I’m a Certified Accountant — Don’t Make These 5 Tax Filing Mistakes on Crypto Earnings
Written by
David Nadelle
Edited by
Nicholas Morine
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Despite the word “currency” in its full name, there are many people who treat digital cryptocurrency differently than traditional earnings and assets, especially when tax time rolls around.
Presuming that the Internal Revenue Service (IRS) isn’t able to detect digital transactions — and that they consequently don’t need to be reported — is the No. 1 mistake crypto traders make, according to certified public accountant and CoinTracker tax expert Shehan Chandrasekera.
“People still think that crypto is kind of invisible to regulators,” Chandrasekera told CNBC Make It. “Truthfully, there are so many ways the IRS knows you’ve had something to do with crypto.”
Everyone who files a Form 1040 (Individual Income Tax Return), 1040-SR (U.S. Tax Return for Seniors) or 1040-NR (U.S. Nonresident Alien Income Tax Return) has to report all digital asset-related income — convertible virtual currency and cryptocurrency, stablecoins, non-fungible tokens (NFTs) — when they file their 2023 federal income tax return.
Not receiving a 1099 miscellaneous form shouldn’t be taken as a reason to avoid declaring cryptocurrency activity on your income tax return, and you shouldn’t rely on 1099s sent from centralized exchanges that trade across different markets or platforms, using their own self-custodial wallets, said Chandrasekera to CNBC.
As crypto mining multiplies and digital currency gets adopted by more Americans, regulations pertaining to tax filing will get easier. But it’s smart to understand the tax implications now. Here are five mistakes you don’t want to make when filing crypto earnings and transactions.
1. Not Filing Crypto Transactions at All
As mentioned above, anyone who interacted with cryptocurrency in the past year — received, sold, sent, exchanged or acquired interest — will need to report this activity on their taxes. The IRS updated Form 1040 to include a mandatory question at the top for the 2022 tax year.
Assuming (or hoping) that the IRS will never know about transactions involving digital assets and failing to report them can have severe consequences. In the U.S., it can lead to fines and penalties (up to $100K) or even jail time (up to 5 years), according to CoinTracking.info.
2. Not Treating Crypto as Property
In the U.S., cryptocurrencies are taxed as property rather than currency, meaning all sales will be subject to tax regulations concerning capital gains and capital losses (and don’t try to report losses only!). Additionally, getting paid in crypto is seen as the same as getting paid in fiat currency. It’s viewed as ordinary income and it’s subject to income tax.
3. Failing To Report Crypto Exchanged for Goods and Services
To confuse matters, when you make a purchase with crypto, it’s also considered a sale “because you’re effectively selling a portion of your holdings to cover the cost of the purchase,” according to Charles Schwab. “People don’t think of shopping as a taxable event, but it can be if you use virtual currencies,” said Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research.
4. Not Reporting Cryptocurrency From Airdrops, Forks and Splits
According to the IRS, taxpayers must report newly received income from the creation of a new cryptocurrency, including that collected through airdrops (a marketing strategy in which a developer distributes new tokens to raise awareness and build a loyal base of followers), forks (kind of like a “software upgrade for the blockchain” which “becomes a currency’s new set of standards,” per Coinbase) and splits/hard forks (when code changes are major, permanently splitting the blockchain into two differently valued types of blockchains and coins or tokens).
5. Not Keeping Accurate Records
Regardless of how deep you dabble in crypto, keeping an accurate record of your transactions (amount, time and date) throughout the year will help greatly when it’s time to calculate your tax liabilities and file.
“Clients rarely keep records or even have an idea of everything they’ve done related to it,” said Justin McCormick, senior associate in the digital assets group at Founders CPA, as reported by Illinois CPA Society. “It’s often like trying to put a puzzle together.”
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