Showing posts with label crypto taxes. Show all posts
Showing posts with label crypto taxes. Show all posts

5 Crypto Tax Tips To Know Before April 15th...

Crypto Tax Tips
With only a month left until Tax Day in the US, cryptocurrency users should be filing their tax returns soon if they haven’t already. Although there was a time when cryptocurrency was not regulated, and the IRS wasn't particularly focused on them, times have changed. The IRS has made it clear that cryptocurrency tax enforcement is one of their top priorities for 2020.

Fortunately, the IRS has created a guide for individuals and businesses on how to fill out their tax returns. It's important to note that you are required to report all taxable transactions, and the failure to do so could result in penalties. However, there are a few things that you can do right now to make the process smoother or even pay less...

You Might Want to Sell at a Loss

Not many people know this, but you can actually 'profit' from your losses. If you are currently holding Bitcoin or any crypto and you sell it at a loss, you can deduct up to $3,000 of losses against other types of income.

This is called a net capital loss, and it's used as a strategy by many investors. Considering that the crypto market plummeted and took a beating over the past year, many investors have significant losses. These losses actually reduce taxable income.

One of the huge benefits crypto has over other assets is that the "Wash sale rule" does not apply. This rule states that once you sell something at a loss, you are not able to repurchase it until "x" days have passed; however, this does not apply to cryptocurrencies, which means that you can sell your losing positions to fill your taxes and re-buy them later on.

Use the Help of a Professional

Crypto taxation is still new, and although the IRS has come up with guidelines on how to do it, it is always best to contact a professional in this field. Crypto tax advisors most likely already know all the tricks and tips mentioned in this article and can apply them quickly.

Furthermore, you can easily find online tax calculators for crypto, and many exchanges already offer the possibility to download and track all your past trades.

Circumvent Taxes by Gifting Crypto

If you have received cryptocurrencies as a gift, you don't have to report it to anyone until you convert the coins to fiat money. According to Coinbase, you can gift someone up to $15,000 in crypto without having to pay any taxes.

Additionally, if you are planning to donate crypto to a charity of any sort, you can claim a "charitable deduction." Either way, it's crucial that you keep track of any gifts or donations that you have gotten or received in the previous year and the market price at the time.

Be Careful with Crypto Airdrops

The IRS has specified that crypto received through some form of airdrop is taxed as ordinary income. This applies even if you never asked or intended to own a specific coin acquired through an airdrop.

Many cryptocurrency exchanges will airdrop different coins to users, and you will owe income taxes on all of them. The amount owed is calculated using the fair market value of the coins at the time they were received.

It's best to avoid as many unnecessary airdrops as possible as it could get you in a lot of trouble. The current rule about airdrops is certainly controversial and will probably change in the future; unfortunately, it applies right now.

Keep Records of Everything

This is perhaps the most important tip and rule when it comes to crypto taxing. Although it's already tax season, you can apply this tip to the next year. There are thousands of cryptocurrencies and dozens of exchanges, and you are probably using quite a few. Whether you write the information on a piece of paper or a spreadsheet, make sure it's accurate. Cryptocurrency exchanges like Coinbase report to the IRS, so make sure you get copies of the 1099’s as well.

Keep track of every single exchange and the cryptocurrency you have bought as well as participation in any airdrops. Similarly, if you have gotten a gift from someone or you have gifted someone with cryptos, write it down. Fortunately, most exchanges have an option that allows you to export your full operational history.

Key Takeaways

As cryptocurrencies have gotten more popular in the last few years, we have seen a sudden change in the way that they are classified and represented to the IRS. You must start tracking your cryptocurrency transactions and account for all the capital gains and income you receive from them; otherwise, the IRS and other governmental agencies can impose tax penalties that can be costly.

Tracking cryptocurrency gains and losses can be tricky, especially if you receive hundreds of transactions within your business or happen to make a lot of trades as an investor. This is where cryptocurrency and bitcoin tax software can come in handy as you will be able to import API keys and receive custom reports based on your trades within minutes.

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Author: David Kemmerer
CryptoTrader.Tax Co-Founder