Crypto is here to stay but there are still many myths about how crypto tax works. Crypto taxes are complex worldwide, with different regulations and quickly changing rules. We are here to demystify all the doubts.
From knowing how exactly crypto is taxed to how tax authorities track your crypto portfolio, discover the top 9 crypto tax myths and how to solve them!
The top 9 crypto tax myths
Find out the top crypto tax myths, how to avoid them, and become crypto tax compliant!
1. Can crypto be tracked for taxes?
Tax authorities around the world, including the IRS, have the tools and human resources to track crypto portfolios and fine those who do not accurately report their taxes.
A common myth is that Bitcoin and crypto trades are anonymous. But with the blockchain and certain tools, everyone, including tax officers, can identify and track unreported trades from taxpayers.
2. How is crypto taxed?
Many people still believe that cryptocurrencies are not taxable assets. But the truth is most crypto transactions are taxable.
In very few countries are gains from crypto trading not taxable. In most countries, from the US to Australia or the UK, profits from crypto trading are taxable similarly to stock trades.
If you trade crypto, you have to report capital gains, while if you earn crypto income, you’ll have to report that in a different way. Discover how to report crypto taxes and which tax forms you need.
3. Airdrops and hard forks are not taxable
It may seem unfair, but if you receive crypto from airdrops or hard forks, even if you didn’t ask for it, you have to report the Fair Market Value (in USD) of the crypto you received as income at the time of your receipt.
If the price of the tokens declines after you receive them from an airdrop/hard fork, you can sell the token and recognize a loss.
But if they gain in price, and then you sell them, you’ll be taxed on the gain based on a capital gains tax rate instead of an ordinary income tax rate.
4. Will I get audited if I don’t report crypto?
Yes, the IRS may send you a letter with the amount of taxes due, but if you also misreport or there is some suspicion of your crypto tax submission, you may get audited.
When you don’t report crypto, you open yourself up to potential fines or harsher implications. It’s easier to import your trades, track your gains, and submit your crypto tax reports with the help of a crypto tax tool like CoinTracking.
5. Do you have to report crypto under $600?
If you have made crypto trades in the US, you have an obligation to report the gain/loss on each trade, regardless of whether it’s under or over $600.
You have to report your gain/loss from every crypto trade, even if it is under $600 in the US. If you receive crypto income under or above $600, you’ll also have to report it at the time you received it, and you’ll be taxed at an income tax level.
6. If you don’t sell crypto, you don’t have to do any tax reporting
In the US, even if you don’t sell/trade crypto, you still have to answer the crypto question on Form 1040 (the US Individual Income Tax Return). However, if you only buy crypto with fiat during the year and hold it, you don’t need any extra crypto tax reporting.
However, if you received any crypto income, even if you didn’t trade any crypto that year, you’ll need to report that crypto on your income tax return, and you’ll be taxed according to an ordinary income tax rate.
7. You can’t sell and immediately buy back the same crypto
In the US, the wash sale does not apply to crypto, allowing you to sell a cryptocurrency at a loss and immediately buy it back at a lower price.
This strategy is commonly employed when traders need some losses to offset other capital gains, but this practice is not allowed with stocks.
8. Trades on a decentralized exchanges are not taxable
Some traders believe that if you trade crypto on decentralized exchanges, trades are not taxed. However, that isn’t the case, as any crypto trade is a taxable event in the US.
If you trade crypto on DEXs or other DeFi protocols, you’ll need to report the gain/loss on each of those trades, taxable at a capital gains tax rate, from 0% to 37%, depending on your holding period.
If you earn crypto income from DeFi vehicles (e.g., staking rewards), you’ll be taxed at an ordinary income tax level, and you will need to report that income on your individual tax return.
9. Can taxes be avoided with crypto?
Yes, you can legally reduce your crypto taxes by crypto tax loss harvesting, holding crypto in the long term (over 12 months) and getting a long-term capital gains tax rate, donating crypto, and some other measures.
You can pay zero taxes on crypto if you move to a crypto-tax-free country or reduce crypto taxes by moving to a crypto-tax-friendly state if you’re in the US.
The best crypto tax software: CoinTracking
The best crypto tax software in the market is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.
Crypto taxes with no errors: CoinTracking Full Service in the US.
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.