Tax season can be stressful, especially for crypto investors. The complexity of tracking cryptocurrency transactions, calculating gains and losses, and staying compliant with ever-evolving regulations can be difficult. However, with a bit of preparation, you can make tax season with your digital assets a breeze.
6 Essential Tips to Stay Ahead of the Curve
- Organize Your Transaction Record: Saving detailed records for all of your crypto transactions is crucial. This includes the dates, amounts, values at the time of transactions, and the purpose of the transaction (buying, selling, trading, or using for goods or services). Use a reliable crypto portfolio tracker or accounting software that can handle complex transactions across multiple exchanges and wallets. Blockchain explorers may provide downloadable Excel files to help you get started.
- Understand Taxable Crypto Events: Not all crypto transactions are taxable. Generally, taxable crypto events include selling crypto for fiat, trading one digital asset for another, and using crypto to purchase goods or services. Transfers between your own wallets usually aren’t taxable but must be documented. Understanding these distinctions can save you from unnecessary panic and ensure accurate reporting when filing your annual income tax returns. Additionally, creating a list of all your wallets and utilizing blockchain explorers can help identify transfers/sales.
- Calculate Your Gains and Losses: The IRS requires you to report your crypto gains and losses. You can use methods like First In, First Out (FIFO) or Specific Identification to calculate your capital gains. You must be consistent with your chosen method within a given tax year. Accurately calculating gains and losses is essential when determining your taxes on cryptocurrency, tax liability and doing proper tax planning.
- Stay Updated on Crypto Regulations: Staying up to date on current tax laws, related Treasury Regulations, and other legislation and pronouncements is crucial For example, the Treasury recently issued final regulations under Reg 1.6045 and its related subsections in June, outlining long-awaited guidance on the new Form 1099-DA reporting of digital asset transactions and clarifying who is considered a broker or dealer required to adhere to these documentation requirements. We plan to address these regulations in a future article.
We recommend subscribing to crypto tax blogs and podcasts, following industry experts’ newsletters and social media pages, and consulting with a tax provisional who specializes in crypto and digital asset reporting, to ensure you are compliant with the latest rules. - Consider Professional Help: Given the complexity of tax on crypto, consulting with an experienced crypto-savvy accountant is invaluable. They can help you navigate the nuances of the digital assets tax law and ensure that your tax return is accurate and complete.
- Plan for Next Year: Once you’ve filed your taxes, take the time to plan for next year. Consider strategies like tax-loss harvesting, which involves selling underperforming assets to offset gains, and setting up systems to track your transactions efficiently throughout the year.
Following these tips can streamline your tax preparation process and avoid last-minute stress. Remember, proactive tax planning and staying informed are key to effectively managing your tax situation.
How Withum Can Help?
If you’re feeling overwhelmed, our Digital Currency and Blockchain Technology Services Team at Withum is here to help. We specialize in crypto tax preparation and can guide you through every step of the process. Contact us today to learn more!
Author: Mohammed Bari | [email protected]
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