If you’ve purchased and sold cryptocurrency in the past year, you may have some questions for the upcoming tax season. While crypto transactions must be reported, the difference between crypto taxes and regular income that you include on your tax report is where people have the most trouble. Are you looking to make sure that you’re reporting everything correctly to the IRS when it comes to your crypto? If so, here are three major differences between crypto taxes and old-school taxes.
1. You will need specialized crypto tax software to report gains.
For your regular tax reporting for income and other items on your tax return, you most likely rely on tax software TurboTax. However, these types of programs don’t work on digital assets. Instead, you will want to turn to crypto tax software to scan through your accounts and wallets (whether you use hot wallets on Coinbase or a desktop wallet), calculate your tax liability based on when you bought your coins and when you sold them, and produce a CSV that you can use to determine what you need to report on your tax forms. Some of the best crypto tax software includes companies like ZenLedger, CryptoTrader.Tax, and TokenTax, just to name a few. With the right software on your side, reporting your profits or losses will be simple.
2. Everything is easier to track when you’re using cryptocurrency.
When you’re working on your regular tax return, having materials like tax supplies can really help you keep everything in one place. Whether it be tax folders, tax return envelopes, or the tax forms you rely on to report your taxes, staying organized is crucial to managing your finances and responsibly reporting your earnings. That being said, since cryptocurrency is completely digital, does it function the same?
The great thing about cryptocurrency is that all of your cryptocurrency transactions are stored on a public ledger supported by blockchain technology. This immutable ledger tracks and records every transaction made on the blockchain, making it easy to find the transactions in the event of an emergency. Otherwise, most wallets and major exchanges will easily export your transaction information to a convenient CSV file on your computer so that you can report your cryptocurrency taxes more effectively. Whereas traditional taxes tend to produce a lot of paperwork, all of your cryptocurrency information can be stored on your desktop or laptop.
3. Cryptocurrency spending isn’t treated the same as fiat currency.
If you’re a trader, you’re probably familiar with the fact that trading your cryptocurrency incurs capital gains taxes. But what fewer may know is that any type of spending is actually a taxable event as well. Unlike fiat currencies, spending your digital currency is seen as trading in the eyes of the IRS. This means that you have to pay close attention to the price of your crypto when you first purchase the assets and how much it’s worth when you spend it.
Granted, the amount you pay will depend on what type of accounting method you use (FIFO, LIFO, etc.). You can learn more about how to handle these transactions when you’re working with a tax professional or tracking capital gains on your virtual currency while using your crypto tax tool.
As a crypto trader, crypto tax reports can seem foreign in comparison to traditional taxes. The good news? Learning how to report for the previous tax year begins with educating yourself more about crypto taxes and what you should expect when you undergo the process of calculating cryptocurrency gains and losses. If you want to make sure that your tax reporting experience goes smoothly, start with the three differences offered above!
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