The Top 5 Mistakes Made When Doing Crypto Taxes
Getting your crypto taxes done can be a cumbersome and frustrating process. This is because the data that makes up your crypto buys, sells, trades, transfers, mining income, forks, splits, air drops, wallet transactions, and all other crypto activity is likely scattered across many different platforms and exchanges. This makes aggregating all of this data difficult.
Crypto tax software is built to simplify this process. However, even with the help of software, many traders often make mistakes when building out their crypto tax reports. After helping thousands of crypto traders prepare accurate tax reports, we decided to put together a list of the most common mistakes that we see made—hopefully this will help you avoid making the same ones!
The 5 Most Common Mistakes
1. Not including ALL years of trading history
This is an understandable mistake. If you are preparing your reports for just 2018, why would you need to upload/ include data from previous years?
Turns out that it is ESSENTIAL to include all years of trade history. This is because your cost basis is determined based upon when you initially acquired the cryptocurrency asset. If you bought Bitcoin in 2016 and used it to trade in and out of some other exchanges throughout the years, it will be impossible to accurately report what your cost basis is for other crypto assets without including the data behind that initial buy.
Your reports will not be accurate without including all years of data.
2. Not including data from all of the exchanges you traded on
It’s equally important to include history from every exchange that you traded on—not just one. This may seem counterintuitive to some people, especially those who received a 1099-K from Coinbase, but it is impossible to create an accurate tax profile without data from everywhere that you transacted.
3. Ignoring crypto received from forks, splits, & air-drops
This is another common mistake made by traders who have not kept track of the tokens that they have received from splits, air-drops, or hard forks. If you are using crypto tax software to automatically generate your tax reports, you need to show the software how you acquired these tokens. Failing to classify them as forked/ air-dropped coins will make it look like they just appeared out of thin air within your account or wallet. Then when you go to trade or sell these coins, the software will alert you that you are trying to sell something that you don’t own (because you never told it that you own them).
This is a tricky problem to solve, but it can easily be remedied by inputting your forked, air-dropped, and split coins as an incoming transaction within your crypto tax software account.
4. Ignoring crypto received as income
Similar to the above, it is important to classify crypto received as income for tax purposes. Income is treated differently than simply trading crypto. If you mined crypto or were compensated in crypto from a job or service you completed, this should be inputted as income with the date and time that you received it.
Failing to include your income data will lead to inaccuracies in your tax reports.
5. Not realizing that you can save money by filing your crypto losses
While crypto gains are taxable, crypto losses can be used to reduce your taxable income. Many crypto investors do not realize that they can actually save money by filing their crypto taxes if they experienced losses.
We wrote an entire article detailing the crypto loss tax process here.
Have a good understanding of how to avoid common crypto tax mistakes now? Get started building your cryptocurrency tax reports with CryptoTrader.Tax today.
Simply bring these reports to your accountant, file them yourself, or upload them into your favorite tax software like TurboTax Online!
*This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own crypto tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.