If crypto were a celebrity, you could describe its journey as a surprising rise from obscurity to cult classic to mainstream appeal, and you could even go so far as to say it’s in danger of being overexposed.
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Members of the first family even launched their own meme coins earlier this year to decidedly mixed reactions. Now, everyone’s paying attention to cryptocurrencies — including the Internal Revenue Service.
Tax agencies worldwide are ramping up their abilities to track crypto transactions, and it’s happening right here at home, too. Crypto investors need to understand the tax liabilities of their favorite digital assets, because the government certainly does.
It’s not as easy to avoid scrutiny or keep your crypto activities, well, cryptic anymore, so you’ll want to be sure to pay any taxes you owe on your crypto gains. Here’s a look at three tax mistakes many crypto investors make that can lead to audits, penalties and other not-very-fun things.
Even if you’re keeping kosher with the IRS, your state tax collector will want a word as well. Federal taxes aren’t your only liability. States and even some local jurisdictions have their own rules regarding cryptocurrency taxation, which can vary significantly.
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Even someone with serious student loan debt and a bunch of degrees might have a hard time calculating capital gains and losses on their crypto transactions. The herding-cats cliche seems appropriate, considering the frequency of trades serious investors make. Make sure you double-check your dates and decimal places, because mistakes here can really cost you.
Crypto investors often make mistakes when determining their cost basis, or the original price they paid for an asset. That figure is what’s used to calculate your profit or loss, and if it’s not accurate, you’re going to have a bad time. Under-report, and you underpay; over-report, and you pay more than you should. Choose neither.
Common cost basis errors include:
Using the wrong acquisition date: Confusing the date of a transfer with the date of the original purchase can lead to an incorrect cost basis.
Improper lot accounting: You might think all of your cryptocurrency exists in one big pile for tax purposes. It doesn’t. You have to track the specific units you sold — for instance, Bitcoin you bought last year as opposed to Bitcoin you bought 10 years ago.
Not including transaction fees: For tax purposes, you should include purchase or sale fees in your cost basis.
Improperly accounting for forks and airdrops: Don’t forget to track your cost basis after a hard fork or airdrop.
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