Beginners Guide to Cryptocurrencies and Taxes
Cryptocurrencies have fundamentally changed the way we operate. They present solutions to problems previously thought of as unsolvable and are offering a more efficient and inclusive financial system. It’s truly remarkable what these digital tokens have been able to accomplish in such a short time frame.
However, one area of cryptocurrency that hasn’t got nearly enough attention as it should, is filing your taxes when crypto is involved. The fact of the matter is, federal governments have been slow to provide guidance on what these digital assets are, how they should be classified, and how to properly file your taxes when you own one or more of them.
The IRS classifies all digital assets as a form of property, which essentially means your crypto holdings are very similar to owning a share in a company. What this means, is that should you decide to buy and sell digital currencies you’re going to owe capital gains on any profit you made. Which presents the problem of understanding what your “cost basis” (or in other words, what you paid for that crypto) is in order to determine what the value of it was when you sold.
Additionally, those who are buying and selling crypto’s on a regular basis need to be aware of the different tax rates of long-term capital gains vs short-term capital gains. Depending on how long you’ve held your cryptocurrencies for will determine what tax rate you pay.
Next, is the requirement to record all your crypto transactions. In order to file your taxes properly you’re going to have to keep a record of all the crypto transactions you made in the past year, to accurately determine how much money you gained (or lost). Keep in mind, if you’re mining cryptocurrencies, this will also have an effect on your overall tax filings.
Things get even more complicated for those who are swapping cryptocurrencies for other cryptocurrencies. Perhaps you’re even using your digital tokens to purchase something like an NFT. Well, remember, in the eyes of the law cryptocurrencies aren’t technically a currency. They’re property. Which means every time you swap a coin or use it to purchase something, this actually counts as you selling your cryptocurrency (potentially for a profit), which then means this transaction is taxable.
What’s the Best Way to File Taxes When I Have Cryptocurrencies?
For those looking for the most efficient option, there are multiple crypto tax accounting software out there, however, for the most part these systems have a history of being inaccurate and confusing to use. More specifically, they weren’t created to be user-friendly, and even worse, are notorious for having incorrect algorithms that are unable to properly track and process all the crypto related information needed to file your taxes.
In truth, although these softwares are showing signs of improvements, they aren’t the best way to file your taxes.
Rather, the most efficient way to deal with cryptocurrencies and taxes is to hire a crypto-specialized accountant. The regulations and requirements for those who are investing and using cryptocurrencies on a regular basis are extremely complex (and are changing rapidly). A specialized accountant within the crypto industry can provide invaluable knowledge as to how to properly file your taxes. It’s their job to understand the tax implications of trading, buying, staking, mining, swapping and any other activity you can do with your crypto.
The more active you are within the crypto universe the more important it will be for you to file your taxes properly. And even with properly documenting each transaction made, the process of filing your taxes when cryptocurrencies are involved remains overwhelming for many. Hiring a professional crypto tax accountant helps ensure your taxes will be accurate and filed on time. Plus, the time you’ll save by hiring a professional to file your taxes will be even more significant.
Everyone knows just how painful taxes can be, imagine having to throw all your cryptocurrency transactions and investments into the mix as well. Hiring a crypto tax expert takes away this headache.
Cryptocurrencies are the future of not only money, but how the financial system operates. But with all this innovation, leaves things complicated as to how to properly file your taxes. Governments have been slow to implement crypto focused legislation and the process of how to properly file your taxes when digital currencies are involved remains unclear at best.
There are solutions out there that allow individuals to file themselves. Yet, these crypto tax software’s have been unreliable and slow to respond to a quickly changing landscape. The more efficient (and painless) way to file your taxes, is to hire a crypto-specialized accountant, who understands the nuances involved in cryptocurrencies and taxes. Doing this not only saves you the headache of filing yourself, but allows you to sleep easy at night knowing your finances are in order.