5 Biggest Mistakes To Avoid When Filing Taxes for Crypto

Many cryptocurrency investors don’t view crypto in the same light as other capital assets, such as stocks. Whereas stocks trade on public exchanges and represent ownership in real companies, cryptocurrency can seem like a video game at times, as it’s a digital asset that can be extremely volatile.

Bitcoin and Crypto Taxes in 2022: What You Need To Know
See: Best Undervalued Cryptocurrencies To Buy for 2022

But in the eyes of the IRS, buying and selling cryptocurrency incurs the same tax consequences as any other financial asset. Here are some common mistakes investors make when it comes to filing taxes for crypto.

Probably the most common mistake when it comes to crypto tax filing mistakes is to disclose transactions. Generally speaking, you can’t even buy cryptocurrency at major financial services firms, meaning most crypto transactions take place on smartphones and mobile platforms, often with no commissions paid. This environment gives crypto trading a gamelike atmosphere, with investors trading in and out in an effort to get the highest “score,” or account balance. Add to this the fact that most crypto trading platforms didn’t even report transactions until very recently and it’s almost understandable that many investors fail to disclose transactions. However, this could have serious financial ramifications down the road, so it’s imperative you report all of your crypto gains and losses.

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Cryptocurrency is something of the “Wild West” when it comes to the investing world. This was particularly true a few years back, when keeping track of crypto transactions was relatively unheard of. Even now, many firms don’t track crypto buys and sells in investor accounts with the same accuracy as stock trades, leaving the onus on investors to keep their own records. As the IRS is beginning to crack down on cryptocurrency transactions, it’s imperative that you locate and record the cost basis of your crypto transactions. Without a cost basis, you won’t have any idea of your gains or losses when you sell your crypto, which could prove to be problematic at tax time. Although this isn’t likely to happen, the IRS can theoretically assume that your cost basis is zero if you can’t prove otherwise, leaving you liable to taxation on the entire amount of your sales proceeds.

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As many fintechs are trying to drive business to their crypto trading platforms, many offer new users a sign-up perk of some free crypto. They may also pay rewards for referring other users to the platform. When these rewards appear in your account, a taxable transaction occurs, as the IRS defines these payouts as income. Even if your firm doesn’t report this transaction to the IRS — and it might not, as crypto reporting is generally lax — you are still legally responsible to declare it to the IRS as income.

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One of the reasons crypto taxation is complicated is that it’s often used on a transactional basis. More and more merchants are accepting Bitcoin as payment for goods and services, and this can unknowingly create a tax headache for users. In the eyes of the IRS, when you use Bitcoin to pay for a cup of coffee, for example, you’re technically converting it to cash and paying the merchant. This results in a potentially taxable transaction. If you’ve used Bitcoin to buy coffee once, it’s likely that you’ve done it tens, hundreds or even thousands of times, creating a lot of paperwork for you at tax time. This one is easy to overlook because unlike a stock transaction, which requires a clear purchase and sale, using crypto to buy something from a merchant just seems like a credit card transaction, not a taxable event.

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Mining Bitcoin may not be a traditional job, but in the eyes of the IRS, the rewards you receive from it are definitely taxable income. Currently, Bitcoin miners earn 6.25 Bitcoins for mining a single block, worth about $272,000 at current levels. This is ordinary income that the IRS expects you to include on your tax return. Depending on how your business is set up, you may even have to pay self-employment tax on those Bitcoin rewards. If you are simply an employee at a cryptocurrency mining organization, the payout you receive from that work — even if it’s in the form of crypto — is similarly taxable.

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