People have many misconceptions about crypto taxes that can lead to grave crypto
accounting mistakes. It is commonly believed that crypto functions differently from
fiat currency. That’s why people expect it to be exempted from taxes in certain use
cases.
That can lead to a variety of crypto tax accounting errors that can trigger an IRS
audit. They can cost you a big chunk of your crypto assets in the form of tax
payments. Most people make these common cryptocurrency accounting errors
because they don’t have answers to these questions:
1.) Do I have to report every disposition of crypto when filing for crypto
taxes?
2.) How can I plan my crypto taxes ahead of time?
3.) Are crypto transactions anonymous and therefore non-taxable?
4.) Can the IRS trace all my crypto purchases?
5.) Are all of my crypto assets taxable?
6.) Can the IRS trace all of my crypto earnings and rewards?
This article will help you answer all of these questions and more regarding crypto
taxes and IRS demands. We are going to look into the 5 biggest crypto accounting
mistakes one by one and discuss how you can avoid them.
Mistake Number 1.) Not Calculating Your Crypto Income
Correctly
Your crypto income is not limited to the profits you make on certain crypto
investments. It is also not limited to the crypto you have stored in any specific
wallet. There are many other cases in which you earn taxable crypto assets like
when you receive crypto as a reward in a game.
Some things you must keep in your mind when calculating your crypto income
include:
Profits from your crypto investments across multiple online platforms
Cryptocurrency you have earned in rewards online
Cryptocurrency you might have won in online games
To avoid making this embarrassing crypto tax accounting mistake, make sure you
count all of these in your income. Don’t leave anything out of your crypto income
statement. You need to provide a transparent and complete income statement to
the IRS to avoid triggering an audit or losing your assets.
Mistake Number 2.) Considering Some Crypto Transactions
Anonymous and Untraceable
People think that those rewards are an untraceable form of cryptocurrency. That is
not true. Cryptocurrency is neither completely anonymous nor completely
decentralized. That is just a very common misconception that can lead to big errors
in accounting for cryptocurrency and filing.
No matter how many ads you see promoting decentralized finance, remember that
that is a vision only. Companies have started to invest in that, but complete
decentralization has not been achieved yet. All of your crypto transactions are
traceable and therefore liable to taxation.
That is why it is important to account for everything in your records when you
submit them to the IRS. Don’t try to hide any asset under the illusion that it may not
be traceable and may not be liable to taxation. That can be one of the biggest red
flags that can lead to an IRS audit.
Mistake Number 3.) Not Calculating a Cost Basis for Crypto
Earnings
You don’t want the IRS to think that you did not have to invest any of your other
assets to get the crypto you have today. In that case, all of the crypto you own will
be considered an earning or a profit. That way, you will have to pay much more tax
on your crypto assets than otherwise.
That is why it is important to evaluate the cost basis for the crypto assets you have.
For example, you may have founded a cryptocurrency and distributed it between
many shareholders and investors. In that case, you have to make sure you know
how much money you had to invest in your project to make it successful.
That will help you avoid having to pay taxes on money that is not technically a part
of your income. Your investment in your crypto project will be exempted from the
taxes that you have to pay to the IRS. That is why you must have a cost basis
defined before you apply for crypto taxes.
Mistake Number 4.) Failure to Maintain a Transparent Record
of Crypto Transactions
When it comes to recording crypto transactions, it is easy to skip some minor
details. For example, you may have used crypto to pay a merchant online or
physically for something very small. It could even be a cup of coffee only.
However, even that must be kept in a record. Crypto transactions are not like credit
card transactions. They are separately taxable. You have to make sure that the
record you present to the IRS is complete.
It must include all of your spendings in crypto – A to Z. If you have not kept track of
your expenditures in crypto before, now might be a good time to start doing so. It
will help you avoid being in trouble with the IRS when you file for crypto taxes.
Mistake Number 5.) Not Hiring a Crypto Tax Accountant to
Manage Everything
A crypto CPA can be the one solution to all of these problems faced by crypto
taxpayers. From keeping everything in their record to helping you arrive at a cost
basis, they can do everything. That is why it is a good idea to hire one and have
them start recording your income and expenditures.
With the records kept by a professional accountant for cryptocurrency, you will
be at much less risk when you file for crypto taxes. An IRS audit can create a lot of
problems for you especially if you don’t have transparent records.
Having an accountant onboard is a great way to keep your assets safe without
paying a huge amount in taxes. Everything will be managed seamlessly, and you will
have a clearer estimate of how much you need to pay in taxes.
Author Bio:
Mark Robert Buckingham is a Crypto tax accountant and founder of
www.ResultsTaxAccountants.com. He’s on a mission to help crypto investors,
traders, DeFi participants, miners and businesses avoid crypto tax and accounting
headaches and frustrations. Mark’s free Cut-Your-Crypto tax blog is:
www.ResultsTaxAccountants.com/blog.
