Filing Crypto Taxes - As Fun as Getting a Root Canal

Filing your crypto tax return can be tricky as rules are changing. This guide covers taxes on sold crypto, tracking trades, documentation needs, reporting gifts/mining, and strategies like tax loss harvesting and more...

Filing your crypto tax return! With rules changing frequently, proper reporting is vital. This article covers the top things to be aware of, such as taxes on crypto sold for dollars and tracking trades. Preparing your crypto taxes correctly is of utmost importance in some nations, so the key points and tips in this guide aim to help inform... But please note tax regulations differ depending on how crypto-friendly your country is towards its citizens. Let’s take a look.

Taxing Crypto

We start with the first things first, and take a look at exactly when the taxman comes knocking on the door. Are all transactions that I make taxable events? Is any crypto-to-crypto or crypto-to-fiat trade a taxable event? We take a look at when we must report our buying and selling and properly keep track of our transactions to help ensure correct tax filings.

Crypto to Fiat Transactions

One transaction requiring disclosure is exchanging cryptocurrency held for legal tender, like selling Bitcoin on an exchange for dollars or euros. Please carefully log all sale details - such as trade dates, purchase prices paid, amounts received - in an organized record for later.

This documentation supports accurate capital gains/loss reporting to tax authorities and also protects you down the road just in case an audit occurs. Taking the time to properly track specifics pays off versus scrambling for missing info when tax season arrives. We see that keeping clear records eases future filing stress.

Crypto to Crypto Transactions

Besides cashing out crypto into legal tender, transferring between digital currencies also requires tax disclosures. This goes against the nature of permissionless systems but if caught without proper reporting, you may only have permission to go to a place called jail.

Documentation includes trading one coin for another, such as swapping Bitcoin for Ethereum. You need to report any exchange of one cryptocurrency for another, including stablecoin swaps on money markets or decentralized exchanges.

These "crypto-to-crypto" trades result in capital gains/losses taxes, similar to when converting to cash. To avoid headaches, be certain to keep detailed records of all your digital token trades well organized for later tax filings.

All Crypto Deposits and Withdrawals

Under new rules soon to be implemented across Europe, each time crypto is moved between accounts must also be tracked. Whether transferring digital coins into exchanges to trade or withdrawing funds out to private wallets, transfers require documentation.

Both deposit amounts into exchanges and withdrawal amounts out need to be logged. Some exchanges will already keep this information and will be happy to provide it to regulators when requested. Be sure to note transfer dates, coin quantities, and wallet IDs for compliance purposes.

Documenting crypto transactions properly is now vital with increasing tax clarity. Maintain meticulous records of capital activities with appropriate software or spreadsheets. This documentation will aid during tax filing season to report accurately and potentially reduce audits from tax authorities whose goal is ensuring compliance...

What About Spending Crypto

Spending crypto to buy goods also triggers taxes. Tax authorities treat it as if you first sold the crypto at market price. So any profit over the initial cost makes a capital gain, similar to selling. Please be sure to inform yourself beforehand if you intend to buy a house or boat with crypto only. Read our article below to learn more about how your transactions are treated in your specific location.

Are Crypto Gifts Taxable?

Receiving crypto as a gift has no tax implications for the recipient. However, the giver must report the fair market value intended for the recipient. The inherited cost basis is key for the recipient's later capital gains calculations if they sell. Again, proper reporting and documentation are required.

What about Crypto Mining?

Crypto mined is considered taxable income, as it is seen as equivalent to salary/wages. The fair market value at receipt must be reported as income. In other words, the value of coins mined equals taxable income.

Taxes on Crypto Staking Rewards

Tax rules regarding crypto staking income remain ambiguous. The IRS has provided little guidance so far. For now, receiving additional crypto from staking likely means taxable income based on fair market value when received. However, it is still unclear whether staking generates new assets or simply reshuffles existing ones. It's advised to follow the same rules as for cryptocurrency mining for now.

Taxes on the dollar… cost averaging

When you sell cryptocurrencies that were purchased over time with set amounts, taxes require tracking each purchase separately. The price paid for every "batch", also called a "lot", sets its unique cost basis.

Two common ways to track sold lots are FIFO (First In First Out) and LIFO (Last In First Out). Under FIFO, the earliest purchased lots at the lowest cost are considered the ones sold first. LIFO treats the newest, highest-cost lots as sold instead.

FIFO potentially results in faster realized gains due to lower starting costs. Using LIFO could delay taxes by designating higher-priced lots for sale first. Pick one approach and apply it consistently when reporting.

What Information Will Need To Be Reported?

When reporting ALL crypto activities, key details must be disclosed. This includes how much was received from each sale, the initial cost of what was sold, sale/trade dates, and capital gains or losses in the local currency.

Even with exchange forms providing some records, it is essential to maintain careful notes of all crypto transactions yourself. The amount and type of information required may vary depending on an individual's tax residency location.

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Main Things to Know About Crypto Taxation in The EU?

Portugal - Crypto is treated as currency, not property. No capital gains tax unless your income comes from professional crypto trading.
UK - Cryptocurrencies fall under financial activities, making any gains taxable. Rates are based on annual income (e.g. staking rewards taxed as normal income). Capital gains tax percentage depends on overall profits.
Germany - Crypto is treated as intangible assets. Gains up to 30% tax but holds of 1+ years get exemption.
France - Also intangible assets, around 30% on gains. Crypto-to-crypto trades are non-taxable.

Tax treatment varies significantly across EU nations. Understanding local regulations is important for crypto holders in each jurisdiction. Proper documentation and reporting help avoid issues down the line. If taxes are on the horizon, be sure to ask legal advice to a tax lawyer or accountant specialized in taxing crypto in your region.

Tax Strategies For Crypto Gains

Understand Your Tax Basis

The most important strategy is knowing your cost basis and tax lots for each coin. With this information, you can make trades that optimize taxes. You can use accounting software to view aggregated cost basis across exchanges, both centralized as decentralized for planning.

Tax Loss Harvesting

Tax loss harvesting means selling coins at a loss to offset previous capital gains. Using accounting tools, identify coins to sell and recognize losses to potentially reduce the overall tax burden for the year. Please note this strategy may not be applicable in all jurisdictions.

Long-Term Holdings

For long-term holdings, understand your tax basis should you eventually sell. You may have opportunities to harvest losses in underperforming coins while maintaining your core long-term portfolio. Hold assets for over a year to potentially qualify for lower long-term capital gains tax rates, or consider investing for longer holding periods instead of frequent trading.

Importance of Tax Planning

Taking proactive steps like implementing tax-loss harvesting, setting funds aside for payments, or exploring donor-advised options can help optimize taxes legally. You should evaluate tax consequences before cashing out and always consult specialists to clarify complex areas such as DeFi and staking.

Consulting a Crypto Tax Professional

A specialist can analyze your unique situation and suggest additional strategies tailored to your goals. Many cryptocurrency tax experts offer their services and help ensure all transactions are reported correctly to avoid potential issues with tax authorities. An audit, while potentially costly, may be the safer option than unexpected tax burdens later.

Common Crypto Tax Mistakes

We’ll take a look at some of the most common errors and mistakes when it comes to filing your cryptocurrency taxes:

Failing to Report Crypto Taxes

One of the largest mistakes made is not properly documenting all crypto activities or not reporting them at all. You must make a habit of keeping precise records of purchases, sales, trades, gifts received, mining rewards and any other taxable events, as this is crucial for accurate tax reporting. Without clear notes, filing taxes becomes exponential more difficult.

Do not neglect to report any taxable crypto income. Failing to submit earnings risks penalties, interest, or potentially even criminal charges, as tax authorities expect complete reporting to collect owed taxes. While you can dispute amounts owed, non-compliance often has costs.

Incomplete Data

Forgetting to consolidate information from all crypto platforms (exchanges, wallets, etc.) can lead to inaccurate calculations. Combining details accurately determines cost basis and prevents phantom profits from off-chain transfers from being incorrectly reported as taxable gains.

Can You Claim a Loss for Stolen or Lost Crypto?

If your cryptocurrency was stolen or lost, you may be able to claim it as a theft loss deduction on your taxes. However, there are specific rules to follow. First, you'll need documentation proving you initially acquired the crypto with the intent of generating profit, like other investment assets. Tax code also now puts limits on how much of a theft loss can be deducted in a single tax year.

Your best course is consulting a crypto tax expert who understands the nuances of your particular situation and can advise the best approach legally.

Exchange Collapse Tax Implications

With the FTX bankruptcy ongoing, the tax treatment of losses from their collapse is still uncertain. According to experts, those affected should avoid claiming any deductions related to FTX on 2022 tax filings for now, as final loss amounts won't be clear until legal proceedings conclude.

It's best to remain patient and discuss with a specialist once more information emerges on how deductions may ultimately be handled within the tax code.

Conclusion

With increasing regulatory focus on crypto, properly reporting your taxes is important. Neglecting compliance is not advisable given enhanced monitoring. Using tax software automates much of the workload and can be a good starting point.

Be thorough - have returns reviewed by a tax professional and if needed, request extensions rather than submitting incomplete forms. Proper record-keeping supports accurate filing and protects you in case of any future audits.

Staying compliant keeps your options open in this growing market. With preparation, filing crypto taxes need not be overly complex or stressful.

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*Important Disclaimer: While every effort is made on this website to provide accurate information, any opinions expressed or information disseminated do not necessarily reflect the views of Bitfinity itself. The information provided here is for general informational purposes only and should not be considered as financial advice.