Don’t Let Crypto Tax Mistakes Cost Your B: Here Are 6 to Avoid!
Are you struggling with the challenge of Mistakes to Avoid in Crypto Taxation? If so, this post is for you!
Cryptocurrency has become highly sought after by aggressive traders due to its highly volatile nature compared to the stock and foreign exchange markets. But trading cryptos can be tricky, and because the tax laws are complex and often changing, it’s easy to make mistakes without realizing it.
Top 7 Mistakes to Avoid in Crypto Taxation ;
Let’s chat about the most common errors traders and investors make when filing their crypto taxes and how to dodge them. From overlooking capital gains to missing reporting transactions, the 7 most common Mistakes to Avoid in Crypto Taxation are covered here to ensure you get your crypto taxes right.
1. Not Filing Crypto Tax
Failing to report your cryptocurrency taxes is a big mistake. In nations with more developed tax laws for digital assets, like the US, Germany, or Australia, trading cryptocurrencies and earning money from digital assets are taxable.
What happens if you don’t report your crypto taxes? You could face audits, fines, and notices demanding payment of taxes owed. Therefore, it’s essential to keep track of your trades throughout the year, calculate your gains and losses, and fill out the correct tax forms by the due date so that you can track the Mistakes to Avoid in Crypto Taxation.
2. Not Tracking Trading History
Not reporting your transactions from the start could create a few headaches when it comes to cryptocurrency taxes. To accurately calculate your gains or losses from the sale, you must consider past years’ transactions when you file your taxes to record the Mistakes to Avoid in Crypto Taxation. This will then show how much cryptocurrency tax is due.
You can also take any well-known services of crypto bookkeeping and accounting to keep track of all your trades. Alternatively, cryptocurrency tax software or crypto tax advisers can make your life easy.
3. Not Harvesting Tax Loss
It’s not uncommon for positions in the crypto market to experience substantial losses before eventually turning a profit, owing to its high volatility. Fortunately, crypto traders can utilize tax-loss harvesting to lower their tax liabilities. However, lower volatility and the Wash Sale Rule make it challenging to employ tax-loss harvesting.
Exploring tax-loss harvesting opportunities in your portfolio can be simplified by using an automatic tool that gathers unrealized losses from multiple exchanges and wallets based on accounting practices. It would also be wise to consult with an expert.
4. Not Recording Separate Crypto
Figuring out which cryptocurrencies are used for trading profits and which you receive as income is critical for filing your taxes correctly. Accepting cryptocurrencies as payment for work or services is a common way to receive them as income. Failing to include these in your return could lead to penalties.
Creating a personal balance sheet is a great way to keep a record so that one can track the Mistakes to Avoid in Crypto Taxation and prevent this from happening and make it easier to submit your taxes. It allows you to keep track of all your cryptocurrency holdings in one place.
5. Failure to Report Transactions Between Cryptocurrencies
When you swap one cryptocurrency held as a capital asset for another, you’re essentially trading one piece of property for another. This means you must report any capital gains or losses. However, many traders don’t understand that it is taxable. This results in incorrect tax filing and possibly penalties in the future.
So next time you convert your Bitcoin to Ethereum or any other token, remember — it’s a taxable event, and you must report it!
6. Poor Cryptocurrency Reporting of Forks, Splits, & Airdrops
Crypto tax reporting can be tricky due to hard forks, forks, and airdrops. An airdrop is a free giveaway of tokens to promote attention. A hard fork is when a blockchain token or coin is split into two, and a fork is an alteration to the blockchain protocols.
No matter if you don’t have power over these cryptocurrencies, it has to be regarded as regular income. The fair market value at the time of receipt is the basis of Mistakes to Avoid in Crypto Taxation and the newly acquired crypto.
7. No Tax Planning for Crypto
Failing to plan and take advantage of tax-optimization measures can be costly. Have a clear goal in mind before entering a trade, and know your selling and buying points, plus what you will do in different situations. Estimate taxes to be paid, so you can budget and avoid having to sell assets to get the cash you need.
For a long-term tax strategy, speak to a crypto tax accountant. Planning can help you stay on top of your taxes and keep more of your investments.
It is critical to keep these mistakes in mind and take the necessary steps to avoid possible consequences. Also, using crypto tax services can be a great way to simplify the Mistakes to Avoid in Crypto Taxation. It can help you navigate the complexities of the tax system.
These services can save you time, energy, and money. Moreover, you can rest assured knowing that your crypto taxes are being handled in a professional and accurate manner.
Akanksha Malik is a content creator & digital strategist at Mesha. She develops content to share her knowledge and insights helping her readers stay updated with the latest in the fintech world, as well as Web3 businesses, cryptocurrencies and other business trends or opportunities. Akanksha also loves exploring architectural sites and different local dishes during her travels.