Published on 27/06/2021
The crypto boom has caught several people off guard. Many who have invested in cryptocurrencies have seen their money get quadrupled, and many lament the missed opportunities. Many others are revisiting their decision to lay off this volatile market as more and more people want to ride the crypto wave.
There is a lot of debate on the ‘value’ of cryptocurrency. Some have outrightly rejected it while some expect Bitcoin price to cross $300,000 by 2022, even as the consolidated market cap of the system has already touched $1.3 trillion as of June 20201. Amidst all the hullabaloo, one thing is clear- buyers must get it right when it comes to reporting crypto income and filing taxes.
The biggest mistake taxpayers are making is not reporting cryptocurrencies they have bought in their income tax returns or reporting it incorrectly when filing taxes. The IRS has now begun to weed out such individuals and bring them to the book. This has prompted people to go for a deeper understanding of buying, selling, and holding cryptocurrency as an investment.
Watch out for these common mistakes that many taxpayers who buy cryptocurrencies make when filing taxes.
Failing to report Cryptocurrency, gains & losses
The worst mistake you can make is not reporting holding cryptocurrencies or reporting having transactions in cryptocurrencies at all. Remember, the IRS is watching every move of each taxpayer and knows when you skip reporting part of your assets. Cryptocurrencies are also considered assets and must be reported in your income tax returns.
No matter if you lose money or gain money when you invest in cryptocurrency, you need to report it. Losses incurred in cryptocurrencies can offset the income tax ramifications of the gains made. Irrespective of that, all gains and losses must be reported in your returns. The tax due must necessarily have information of losses and gains made in cryptocurrencies. In addition to this, taxpayers must pay taxes on any gains made. Non-compliance with any such step will lead to scrutiny by the IRS.
Improper reporting of Crypto transactions
Buying cryptocurrency as an investment option is completely different from receiving cryptocurrency in exchange for a service rendered to another person or group. Consequently, the tax slabs for the two scenarios differ from each other. Hence, it is essential to properly report the revenue source of the cryptocurrency you are holding.
Failing to keep a record of Crypto transactions
Taxpayers must maintain a clear record of any taxable sale. Like any other asset, taxpayers must maintain a record of cryptocurrency transactions for future uses. Make a clear record of profit and losses booked by you in a transaction. Failing to do so, you may have to pay taxes on the cryptocurrency sale since there will be no basis in the asset. Do not rely entirely on electronic data and record, maintain a manual record for your use as well to ensure tax season sails by smoothly.
Passing on Cryptocurrencies to heirs
As with any other asset, you will want to pass down all your cryptocurrency assets too to your heirs in case of your death. For this to happen without any hiccups, make sure that your next of kin or heirs know about your cryptocurrency accounts. The cryptocurrencies that you hold will be added as a taxable asset to the rest of your estate when it is passed down to your beneficiaries as per your will. You should let the beneficiaries know of this since they will have to pay taxes on this asset as well.
Using the wrong form to report Crypto transactions
When you are reporting the cryptocurrency transactions you made, it is also important to report the form in which you hold the cryptocurrency. Make sure that you add in details like if you were paid for a service in cryptocurrency or exchanged another good for cryptocurrency or vice versa. This will ease filing returns for you and prevent any untoward tax consequences.
The IRS has become stricter when it comes to taxpayers reporting cryptocurrency as an asset. Taxpayers need to be more mindful and avoid making mistakes that can cost them a bomb in fines and penalties. Speak to a qualified tax professional at firstname.lastname@example.org today for any query on taxes on cryptocurrencies.