The tax filing deadline — April 18 — is looming, but many crypto investors seem to be ill-prepared to file taxes on their earnings, according to a new survey. This knowledge gap can lead to inaccurately filed tax returns, potentially resulting in crypto investors paying too much or too little in tax.
The new survey, by CoinTracker, finds that a staggering 40% of U.S. crypto investors don’t even know paying taxes is required for selling cryptocurrency for fiat currency — and 48% did not know that selling or trading an NFT is a taxable event. More surprisingly, 96% of respondents had not filed their tax returns as of March 27, 2022, possibly because of the widespread confusion surrounding crypto taxes, the survey found.
CoinTracker’s head of tax strategy, Shehan Chandrasekera, told GOBankingRates the fact that 40% of the crypto-investing population didn’t know about the tax obligations when cashing out is surprising. “I would say lack of education and awareness related to crypto taxes are arguably the main contributing factors,” Chandrasekera said.
The survey also found that when it comes to calculating taxes on their cryptocurrency activities, an overwhelming 84% of crypto investors are not completely confident that they know all they need to.
“Cryptocurrency taxes are complicated, and especially trying to do them by hand without the support of crypto tax software is a daunting challenge,” Chandrasekera said. “It’s therefore not surprising that the vast majority of cryptocurrency users are unprepared to file their taxes.”
Given a list of possible cryptocurrency situations that require paying income tax, just 3% of those polled got all answers correct, leaving 97% with at least one wrong answer. For example, 58% don’t realize they need to pay taxes when trading one type of cryptocurrency for another, or when using cryptos to buy a good or service or service (64% of respondents got this latter question wrong).
Chandrasekera explained that one of the most important things for crypto investors to know is that cryptocurrencies are taxed as property by the Internal Revenue Service (IRS).
“This guidance has been out since 2014. If you have any taxable events, you should report them on your taxes accurately and pay taxes. If you have cryptocurrency losses, you can claim them on your taxes and receive a higher refund in some cases,” Chandrasekera said.
Common Taxable Events Involving Crypto
Common taxable events include: cashing out crypto, crypto-to-crypto trades, spending crypto to buy goods and services, earning crypto (wages, interest, staking, mining income) and crypto airdrops.
In terms of the most common difficulties for crypto investors, it’s that they have a responsibility to reconcile their crypto activity across exchanges and wallets and calculate the correct capital gains or losses.
“This is often a very difficult task to do manually due to various reasons,” Chandrasekera said. “It is virtually impossible for an average taxpayer to keep detailed records of all the data required to file accurate tax forms. To correctly file tax forms, they need to know the purchase date of each coin, sale date of each coin, name and the quantity of each coin they sold, how much they paid for the coin (cost basis) and the market value at the time they sold the coin.”
He added that investors also have to know the right tax rules to apply for somewhat complex crypto transactions such as airdrop, staking or lending.
New Investors Learning About Crypto Taxes
Mark Homza, co-CEO and co-founder of Funday, told GOBankingRates that when it comes to tax planning for cryptocurrencies it’s no different from a capital gains tax on your public equity investments.
“The pandemic increased the volume of retail investors participating in the public market, many of which traded for the first time and had to adapt to new tax implications,” Homza said. ” It’s a learning curve no matter which market you enter for the first time, but there are a few upsides to cryptocurrency investing. In relation to tax implications, while you will be taxed if you transfer your crypto to another or choose to lock in your gains, if you choose to store earned capital on an exchange or in a digital wallet your crypto investment will not be taxed.”
He added that despite tax implications, cryptocurrencies allow a larger volume of the global population to participate in the market — and to access an array of new portfolio diversification opportunities.
“As regulation becomes more clear around cryptocurrencies and new investors begin to familiarize themselves with the nuances of the digital assets space, tax parameters and activities will become far more understood and seamless,” he said.