Becky
Editor
Editor
According to a survey by Insuranks, 22% of young adults don’t know how to file their taxes. Another survey conducted by SWNSdigital notes that 56% of young adults are intimidated by the tax filing process in general, with 28% noting that they aren’t looking forward to having to file and report their taxes.
Tax season can be complicated. With tax day coming up soon, the daunting task is inevitable. With even the smallest error leading to serious consequences, it’s important to get taxes done right, across all portfolios.
We spoke to three key accounting experts to find out the common mistakes that are made with filing tax (and the solutions to avoid making the mistakes!).
At a glance:
The IRS can see all of your crypto activity. Treat your taxes with this knowledge.
The IRS has robust mechanisms to monitor cryptocurrency activity, through both centralised and decentralised exchanges. Make sure you can record and report your crypto transactions thoroughly, whether through a crypto tax tool or with a practitioner.
We spoke to four cryptocurrency and tax experts to bring up the leading mistakes investors make with their tax filings – and the solutions to avoid making the issues yourself.
Many don’t realise that cryptocurrencies are seen as taxable assets, so they don’t record any crypto tokens or blockchain-based assets in their tax filings.
Carter Seuthe, the CEO of Credit Summit commented:
“One of the most common mistakes I see with cryptocurrency taxes is people not understanding that they even need to file tax for their crypto investments. I think this is an area that’s still new enough, many people find it confusing or unclear just what they’re responsible for when it comes to crypto in their portfolios.”
David Kemmerer, CoinLedger CEO has also seen many fail to record their cryptocurrency portfolio in tax because they don’t know that it’s taxable:
“I’ve found on many occasions, people believe that trading crypto to crypto does not incur tax, and only expect to pay tax on crypto to USD transactions. However, this is not the case—any transaction made with your crypto holdings will incur tax. It’s important to keep close records of all your crypto activity in order to present the most accurate picture of your portfolio and trading.”
The solution:
To avoid making the mistake of not recording crypto assets, it’s advised to work with a tax practitioner who has insight into crypto tax. This will help make certain that all crypto portfolios are being recorded accurately and honestly.
Filing tax before all documentation is ready often results in assets being recorded incorrectly. This means they’ll need to amend their tax submission after receiving the documentation. It’s not only a loss of time and resources but also can lead to inaccuracy and confusion.
Seuthe has noticed this, especially with the crypto investments:
“Another common mistake I’ve seen would be people filing their taxes before receiving relevant documentation for their crypto investments, and then needing to amend their submission.”
The solution:
Prepare in advance and make sure you have the documents needed to file your taxes.
Filing in tax can be complicated, especially with cryptocurrency fees and different records on transactions. Double accounting has been a mistake many have made, with transactions entered twice or multiple times, creating inaccuracies in the tax reports.
According to Mathilde Schmidt, CEO of Office Group Zug, Switzerland:
“I have found the most common mistake some of my clients make when I take over their crypto accounting, is double-accounting, entering the same transaction several times, as the ledger exports, fee structure etc. of decentralised exchanges can often differ from what you find in transaction records of the blockchains (such as through etherscan).”
The solution:
Schmidt advises that the best way to spot the mistakes is to use a crypto accounting tool or a system that lets you document crypto transactions with a note (such as an account number). When exporting at the end of one year, one should also make sure they thoroughly understand the structure of the various exports before inserting those into the respective journal entries.
While they are different from other cryptocurrencies, airdrops and hard forks are still taxable and can be treated as ordinary income. This means that the income needs to be reported at the market value of the asset when you take ownership of it. The IRS has issued guidelines on this, stating that the value of an airdrop or funds received from a hard fork is ordinary income and should be treated as such regarding your tax filing.
Spokesperson Scott Glover of Coin Insider commented on this:
“Alternative assets, beyond Bitcoin, are often perceived as exempt from the IRS’ view. It’s so important during tax season to recognise that any asset held can be taxed. Even though digital assets like airdrops are still a way from traditional regulation, they still count when it comes to tax.”
The solution:
Even if an airdrop is received as a gift, make sure you are taking note of and recording all digital currencies as income. Read up on IRS guidelines or work with a tax practitioner to understand what can and can’t be taxed.
Under Publication 544, the IRS states that any losses incurred by cryptocurrency assets and trades are required to be filed using Form 8949 and 1040 Schedule D. Claiming crypto capital losses can allow you to deduct them from your capital gains or income, which can reduce your tax liability.
The solution:
Take note of what the market values of assets are at the beginning and end of tax seasons and record all capital gains AND losses.
