This article highlights three common tax mistakes made by cryptocurrency investors: neglecting state and local tax obligations, inaccuracies in calculating capital gains, and failing to report all taxable events. It emphasises the importance of understanding various taxable transactions and correctly determining cost basis to avoid audits and penalties from tax authorities.
Cryptocurrencies have evolved from niche investments to mainstream assets, attracting significant scrutiny from tax authorities, including the IRS. As the landscape of digital assets continues to expand, investors must become aware of the associated tax obligations to avoid legal repercussions. This article outlines three common tax mistakes made by crypto investors that could result in audits and penalties.
Firstly, state and local tax obligations must be acknowledged in addition to federal taxes. Each jurisdiction may impose its own regulations governing cryptocurrency, leading to substantial variation in tax liabilities. Therefore, investors should be well-informed about local crypto tax laws to ensure compliance and avoid potential fines.
Secondly, inaccuracies in calculating capital gains can lead to significant tax errors. Investors frequently encounter challenges determining their cost basis — the original purchase price of an asset. Errors may arise from using incorrect acquisition dates, failing to account for specific units sold, neglecting transaction fees, or inadequately tracking costs after forks and airdrops. Each of these oversights can lead to either over-reporting or under-reporting gains, which can severely impact tax responsibilities.
Lastly, many investors overlook the necessity to report all taxable events. It is a common misconception that only cashing out equates to a taxable event. However, various transactions trigger tax implications, such as:
– Selling cryptocurrency for fiat currency
– Trading one cryptocurrency for another
– Using crypto to purchase goods or services
– Receiving crypto as income from any source
– Mining cryptocurrency
– Earning staking rewards
Understanding these principles is crucial for crypto investors to minimise risks and maximise compliance with tax regulations. Engaging with a tax professional can also provide valuable insights to navigate the complexities of cryptocurrency taxation and ensure accurate reporting for the upcoming tax year.
