The Top Mistake Made by Cryptocurrency Traders During Tax Season

“Many people harbor the misconception that cryptocurrency activities are off the radar for regulatory scrutiny,” Chandrasekera informs CNBC Make It. “In actuality, the IRS has multiple methods at its disposal to detect if you’ve engaged with crypto.”

Omitting to declare your profits, losses, or revenue from cryptocurrency trades on your tax return could result in serious repercussions, including audits, penalties, interest on due taxes, and in extreme cases, criminal charges, as per information available on CNBC’s website.

Keep in mind, the IRS requires that all taxable events from your cryptocurrency activities within the financial year be reported during tax filings, irrespective of the size of your profits or losses.

When utilizing a major exchange like Coinbase, and you generate an income of $600 or more annually, the exchange will issue a 1099 miscellaneous form to both the taxpayer and the IRS, which you can learn more about on Coinbase’s educational page.

Still, according to Chandrasekera, users of central exchanges must not depend solely on these platforms for accurate reporting of their crypto finances, particularly for those who trade across multiple platforms or perform transactions from their personal self-custodial wallets.

“These platforms only track the activities within their eco-system,” he points out. “Tax forms provided by them can be incomplete or incorrect as they do not account for a user’s external transactions.”

This makes it imperative to maintain precise records for accurate crypto tax reporting to the government.

It’s your responsibility to document all profits and losses meticulously.

Tracking every cryptocurrency transaction and the specific values of each coin at the time of purchase and sale can be a challenging task.

Cryptocurrency tax software like CoinTracker or Koinly may be of assistance in organizing a thorough record of your crypto activities, and they can even automatically generate the necessary tax documents, as discussed by Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth, with CNBC Make It.

As per the IRS website, digital currencies are categorized as property for the purposes of federal income tax. This classifies cryptocurrency transactions under the capital gains and losses tax rules, which are generally taxed differently compared to ordinary income. For a deeper understanding, one may explore the topic on CNBC’s resource.

If you purchase and later sell crypto at a higher value, you’ll incur capital gains taxes on the proceeds. For example, buying crypto for $100 and selling it at $300 results in a taxable gain of $200.

Selling crypto held for less than a year triggers a short-term capital gains tax, whereas assets sold after a year fall under the long-term capital gains tax.

Conversely, if the sale price is below your purchase price, you’ll experience a capital loss. Should your losses exceed gains for the year, you can offset up to $3,000 of your regular taxable income with this loss. For instance, if you have $500 more in losses than gains, that $500 can be deducted from your taxable income.

For additional instructions on filing taxes with cryptocurrency assets, you can refer to the IRS’s FAQs on virtual currency transactions.

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