Have you bought, sold, or traded cryptocurrency in the past year? Then you’ll need to report this activity on your taxes.
Many people who are new to the world of virtual currency fail to realize that these transactions are taxable. As a result, they sometimes make costly mistakes when filing their annual tax returns.
Knowing a few common cryptocurrency filing mistakes can help you avoid these mistakes and any penalties that come with them. Read on to learn the top cryptocurrency tax filing mistakes to avoid. Then contact our team at Levy and Associates to request assistance with your cryptocurrency taxes.
Mistake #1: Not Filing at All
Most people who have interacted with cryptocurrency in the past year will need to report this activity on their taxes. The IRS recently updated form 1040 to include a question at the top asking if you received, sold, sent, exchanged, or acquired interest in any virtual currency in the past year. If the answer is “yes,” you’ll need to report this activity on your tax returns.
You may think, “If I don’t report my crypto activity on my taxes, the IRS will never know that I traded or sold crypto.” However, not filing your cryptocurrency taxes is against the law. If the IRS learns of your failure to report this activity, you’ll need to pay interest and fees on top of your tax bill. You may even be charged with tax fraud.
Mistake #2: Treating Crypto as Currency Instead of Property
Even though it has “currency” in its name, the IRS does not consider cryptocurrency a form of currency. Instead, you’ll need to report your crypto transactions as property transactions for tax purposes.
Your crypto activity will be subject to the tax rules and regulations for exchanging property in the U.S. For example, you may be liable for capital gains taxes for your crypto exchanges.
Mistake #3: Only Reporting Losses – Not Gains
Some taxpayers try to lower their tax bills by only reporting cryptocurrency losses and failing to mention any gains. Reporting your losses can allow you to reduce your taxable income by up to $3,000.
However, you’ll need to report your crypto gains and other transactions alongside these losses. The IRS examines crypto losses more closely than other items on your returns. If you only report losses, it may flag your returns for a review or audit — meaning you’ll eventually be liable for your other activity, along with interest and penalties.
Mistake #4: Not Distinguishing Between Crypto Income and Trade Profit
The IRS requires taxpayers to report income differently than investment or trade profits. As a result, when you file taxes for cryptocurrency activities, you’ll need to determine what category to classify your crypto gains.
For example, if someone paid you in cryptocurrency for performing a service or selling a good, you’ll need to report this payment as part of your income. Meanwhile, if you traded cryptocurrency and made a profit on the trade, you’ll need to detail this activity alongside other capital gains.
Mistake #5: Not Keeping Accurate Records of Crypto Activity
Whether you’re planning to make crypto trading an occasional hobby or a full-time job, you should keep precise, up-to-date records of your activity. We recommend recording every transaction amount, time and date, and platform in a spreadsheet. Then, when you need to file your tax returns, you won’t have to go hunting for the information you need to report.
If you’re struggling with cryptocurrency tax filing, we can help. Our tax experts at Levy and Associates have extensive training and experience helping clients like you file their tax returns with mastery and precision.
Contact our tax experts today at 800-TAX-LEVY to schedule a free, confidential consultation.