Filing your taxes with cryptocurrency income or profits can quickly become a difficult process. Crypto trades can be complex with their transfers, mining, forks, splits, wallet spends and so on. These can occur on several different platforms, as well.
It can be difficult to bring them all together in one place to file, and while you can use tax software built especially for cryptocurrency traders, you still need to put in the right information first.
Here are some of the most significant mistakes people make, and tips on avoiding them.
Neglecting to include every year of your trading history
It’s an understandable oversight – if you are only preparing your tax return for the current year, why would you want to provide information about your trading history from last year or the year before?
In truth, it’s essential because you determine your cost basis based on when you bought your cryptocurrency holdings. If you bought a Bitcoin in one year, traded it through various exchanges the next, and then acquired more Bitcoins with the profits made, it would be difficult to determine your cost basis for the other cryptocurrency acquisitions without taking into account the cost of the first purchase.
Forgetting about cryptocurrency received from splits, forks and airdrops
If you’re using special tax software that automatically creates crypto tax reports for you, you need to know it won’t work properly unless you put in information about how you acquired the tokens that came your way through hard forks, splits and airdrops. If you fail to specify you acquired your tokens in these ways, it could look like they just appeared in your account out of nowhere.
If you attempted to sell those tokens, the software would tell you that you were attempting to sell tokens you didn’t own. The only way to correct this problem is to be careful to categorize split, forked or airdropped coins as incoming transactions in your tax software.
Forgetting about crypto currency income
For tax purposes, cryptocurrency you receive as income is treated differently from cryptocurrency traded on exchanges. Whether you are paid in cryptocurrency or you mine it yourself, you should remember to specify income as income, and not trade profit.
You should include the date and the time you received these coins as income, as well.
Neglecting to understand you can put in Cryptocurrency losses
Gains made in cryptocurrency trading are treated as taxable income. Losses made in Cryptocurrency trading, however, can be used to lower the taxable income you report. Far too many investors in cryptocurrency fail to realize they save money by filing their cryptocurrency taxes when they experience losses.
Neglecting to include data from all the exchanges that you used
It’s important to include correct and complete trading history for every exchange you’ve used, and not just one you used the most. It may seem strange you would need to include information from other coin exchanges, however, it would be impossible to create a full and complete tax profile without data obtained from every trading source.
Filing your taxes for regular money can be hard enough. When it comes to filing taxes for cryptocurrency trades and income, it can be slightly more complicated and educating yourself about the filing process is the best way to avoid mistakes.