4 things you should know about crypto taxes before the April 15th deadline
There’s a good chance that you will actually reduce your overall tax bill by properly reporting everything.
Tax season is officially in full swing as we are now a month and a half out from the U.S. April 15th deadline. For those who have been investing or trading in cryptocurrency, tax reporting can be a little extra stressful as reporting all crypto taxable events can be challenging and tedious.
For this reason, it’s beneficial to understand some of the nuanced tips and tricks that can save you time and money when filing your crypto taxes this year.
Maintain records of each exchange or crypto platform you traded on
One of the biggest challenges for crypto traders doing their tax reporting is collecting all of their necessary records. To properly report your gains and losses from your crypto trading, you need to have records of each time you bought, sold, traded, or otherwise transacted. For this reason, it’s vitally important that you maintain records of each exchange you use. If you have used many different exchanges throughout the years, take a moment to account for each one and list them out.
Your losses can reduce your taxes
Some investors believe that if they have net losses overall on their crypto investing activity that they don’t need to report these losses. This is untrue, and it also causes them to miss out on the tax savings that capital losses bring. TurboTax Premier is a product specifically designed for investors so if you’re into crypto you should look for that or consult with a tax expert.
Just like if you were to lose money when trading stocks, capital losses from your cryptocurrency transactions deduct from your capital gains and income. In effect, they reduce your taxable income and put money back in your pocket!
If you realized losses throughout the year from trading crypto, these losses can and should be used to offset other capital gains as well as up to $3,000 in ordinary income. Keep in mind, you need to “realize” these gains to be able to write them off on your taxes.
1099-K’s and other documents from exchanges aren’t helpful
Many investors ask the fateful question, does Coinbase report to the IRS? The short answer is yes. However, cryptocurrency exchanges like Coinbase aren’t able to provide their users with accurate gains and losses reports—which is what is needed for tax reporting purposes. This is problematic for users.
By nature of the blockchain technology that exchanges operate on, users are able to send Bitcoin and other cryptocurrencies from one wallet to another, irrespective of the original exchange or platform. An example of this would look like you buying Bitcoin through Coinbase and then sending it to a Binance wallet address to acquire new coins and assets.
Because you can send cryptocurrencies from other platforms onto exchanges like Coinbase at any time, Coinbase has no possible way of knowing how, when, where or at what cost you acquired that cryptocurrency that you sent in. Coinbase only sees that it showed up in your Coinbase wallet.
This means that anytime you move crypto-assets off of, or onto, an exchange like Coinbase from another location, Coinbase completely loses the ability to provide you with tax information that you need for capital gains and losses reporting. This is because the exchange has no way of identifying what your cost basis is in that certain cryptocurrency, which is an essential piece to figure out your capital gain or loss. This is true of all other major cryptocurrency exchanges.
The solution to this problem is to aggregate all of your cryptocurrency data across all of the platforms you use so that you can then build your holistic tax reports. You can also ask an online tax expert from TurboTax Live about crypto tax implications in New York, Chicago, San Francisco, or wherever it is you reside.
You can automate the reporting process with crypto tax calculators
Crypto tax calculators exist to automate the cryptocurrency tax reporting process. A number of them exist in the marketplace today all serving the same purpose. Users can simply import all of their historical transactions from their cryptocurrency exchanges and other platforms in the calculator. The software then does all the number crunching and spits out your required tax forms for you.
All in all, tax season is upon us. When you mix in crypto tax reporting along with all of your normal W2 forms and such, things can get a little more complicated; however, it is still manageable as long as you take your time, and bring all of your records together. There’s a good chance that you will actually reduce your overall tax bill by properly reporting everything.
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