exchange. One way to address this issue is by using a weighted index to help you figure out the cost basis. You could even check whether your cryptocurrency exchange or service provide offers gains and loss calculations or even can help you figure out your cost basis. Bitcoin Tax is one such platform that may be able to help you with this problem.
Payments in Cryptos
Another challenge that you can face is if you mined your own cryptocurrency or someone paid you in cryptos. Different rules will apply depending on how you got your cryptocurrencies. For example, if you are mining cryptos for yourself versus for someone else, then two different tax laws would apply. Now, if you’ve been employed by someone to mine cryptocurrencies vis-à-vis being hired as an independent contractor, you again look at two different rules. Do your research very carefully and ensure you have declared your mining activities correctly.
Cryptocurrency Tax Reporting Tips
Here are some tips that you should keep in mind while reporting your cryptocurrency related transactions for tax purposes.
- Cryptocurrency tax mistakes are easy to make since we don’t consider the tiny details. For example, you paid for your coffee using Bitcoin. Well, that needs to be reported too. Even cryptocurrencies as gifts need to be reported.
- Make sure you track all transactions (the date and the amount your paid) and translate them into dollars.
- Don’t assume you can exchange cryptocurrency tax free. Even if you have swapped one crypto for another, you will still need to report it.
For a better idea of how to manage your reporting, take a look at the IRS’s Cryptocurrency Tax Principles.