The world of cryptocurrency is still new, and it’s challenging to be sure you’re doing everything correctly. But to avoid ending up in hot water, you must file your crypto taxes correctly. In this article, we’ll walk through all the necessary prerequisites.
Set up perfect accounting.
You need to keep track of your cryptocurrency transactions and report them correctly on your tax return.
There are many different ways that you can do this, but it’s essential to choose the method that works best for your situation. For example, one common mistake is using an Excel spreadsheet or other software to track each transaction and calculate gains/losses manually. That is not recommended because it can lead to errors when reconciling accounts at the end of the year.
Instead, we recommend using dedicated accounting software so that all information is automatically imported into one place whenever there’s a change in value. Of course, a good accountant should also be able to help set up these kinds of tools.
Understand the regulations in your jurisdiction.
Before you start, it’s essential to understand the regulations in your jurisdiction.
For example, do you have a capital gains tax? Are cryptocurrencies being taxed based on their classification as an investment or currency? How much do you owe, and how will it be calculated?
Find out from your government what taxes are applicable, what forms need to be filled out, and any deadlines for filing them.
Choose the right software for filing crypto taxes
Choosing the right tax filing software is crucial to ensure you file your taxes correctly and on time. As with any other software, there are a few things to look for when selecting a crypto tax automation tool.
- Convenience: How easy it will be to use the software once you’ve installed it and created an account. You want something that will take less than hours upon hours of reading documents just so that you can figure out how something works. It should be intuitive enough to start without knowing anything about cryptocurrencies or blockchain technology.
- Ease-of-use: While this doesn’t necessarily mean simplicity, it does mean figuring out what each feature does quickly without needing instructions. It doesn’t benefit users if there is too steep of a learning curve to filing crypto taxes. Thankfully, most service providers ensure a smooth process.
Follow simple steps to file your crypto taxes correctly.
It’s an important step, especially if you’re planning to hold onto your crypto long-term. Additionally, the IRS investigates thousands of people who have not adequately reported their cryptocurrency activity.
Cryptocurrency tax laws have been in flux since their inception, making it difficult for many people to determine what they need to report and pay taxes on. In 2016, the IRS released an official announcement stating that cryptocurrencies are property rather than currency. That classification means any income generated from trading or selling them is taxable.
Many people trade cryptos using platforms known as exchanges. Those act like stock markets but allow users to buy/sell/trade digital currencies with one another. Those activities are crucial while filing crypto taxes.
Conclusion
Whether you are a crypto trader or investor, keeping track of your profits and losses is crucial to ensuring you don’t pay unnecessary taxes.
Filing your crypto taxes can be easy and stress-free by following the tips outlined above and using the right tools.
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