Top 3 Ways of Dealing With Cryptocurrency Taxes: Records, Accuracy, and Automation
Undoubtedly, crypto and Bitcoin have shifted the public eye in recent years. There is interest from governments about the sphere’s underpinning technology, the blockchain. Applicability in the years of doubting regulators is lukewarm. While some embrace blockchain, they still rebuff the idea of cryptocurrencies. Most governments nowadays are receptive to cryptocurrencies and strategically positioning themselves to tap extra revenue from the rapid price gains of the past few years. Less than 15 years after launching, Bitcoin is now emerging from the ashes of rejection and finding acceptance in mainstream finance. The asset now commands a market cap of over $2 trillion and is the most popular cryptocurrency. There are others like ETH, Litecoin, DeFi tokens, and even NFTs, broadly classified as digital assets.
Cryptocurrencies are Property in Most Countries
While cryptocurrencies disrupt processes, forcing remittance companies to adapt and even integrate them expediently, binding laws in most jurisdictions remain fuzzy. Besides El Salvador that recently made Bitcoin legal tender accepting the coin to settle debt and tax obligations, countries across the globe employ different classification criteria.
known officially as virtual currencies, are categorized as property. Accordingly, owners of these digital assets must file tax returns reflecting on capital tax gains matching the records of tax authorities. This, to be specific, is regardless of whether the digital asset in question is a utility or an investment contract.
As of October 2021, Bitcoin is the only asset that regulators have hinted as being a utility. That is, the token is community-driven, satisfactorily decentralized without a central intermediary, and the coin serves a purely utilitarian purpose promising its holders no return on their initial investment. Ethereum (ETH) may also qualify as a utility but as per regulators in the U.S., reading from SEC’s official comments, most cryptocurrencies qualify as securities — and that’s a whole different ball game.
The Cryptocurrency Tax Campaign by the Internal Revenue Service (IRS)
Therefore, it is imperative for cryptocurrency holders — investors and traders — to keep up with tabs. This means updating themselves with the best crypto tax practices and being on the right side of the equation with regulators like the SEC.
To let its citizens and taxpayers know that the Internal Revenue Service (IRS) was up to date with crypto events, watching closely how the scene unfolds, the agency activated the Virtual Currency Compliance campaign in 2019 to address non-compliance among digital currency holders.
As part of the company, the tax collector sent thousands of warning letters to users, asking some to file amended tax returns to fix the discrepancy with the agency’s records. It had emerged that some users, primarily traders who made a fortune from the ICO mania of 2017, weren’t aware of their tax obligations and failed to file returns. This was partly due to the unclear laws around crypto taxation in the U.S.
Meeting Your Crypto Tax Obligations, Being on the Right Side of the Law
There was Letter 6173, which asked users to respond within a month, while the more serious CP 2000 warned users that their returns didn’t match their records, listing the error and the applicable interest.
In cases where the user needs to take action, they can dispute the total amount owed by supplying supporting documents to prove their case. It can be done manually or through a crypto tax provider. To save time while remaining highly accurate, the latter option is more convenient.
A crypto holder can choose the services of Accointing, for instance. This platform serves a duo function of helping the holder track their portfolio and concurrently help them file their cryptocurrency taxes. The portal is freely accessible, allowing users to access a customized crypto tax report. It generates Form 8949 — for reporting a trade or an exchange of an asset to the IRS — for filling the Schedule D Form, a TurboTax file to drag and drop online, and a crypto tax report for your CPA. The product is accessible via desktop or mobile, presently automatically connecting to over 300 wallets and exchanges.
Alternatively, a user can use Koinly, an app with an easy user interface supporting Canadian, U.S., and tax forms from other 15 countries. Besides, the tool supports over 300 cryptocurrency exchanges allowing users to import their trading transactions from ramps and hard wallets via API or CSV for quick reporting. Meanwhile, CryptoTrader is global and integrated with TurboTax. Like the rest, it is a portal for users to calculate their cryptocurrency taxes quickly. The premium charged depends on the number of cryptocurrency transactions.
How To Deal With Cryptocurrency Taxes
Regardless of the crypto tax tool chosen, cryptocurrencies are properties in the U.S. — and most countries. Therefore, it is critical to understand the tax implication of trading, exchanging, or earning them. To be on the safe side and avoid penalties, here are three ways to deal with cryptocurrency taxes:
- Always Report All Forms Of Crypto Transactions
Digital assets are securities, and a trader might think swapping them for another is tax-free. However, the IRS states clearly that they are all taxable events that must be filed annually.
- Always Use The Correct Form To Report Crypto Transactions
From trading crypto to mining, investing, or using them as a medium of exchange, every type might require a potentially different form when filing. Therefore, a user must be keen to fill in the correct IRS form to capture the transaction and calculate applicable tax correctly.
- Always Maintain A Record Of All Crypto Transactions
It is critical, especially when considering the SEC’s classification of crypto as digital property. Preparing and maintaining a record of all applicable transactions helps in establishing its basis. In turn, this aids in calculating profitability or loss, which goes into deducing tax dues. Although traders can opt to do this manually, automating the service and keeping everything neat via a professional crypto tax tool service provider is advisable.