For millions of people, cryptocurrency makes perfect sense. Its neatly defined rules, mathematical certainty, and resistance to being co-opted by certain interest groups make it one of the soundest, and most apolitical financial tools ever created. In just 32,000 lines of code, Satoshi published a blueprint, in 2008, for a monetary system that would change the world.
Cryptocurrency might make sense, but the world it inhabits is a messy and complex one characterized by ambiguous and overlapping regulations and illogical geo-restrictions that can, for instance, make a simple microtransaction in one territory a taxable event in another. That’s why we have crypto accountants, to make sense of the topsy-turvy financial system we inhabit, and also to make sense of the topsy-turvy state of the CSV we deliver to them annually containing our digital asset activity.
Whether you’re planning to prepare your cryptocurrency taxes yourself, or on assigning that duty to a qualified bookkeeper, there are some things you should do in advance – and some you shouldn’t. If you’re prepping your crypto taxes, here are 10 things you should never do.
Don’t Calculate Manually
Just because you’re due tax on every trade you make doesn’t consign you to late nights cross-referencing the price of BTC six months ago with the derisory profit you made on a now defunct altcoin exchange at the time.
Don’t Get Selective
You don’t get to pick or choose which trades you declare and which you don’t. Given the transparency of public blockchains, and the ease with which wallet addresses can be mapped, it would be unwise to start arbitrarily deciding which transactions to report. Indeed, since the very act of declaring taxable income from cryptocurrency invites scrutiny, it’s recommended that you make a clean breast of things. If you’re gonna report it, you gotta report it all. That being said…
Don’t Stress Over Satoshis
The average crypto wallet is filled with illiquid shitcoins, dust from previous transactions, and gambling tokens that were sent unsolicited. Should you fail to report a few satoshis here and there, or omit a few worthless tokens you were airdropped, you’re unlikely to get a knock at the door from the IRS.
Don’t Include Coins You Hodl
If you mined bitcoin in 2011 and haven’t sold it since, you’re due no tax on it at this point in time. Likewise with those altcoins and ICO tokens you bought in 2017 that are now worth buttons. In most countries, you’re not due tax on crypto until you sell it for fiat or exchange it for something else of value, at which point capital gains tax may be due. In the meantime, hodlers go tax-free.
Don’t Forget Mining Revenue
The bad news is you’re still due tax on coins you sell or trade from crypto mining. The good news is there’s a lot you can do here to lower your tax obligations. If your hobby has turned into a profession, it’s worth registering as a sole trader or business. In places that charge sales tax, such as Europe, you can become VAT registered and claim around 20% back on all the equipment you buy – and even on your electricity bill. Note that your tax status will change as a result, however, and you’ll be liable for corporation tax, which is manifested as a percentage of your profits.
Don’t Copy the Tax Strategy of Others
Just because your bitcoin bro claims to be slashing his tax through an innovative offshore trust doesn’t mean you should follow suit. What’s legally right for one person may not be for another; his earnings threshold, business status and other variables may differ significantly. Should the tax agency ever take you to task for dubious reporting practices, “He was doing it so I thought it was fine!” won’t cut it as a defense.
Don’t Forget to Write off Your Losses
Just because each cryptocurrency trade is taxable in many countries doesn’t mean it has to result in you paying tax. Losing trades might hurt at the time, but when it comes to calculating your tax bill, you’ll recall them a lot more fondly.
Don’t Forget Your Tax Reductions
If you donated to charity this year using cryptocurrency, that’s deductible. Just make sure that the charity qualifies for tax relief when donating in crypto.
Don’t Believe the Scare Stories
The IRS has been sending out notices to some crypto traders, warning them that they could be in line for an audit. While there’s much to dislike about the manner in which tax agencies use scare tactics, there’s no cause for fear. They’re not about to make an example of anyone who’s striving to accurately report their tax obligations.
Don’t Leave It Late
The most obvious tax “don’t” is also the one that needs repeating the most. Every year, a proportion of taxpayers don’t start prepping their return until the last minute. After enduring the panic and stress this causes, they vow never to make the mistake again – before doing exactly the same next year. Don’t be like that.
Despite the number of “don’ts” in this list, the truth is that preparing your cryptocurrency taxes is mostly a matter of common sense. Get organized in advance, utilize crypto tax software to record your trades, and you can turn a potentially negative experience into a positive – or at the very least a painless – one.
[Editor’s Note: This article is a guest submission and was not authored by BeInCrypto. We have chosen to share it because we believe it may be of interest to our readers. We suggest that readers verify any information presented independently.]