National tax agencies have recently made it clear that the long arms of the law will be wielded to ensure bitcoiners pay the appropriate tax on their earnings. Motivated by surging interest in crypto, authorities are cracking the whip and instilling fear in those who have, until now, dismissed the notion that they might be pursued for tax on their trading.
Also read: IRS Dispels Crypto Tax Confusion
A Taxonomy of Crypto Tax Requirements
Quantifying gains and losses on cryptocurrency purchases, and determining which transactions are liable to tax (and which kind of tax), has long been a challenge for individuals operating in this space. Compounded their dilemma was a complete lack of direction from authorities, which have been slow to develop an understanding of the cryptosphere and tighten their regulations accordingly. In light of recently published guidance, and the spate of ensuing news coverage, however, anyone found to be willfully dodging tax cannot reasonably claim ignorance of their obligations.
Which isn’t to say that managing your crypto tax affairs is now a walk in the park – far from it. The complexities of hard forks, token sales, airdrops, mining and the heterogeneous nature of exchanges (property for crypto, BTC for ETH etc) throw up no end of questions, and every country has its own rules. Figuring out the tax due on your crypto transactions over the course of a year, particularly if you are a busy investor, can be a bit like trying to solve a riddle wrapped inside an enigma, concealed within a conundrum.
Maintain Accurate Transaction Records
To summarize: if you have bought, sold, sent or received digital currency in recent years, you should have been maintaining comprehensive records of your activity. It’s impossible to know just what percentage of cryptocurrency holders have dotted their i’s and crossed their t’s, but given that the IRS recently mailed over 10,000 letters warning of stiff penalties for those who fail to pay tax on their transactions, the suspicion is: not all. Not even close.
And blatant evasion isn’t the only reason for that. Another is that, historically speaking, many accountants have been unwilling to familiarize themselves with crypto-accounting directives. That’s why, in the last few years, an entirely new subset of accountancy firms have entered the market, targeting the crypto niche. Specialist software such as cryptocurrency tax calculators and automated accounting programs have also appeared, promising to help you report gains and losses more accurately.
While working out tax due on crypto investments is tricky, record-keeping itself isn’t. It’s mainly laborious and punishingly dull – a matter of faithfully recording the date and time each crypto asset is acquired, its market value at the time, the date and time each asset is sold, exchanged or otherwise disposed of, the market value of each unit when it is sold, exchanged or disposed of, and the value received for each unit. Better start populating a spreadsheet.
As with any transactional enterprise, consistent, accurate record-keeping will stand you in good stead when it’s time to file your tax return. Don’t leave it until the last minute.
How Crypto Tax Software Can Simplify the Process
Traditional accounting systems simply aren’t equipped to deal with virtual currencies, which are famously volatile and differ in key ways from fiat money. Maintaining accurate accounts, therefore, requires a lot of legwork if you assume the burden yourself.
As mentioned, hiring a specialist senior tax accountant or utilizing crypto tax software can help you navigate the daunting landscape and satisfy the circling wolves. Most tracking programs allow you to import CSV files of your trades direct from exchanges, and review real-time dashboards so you can track your obligations from month to month. Accountants, meanwhile, can negotiate with tax agencies on your behalf to resolve any queries or disputes, and their experience may prove invaluable if your obligations encompass hundreds of trades across multiple platforms, involving disparate tokens. Even contemplating such reporting liabilities is enough to induce a headache.
With tax authorities now looking to work with exchanges to identify those who have bought and sold crypto, it’s time to start paying the piper if you haven’t already. Every single trade you make in the cryptosphere is likely to impact tax calculations in some way. Speak to a tax professional, invest in tracking and management software, or – providing your trading history is relatively straightforward – do it yourself. Godspeed.
What crypto tax tools do you recommend? Let us know in the comments section below.
Images courtesy of Shutterstock.
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The post How to Navigate the Minefield of Cryptocurrency Taxation appeared first on Bitcoin News.
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