Don't Make These 2 Crypto Mistakes on Your Taxes

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The April 18 tax deadline is less than two weeks away. For many Americans, it will be the first time they will need to report cryptocurrency transactions to the Internal Revenue Service.  

It's a process that can be tricky, especially if you aren't familiar with the rules. In particular, there are two misconceptions that commonly trip up crypto investors come tax time, says Austin Woodward, a certified public accountant and CEO of crypto accounting platform TaxBit.

Misconception No. 1: Cryptocurrency is anonymous

Woodward often has to clear up the belief that cryptocurrencies are "anonymous," he says. Many people think that if they bought only $250 worth of crypto and sold it at $350, the $100 profit is small enough that they can get away with not reporting it.

But failing to report crypto gains could result in a lengthy IRS audit and possible fines, Woodward says. The IRS has "a lot of infrastructure and teams in place to go after known cryptocurrency users that don't report," he says. Investors need to be diligent and transparent about their crypto holdings, no matter how small.  

Misconception No. 2: You only need to mention your crypto transactions on your taxes when you turn your cryptocurrency into dollars

Crypto investors also commonly think that if they never exchanged their crypto for fiat currency, then they don't need to mention it on their tax return, Woodward says.

However, there are a number of other taxable scenarios that need to be reported. Here are a few examples:

  • You exchanged one cryptocurrency for another (e.g. you traded your bitcoin for ether)
  • You received interest on your holdings if you have a crypto savings account
  • You received any amount of cryptocurrency as a gift
  • You used crypto to make a purchase

The first item taxpayers will encounter on their 1040 forms after filling out their contact information is a question asking if "at any time during 2021, did [they] receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency."

"If you just bought it and didn't sell anything, you can actually answer 'no' to that question because you do not have any taxable gains or losses to report," Woodward says.

But if you bought and sold cryptocurrency, or otherwise spent your crypto or exchanged it for other digital tokens, you must respond "yes."

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