5 min read · Mar 18, 2023
Tax season is here, and many people are faced with the idea of doing their own taxes to save money. While doing your own taxes might seem like a cost-effective solution, this could actually wind up being a pricey mistake. Tax laws are confusing and constantly changing, and if you’re not familiar with the latest laws, you might be overlooking deductions and credits that you’re eligible for, or just flat out make mistakes on your return. Inaccurate tax returns can lead to penalties, interest charges, and potentially even a dreaded audit. Getting the right help with preparing your taxes can lead you to tax planning opportunities that you’re not aware of.
As cryptocurrency becomes more popular, it’s no surprise that taxes on digital assets are also on the rise. It’s a new frontier for many investors, and it’s really easy to get confused about how to report your gains and losses. Unfortunately, many people are making mistakes on their tax returns, which can lead to fines and penalties from the tax authorities. That’s why governments all around the world are paying more attention to cryptocurrency taxation and are cracking down on those who don’t follow the rules.
As the world of cryptocurrency, NFTs, and decentralized finance is developing at a rapid pace, tax laws and regulations have been struggling to keep up and can even change from how you did your tax reporting just last year. Tax season can be stressful enough without having to worry about how to report your digital investments. But the lack of clear guidance can make it tough to know what to do. To make matters worse, the changing nature of cryptocurrency and the lack of standardized rules can leave taxpayers feeling unsure about the proper way to report and pay taxes on these transactions.
One of the biggest problems in reporting cryptocurrency transactions is how complicated they can be. Unlike traditional investments, crypto transactions can involve multiple parties, exchanges, and jurisdictions, which can make it difficult to accurately track gains and losses and determine your tax liability. This complexity can get overwhelming for taxpayers if you’re not familiar with the nuances of cryptocurrency transactions.
When it comes to tax reporting, one of the key things to keep in mind is that digital assets/virtual currencies/NFTs are treated as property. The same way of owning a home; it’s property and is taxable. This means that any gains or losses from buying, selling, or trading digital assets are subject to capital gains tax. While this may seem straightforward, you now have to keep track of your cost basis (how much did you get it for) of each asset and the exact date it was acquired.
As we all know, prices of coins, tokens, and NFTs can change by the minute. This can make calculating gains and losses tricky, but still necessary. You’ll want to keep accurate records and stay organized to make sure that you’re properly reporting your investments and minimizing your tax liability.
Crypto investing can take many different forms: mining, staking, lending, borrowing, air drops, giveaways, you name it. Each type of these strategies comes with their own set of tax rules and reporting guidelines. We engage in decentralized finance for it’s the ability to grow income using the “infinite money loop”. Quick example: you can stake NFTs and earn staking yield in the form of tokens. You can then swap out your token yield and lend out ETH, MATIC, USDT (just to name a few) using decentralized finance platforms such as Aave or Compound. The interest earned from lending out your assets to borrowers can be sold for income to you, or reinvested back into this infinite money loop for future gains. Such strategies are quite common in decentralized finance, but there are still tax liabilities that they carry. You need track your basis, the dates of each transaction, your gains and losses, and income generated for EACH of these transactions.
Crypto’s popularity has exploded with investors and traders from all around the world participating in the market. As a result, many markets now occur across international borders, which adds an extra layer of complexity to tax reporting and compliance. Different countries have different tax laws and regulations. Failing to properly report and pay taxes on your international cryptocurrency transactions can lead to some pretty serious consequences. Think penalties, fines, and potentially even legal trouble.
But crypto is totally anonymous, right? What if I just don’t include it on my taxes?
No, you should not hide your crypto investments from your tax reporting. Period.
In the United States, the IRS treats digital assets as property for tax purposes. This means that any gains or losses from the sale or exchange of cryptocurrency are subject to capital gains tax. Failing to report your crypto transactions on your tax return could land you in deep trouble with the IRS. You could be looking at penalties of up to 20% of the underpaid tax and interest charges. And if the IRS thinks that you did it on purpose, you could be hit with even steeper penalties, and even criminal charges. Whatever you do, don’t try to hide your crypto investments from the taxman. The IRS has been cracking down on non-compliance when it comes to cryptocurrency, and they’re serious about making sure investors report all transactions and pay taxes on any gains.
To make sure you stay on the right side of the law, keep careful records of your investments and transactions, including when you bought and sold, and for how much. The bottom line? Be transparent and stay compliant to avoid getting stung on your crypto taxes.
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If you’re not sure how to organize and report your crypto investments on your tax returns and are looking for help, try CoinLedger, free to use cryptocurrency and NFT tax software.
