When it comes to cryptocurrency trading and taxes, there’s a crucial error many are making—assuming that the Internal Revenue Service (IRS) is in the dark about their transactions. This oversight, as pointed out by Shehan Chandrasekera, a Certified Public Accountant (CPA) and the head of tax strategy at CoinTracker, could lead to severe repercussions including audits, penalties, and even criminal charges.
The IRS is Watching: Understanding Your Tax Obligations
Contrary to what some believe, the IRS is well-equipped to track cryptocurrency transactions, regardless of whether these digital assets are exchanged for cash or not. As the IRS treats virtual currency as property, all transactions, gains, and losses are taxable events that must be accurately reported. Failing to do so is a gamble that could cost traders dearly.
For those trading through centralized exchanges like Coinbase, forms such as the 1099-MISC are issued for earnings of $600 or more, automatically notifying both the trader and the IRS. However, relying solely on these exchanges for tax reporting can be a misstep, especially for those trading across multiple platforms or using self-custodial wallets. Exchanges only have insight into the activities within their own systems, potentially overlooking or misrepresenting external transactions.
Keeping Meticulous Records: The Key to Compliance
The responsibility of maintaining comprehensive records of all crypto transactions falls squarely on the trader. This task, while daunting, is essential for accurate tax reporting. Crypto tax software tools like CoinTracker and Koinly can be invaluable in this regard, helping traders track their activities across various platforms and ensuring the correct tax forms are generated.
How Crypto is Taxed
Understanding how the IRS taxes crypto is crucial. All virtual currency transactions are subject to capital gains and losses taxes. This means if you sell crypto for more than your purchase price, you owe taxes on the profit, categorized as either short-term or long-term capital gains depending on the holding period. Conversely, selling at a loss can provide a deductible against your taxable income, offering some relief in less favorable trading outcomes.
Navigating Crypto Taxes Wisely
The evolving landscape of cryptocurrency taxation underscores the importance of staying informed and prepared. By acknowledging the IRS’s capabilities and taking proactive steps to accurately report all crypto transactions, traders can avoid the pitfalls of non-compliance. Proper record-keeping and the use of dedicated tax software not only ensure peace of mind but also safeguard against potential legal and financial consequences. As the crypto market continues to mature, so too should the approach of those who navigate it.
