Top 7 Crypto Tax Mistakes: How to Avoid Common Crypto Errors

Top 7 Crypto Tax Mistakes 

When it comes to cryptocurrency and U.S. tax law, it can get very complicated for Taxpayers who have cryptocurrency-related income. One of the key issues that make crypto taxes more complicated than other types of income taxes, is the fact that cryptocurrency is technically not categorized as currency under U.S. tax law. Therefore, cryptocurrency transactions are taxed differently than other types of transactions. There are many mistakes that taxpayers understandably make when it comes to cryptocurrency income-related matters, but let’s take a look at seven (7) of the most common types of cryptocurrency tax mistakes so that you can avoid them going forward.

Selling Cryptocurrency is Taxable

The first thing to keep in mind is that when a person sells cryptocurrency, it is a taxable event. Similar to selling a home or other asset, you take the value on the date the asset was purchased and the value on the date was sold and if there is any gain then you pay tax on the gain. If you have any carry-forward losses from other years or losses in the same year it may reduce or eliminate any income tax

Exchanging Cryptocurrency is Taxable Too

When a person exchanges one cryptocurrency for another cryptocurrency that could be a taxable event. To determine the tax liability, a person will look at the fair market value along with the basis of the cryptocurrency that was exchanged. This can be a bit of a complicated concept because most people who utilize cryptocurrency on a daily basis use it as though it is regular currency but it is important to remember the United States does not recognize cryptocurrency as currency. For tax purposes, it is considered property.

Crypto as Income (Employment Taxes)

If a person receives cryptocurrency as employment income, then the taxation of that cryptocurrency is taxable like how your paycheck would be taxed (aka income tax). In other words, just because you received cryptocurrency for employment does not mean you get to apply capital gain rates to income tax. In addition, even though cryptocurrency is being used as employment income, there may also be Social Security and other related taxes.

Airdrops are Taxable as Income

As we’ve discussed before on this website, unfortunately even though it may feel like a gift,  from a US tax perspective air drops are taxable income and they are taxed as ordinary income.

What if You Cannot Get Your Exact Crypto Information?

Another common misconception is that if a person is unable to obtain all of the necessary information to 100% accurately report their cryptocurrency, they are better off not reporting it. In fact, even if a Taxpayer is unable to exactly establish the basis or fair market value of certain cryptocurrency transactions, it is still required to be included on the tax return. When a person does not report the cryptocurrency simply because they do not have entirely accurate information that could lead to a much bigger headache than estimating.

Hard Forks as Income

The taxation of hard forks boils down in part to the timing. When the taxpayer has dominion and control over the cryptocurrency as a result of a hard fork will determine when taxation may come into play. Also, whether or not a person uses a crypto exchange or not may impact when they actually have dominion or control over the new cryptocurrency.

Cryptocurrency Voluntary Disclosure

If a person is out of compliance for failing to report the cryptocurrency, all hope is not lost — there are various paths they may take in order to get into compliance. Whether or not the cryptocurrency is domestic or foreign and whether or not the taxpayer is willful or non-willful will impact which amnesty program they qualify for. Taxpayers should consult with a Board Certified Tax Law Specialist to get a better understanding of what their options may be.

Golding & Golding: We Specialize in Offshore and Voluntary Disclosure

Golding & Golding specializes exclusively in international tax and specifically, IRS offshore disclosure. 

Contact our firm today for assistance with getting compliant.