Thinking of getting into cryptocurrencies? Top 10 Crypto Tax Mistakes to Avoid

Depending on the month, day, hour or minute that you check the news, you might think that investing in cryptocurrencies or getting paid in cryptocurrencies is the the best idea since sliced ​​bread or the worst possible use of your money, forever. If you agree with Warren Buffett that the cryptocurrency has “worthless“Or do you think the value of Bitcoin will rise to $ 300,000 In 2022, there is one thing about cryptocurrency that is not up for debate: Getting it right on tax returns has never been more critical.

The IRS is aggressively working to identify and eradicate United States taxpayers who are required to report cryptocurrency transactions, but who misreport or omit cryptocurrency entirely on their tax returns. Understanding the tax implications of buying, selling, trading, or earning cryptocurrencies has never been more important. We’ve identified ten common mistakes made when reporting (or not reporting) cryptocurrency transactions to the Internal Revenue Service, and we’ll detail how to avoid each mistake in its own article. Finally, we will finish the Top 10 Crypto Tax Mistakes to Avoid series with tips for the IRS on how to better reach taxpayers who are making crypto tax mistakes and how to get those taxpayers back into compliance. As a tax litigator, it is my job for the Monday-Morning Quarterback how the taxpayers and their tax professionals did it the first time. This series aims to help people get it right from the start or identify potential mistakes that may need to be addressed.

Number 10: Incorrectly reporting cryptocurrencies received from airdrops, forks, and splits

“Air-drops, forks, and splits” may be foreign terms for novice cryptocurrency investors, but it’s important for anyone venturing into this area to quickly become familiar with them, as they have tax implications. Resolution of Income 2019-24 specifically addresses these thorny issues, and we will help you resolve the complexities of these events and how they affect your tax filing requirements.

Number 9: Do not report crypto-to-crypto transactions

It is common for cryptocurrency investors to exchange one cryptocurrency for another in a coin-to-coin transaction. It is important to understand that these are taxable events and how they should be reported.

Number 8: Using the wrong form to report cryptocurrency transactions

Are you paid in cryptocurrencies? Did you trade a car for crypto or vice versa? Are you simply investing in cryptocurrencies? Are you mining crypto? Each of these potential transactions may require a different IRS form to accurately report the transaction and calculate the tax consequences.

Number 7: Incorrectly reporting cryptocurrencies received as income from work

Cryptocurrencies received in exchange for the provision of services are not taxed in the same way as the sale of cryptocurrencies for investment. We will explore and explain the proper tax treatment of cryptocurrencies as income.

Number 6: Failure to report the exchange of cryptocurrencies for goods and services

Thinking of paying for your new outdoor furniture from overstock.com on Bitcoin? As more and more retailers accept crypto, taxpayers must understand the tax implications and reporting requirements associated with paying in crypto.

Number 5: Failure to prepare and maintain adequate records (or none!) That reflect crypto transactions

As with any sale or exchange of taxable property, contributors You must be able to establish a basis on an asset, including cryptocurrency, to calculate the profit or loss and the resulting tax due. Taxpayers who don’t keep good records can find themselves paying taxes on the sale of cryptocurrencies as if they had no basis in the asset. Taxpayers must resist the temptation to be carried away by laziness and assume that all records will be available electronically when it comes time to file taxes.

Number 4: Not correctly calculating cryptocurrency gains and losses

Did you lose money on cryptocurrencies? Losses can and should be reported to the IRS just like gains, and losses can fully outweigh the tax consequences of the gains. But if they do, taxpayers must still report the transactions. Cryptocurrency investors are not solely required to report and pay taxes on earnings, and should include profit and loss when calculating taxes due.

Number 3: Using Similar Exchanges to Report Cryptocurrencies

To be fair, this is not something I have seen any of my clients do. But because cryptocurrencies held as investment are required to be reported as property, it makes sense that cryptocurrency-for-property exchanges, such as a Tesla or the exchange of Bitcoin for Ethereum, should qualify for a similar exchange under. section 1031 of the Internal Revenue Code. Unfortunately, this is not the case.

Number 2: Failure to take proper steps to transfer your cryptocurrency in the event of death or disability

Do your loved ones know how to access your cryptocurrency accounts? If you die or are disabled, the value of your cryptocurrency may well be included in your taxable estate, even if your loved ones cannot access or unlock the value of that asset. We’ll explore best practices to make sure your loved ones aren’t left cleaning up their crypto clutter without any access to the asset’s value.

Number 1: Do not report the cryptocurrency at all

By far the worst mistake, whether intentional or not, that taxpayers make when it comes to taxes and cryptocurrencies is not reporting crypto transactions. Carolyn Schenk, National Fraud and Counseling Advisor in the Assistance Division of the IRS’s Office of Chief Legal Counsel, put it this way when addressing crypto investors who do not report income: “We see it.”

Putting it all together

As I am not the Commissioner of the Internal Revenue Service, I cannot decide how the IRS will handle increasing and improving the scope to taxpayers who should report cryptocurrency transactions on their tax returns, and I cannot decide how the IRS will do that. those taxpayers comply. But as a tax litigator, I have a lot of ideas about how I think the IRS should achieve these goals. We’ll end our series with a close look at how the IRS has been handling outreach and enforcement thus far, and what we’d like to see in the future.

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