Five Tax Tips for Crypto Investors to Follow
Although tax season comes every year, it still seems to take many people by surprise. This year government around the world are expecting individuals to pay taxes on bitcoin and other cryptocurrencies. Yet, while some companies are rolling out cryptocurrency-reporting tools for accounting and tax purposes, cryptocurrency tax calculation and reporting remains a relatively new and challenging endeavor. We put together a few recommendations on how to avoid stress and missing deadlines and have a smooth tax season:
Try to get a head start on your taxes to avoid anxiety resulting from procrastination and last minute decisions. In the US, filing early usually results in early refunds for those who do and gives a chance for those who actually owe taxes to prepare pay.
Keep Good Records
It is very important to keep good records throughout the year, even more so when you deal in cryptocurrency. You may receive questions from your bank, tax authorities or other institutions in the future. For instance, you may be asked to provide proof that you have acquired your declared assets legitimately. This is why you have to at least keep the following: bank statements with crypto-exchanges, (mining) wallet transactions, and a trading history on your exchanges.
Use Tools to Keep Track
In many tax jurisdictions, such as the United States or the United Kingdom, individuals pay taxes on every trade they make. That is why it is important that you keep track of all potentially taxable trades and, more importantly, that you have a clear insight into how much tax you owe over a fiscal year. There is software out there that can help you with tracking. Our recommendation is to use CoinTracking. CoinTracking analyzes your trades and generates real-time reports on Profit and Loss (P&L), the value of your coins, realized and unrealized gains, as well as reports for tax purposes. You can sign up for free and quickly learn how to use this tool on its website.
Cash Out Liquidity
Having calculated your tax liability, it is important to set this total amount aside, even though the amount does not have to be paid immediately. But running risks with the amount of tax debt is highly discouraged. Here is an example. Suppose you made $10,000 profit in 2018, and you owe 15% tax on this to the U.S. tax authorities. You will therefore owe $1,500 to the tax authorities over your profit in 2018. Suppose you make the mistake of not reserving the debt amount and you continue to invest. What if you have half of your $10,000 in profit left in 2019 ($5,000)? The moment the deadline is reached, you must (still) cash out the amount of your winnings. Now you cash out $1,500 (debt amount) over your $5,000.
In this case, you actually cash out 30% of your profit. Effectively, you have not paid 15% profit tax ($1,500 over $10,000), but 30% ($1,500 over the remainder of your profit $5,000). Needless to say, this can also go the other way, you may end up with higher profits, but why take an additional risk?
It has been a tough year for Bitcoin, which dropped from its peak price of over $16,000 all the way to below $4,000 in 2018. Needless to say, there were many unprofitable trades. In many cases, losses from unprofitable trades can be deducted from your total payable tax. This is why it is important to track all trades and calculate the taxable amount. If the taxable amount of a trade is negative, you can deduct it from your taxable profits.
In addition to losses, there are also expenses that can be deducted from your total taxable amount. Therefore, it is important to also map out your non-investment related expenses. You could be pleasantly surprised, as non-investment related expenses can include medical, childcare, charitable contributions, and education related expenses.
Get Professional Advice
Many successful investors have their own lawyers, accountants, and investment advisors. Clearly, this is not always necessary, but it is a good idea to consider how professional help can contribute to your financial situation. Although professional advice can be pricy, it may be able to save you money and time in the long run and give you peace of mind. That is of course, if the professional you hire is good. Word of mouth is one of the ways to find a reputable professional.
Text by Contributor @CryptoCountant