The popularity of cryptocurrencies has increased significantly in recent years. Whether you sell crypto, exchange it for another digital asset, or use it to make a purchase, understanding crypto tax ramifications is crucial.
Cryptocurrencies are classified as intangible assets, akin to equities and bonds when it comes to taxation. Much of its appeal stems from the fact that it is a decentralized medium of exchange, which means it functions independently from financial institutions, banks, or other central institutions like governments.
There is no tax evasion, even in the world of crypto. Hence, it’s important to file your taxes appropriately and in compliance with the regulations of your country to prevent any legal complications.
Here are six smart ways to calculate your Crypto taxes.
1. Use a Crypto Tax software
Crypto tax software is a tool that computes the tax you owe and provides a report for you automatically. It streamlines the tax filing process and makes it easy to file your taxes in a short amount of time.
When it comes to selecting crypto tax software, there are several alternatives available. However, it is important to remember that the best crypto tax software is typically the one you pay for. While many software vendors provide free versions, the functionality of their free plans is often limited.
A paid version of crypto tax software may offer additional benefits and features, such as the capability to import transactional data from different exchanges and automatic computation of gains and losses. In addition, premium software typically offers superior customer assistance, which can be essential if you face problems or have queries regarding your tax responsibilities.
2. Record and Track All of Your Crypto Transactions
Keeping proper and detailed records of your crypto transactions is critical. Maintaining thorough records, such as the amount received or paid, the purchase date, and the transaction fee, can assist you in determining the cost basis of your assets and adequately calculating your profits or losses.
The information will be beneficial when assessing how much money you’ve gained or lost due to the process. When the tax deadline approaches, finding all this information retrospectively might be challenging. Some cryptocurrency exchanges can assist you in tracking your transactions, but they may not have all the information you want.
3. Use FIFO, HIFO, or LIFO Method
FIFO, HIFO, and LIFO are different approaches for calculating crypto gains and losses. First-in-first-out (FIFO) is regarded as the most conservative accounting approach. It is the methodology most traders utilize to compute capital gains. The first crypto you buy is the first crypto that is tallied for sale in FIFO.
In the HIFO (highest-in, first-out) method, the crypto with the most extensive cost basis is sold first. It results in the most negligible capital gains and splendid capital losses. Therefore, it can be utilized as a tax-minimizing strategy. On the other hand, last-in-first-out (LIFO) means that the last cryptocurrency you purchase will be your first to sell.
The best accounting approach for you may vary depending on market conditions. Using LIFO during rising crypto prices will almost certainly result in much lower overall taxable gains. In comparison, FIFO will almost certainly produce better results during declining pricing.
4. Use a Crypto Tax Calculator
Calculating crypto tax can be difficult, especially as your portfolio grows. However, using a crypto tax calculator can simplify the task and save you time while reducing errors.
Instead of manually calculating your crypto tax, a crypto tax calculator can do most of the work for you. These calculators work well with wallets and exchanges, consolidating all of your transactions and assisting you in calculating your tax obligations based on those transactions. The best cryptocurrency tax calculators are designed to make the process seamless.
5. Consult a Crypto CPA
A crypto-certified public accountant (CPA) is a tax professional who specializes in cryptocurrencies. It might sometimes be challenging to comprehend how taxes apply to your crypto holdings, and a CPA can assist you in filing appropriately. If calculating your tax bills for a year of cryptocurrency mining, trading, and lending seems overwhelming, it may be wise to delegate the task to a professional.
Many CPAs are unaware of the complexities of crypto taxation. You should ensure they have digital currency expertise if you opt to hire one. When contacting prospective accountants, enquire about their familiarity with cryptocurrencies and pose particular inquiries concerning crypto tax regulations. If they possess crypto, it is a good indicator that they are interested in grasping crypto taxation.
If you operate a cryptocurrency-related business or get your primary income from crypto assets, ensure your CPA is well-informed about business-related tax processes and sophisticated trading outcomes.
6. List Your Transactions
Taxes on your cryptocurrencies are not required for every transaction but are obligatory in certain instances. Listing all taxable and non-taxable transactions separately to establish your tax obligations would be best. For example, if you receive crypto as payment for services or goods, it is considered income and subject to income tax rather than being considered for capital gains. Therefore, separately listing your different transactions makes your calculations easier.
Conclusion
The real-world value of cryptocurrencies has pushed the asset into the taxable zone, meaning everyone who earns or trades crypto must keep the tax authorities informed. Despite many people being opposed to these relatively new regulations and laws, it is essential to keep track of your crypto assets so that you can know what to declare to the tax authorities to prevent any penalties.
