Cryptocurrency or crypto has grown increasingly popular among aggressive traders because of its substantial volatility relative to the equity and forex markets. Although the same technical analysis techniques apply, numerous distinct variations exist between cryptographic and traditional financial markets, mainly when it comes to calculating and paying taxes.
It may be a frustrating and challenging procedure to get your crypto taxes done. This is because your crypto data buys, sells, trades, transfers, and all other crypto activities are likely to be spread over many different platforms and exchanges. This makes it tough to collect all the data. It has therefore never been more critical to understand the tax rules of purchasing, selling, trading, and earning crypto. With that said, here are the common tax mistakes that every crypto investor should avoid:
1. Failing To Include Trading Experience From Previous Years
Verifying that you’ve included all prior years’ trade data is a critical component of the tax filing procedure. Numerous traders make the same mistake of incorporating only the data from the preceding fiscal year.
This is an understandable error. If you’re only producing 2020 reports, why would you need to upload or include your trading experience from previous years? It turns out that having your entire trade history is essential.
This is because your cost basis is established by the date on which you purchased the Bitcoin asset in the first place. Suppose you bought Bitcoin in 2018 and traded it in and out of several other exchanges over the years. In that case, it’ll be hard to correctly disclose your cost basis for subsequent crypto assets without providing the data behind that first purchase.
Failure to provide information relevant to the cost basis computation of your crypto assets might result in a much larger tax bill. If you don’t make a timely payment, there’s a general interest charge (GIC) to your balance.
Your debt will continue to rise each day that it isn’t paid. Interest is calculated daily compounding on the balance due and is credited to your account periodically. You can check this Australian crypto tax guide to learn more about paying your taxes properly, though there are other resources online you can use if you live elsewhere.
2. Not Reporting Crypto Received From Forks, Splits, And Airdrops
While the words ‘airdrops,’ ‘forks,’ and ‘splits’ may be unfamiliar to novice cryptocurrency investors, it’s critical that anybody dabbling in this field rapidly get acquainted with them due to their tax implications.
While Bitcoin gained through airdrops, forks, and chain splits is technically free, the taxman is sure to know about it. Many traders who get cryptocurrency due to those occurrences neglect to track windfalls from forks or airdrops.
If you don’t categorize cryptocurrency gained through airdrops and forks as such, you’ll almost certainly face a higher tax rate. This is another frequent mistake made by traders who’ve lost track of the tokens they got due to splits, airdrops, or forks.
Suppose you’re utilizing crypto tax software to create your tax returns automatically. In that case, you must demonstrate to the software how you got those tokens. If they’re not classified as forked/airdropped coins, they’ll appear to have emerged out of thin air within your account or wallet. When you attempt to trade or sell the coins, the program will notify you that you’re trying to sell something you don’t possess.
3. Not Classifying Crypto As Income
If you’re compensated in cryptocurrency, you must include the cryptocurrency fair market value in your regular income. Note that payments made in cryptocurrency for providing services aren’t taxed in the same way as crypto sales are kept for investment purposes.
For instance, Anna worked for a startup and was compensated with 1 BTC on August 8, 2020. At the time of receipt, one Bitcoin was worth USD$1,000. Anna must disclose an income of USD$1,000 when she files her 2020/2021 income tax return.
Also, not all cryptocurrency-related transactions are taxable. While the sale of cryptocurrency is generally subject to capital gains tax, cryptocurrency earned through mining or as pay for work or services may be taxed as income.
If you acquire crypto due to a commercial crypto mining activity, it’s critical to identify it as income. If you’re unsure whether your cryptocurrency mining activities qualify as income, consult your country’s tax guide on cryptocurrency mining and taxation.
4. Failing To Calculate Crypto Gains And Losses
While most traders are aware that their cryptocurrency profits will be taxed, it’s possible to use cryptocurrency losses to offset their overall taxable income in some circumstances. If you’ve suffered crypto losses, you may be eligible to claim them in the current year or the following tax years.
Losses, like profits, can and should be reported, and losses may entirely negate any tax implications associated with gains. However, if they do, taxpayers must still disclose the transactions. Cryptocurrency investors aren’t obligated to declare and pay taxes on their earnings solely and should account for gains and losses when determining their tax liability.
5. Not Filing Crypto Taxes At All
By far, this is the most serious mistake people make when it comes to taxes and cryptocurrencies, and it could either be deliberate or accidental. Many crypto fans were first attracted to the prospect of government-free, privacy-focused digital money. While crypto has proven difficult to trace, this doesn’t absolve crypto traders of their tax obligations.
If you’ve previously neglected to pay taxes, it’s prudent to file an updated return and make payments as soon as possible. Failure to make a timely payment may result in penalties and interest on the outstanding balance, which can be considerable if tax evasion is detected years later.
Performing a fundamental cryptocurrency tax report for irregular traders is relatively easy. However, whether you’re a full-time crypto trader or have carried out several businesses in a tax year, you may want to consider using tax professionals’ services. This is to guarantee that you’re following an efficient tax plan.
Suppose you’ve traded cryptocurrencies in the previous year. You must then check that your crypto taxes have been appropriately submitted to avoid over-taxation. If you don’t know whether you’re following the most acceptable crypto tax approach, then get sound tax advice from a tax expert with significant cryptocurrency assets.