Tax is one topic that could snuff the joy out of an average trader. However, as with it is with all regulatory reform relating to crypto, traders ought to take this topic seriously. A nonchalant attitude towards your trading activities and how much you owe as tax could come back to hurt you. Take the case of a Swedish trader, for instance, who just found out that he owed as much as $900,000 in taxes after trading crypto for 3years.
Unfortunately, cases like this are becoming rampant as governments have intensified their efforts to impose tax laws on crypto. As such, the only way to avoid this situation is to adhere to tax laws in your region. Nevertheless, this sound simpler than it really is and the unclear nature of most tax laws globally continues to haunt the crypto community. In light of this, there is a need for traders to follow basic practices that would help them become tax compliant.
Tips You Should Consider While Preparing Your Tax
Have A Record Of All Your Activities On Exchanges
For traders, exchanges are where we do all of our businesses and therefore, it is important that you have a record of your trading history. This comes handy when you are filing your tax return as it will ensure that you are not leaving any important piece of information out. Having a history of your trades would also help you state your case in the event of an investigation.
Although blockchain and crypto promise a level of secrecy that banks do not, yet, you should know that exchanges are bound to give information to the government when they request for it. They fear tax regulators as much as you do and would rather comply with them than get burnt. So, do the needful and save yourself from the hassles that come with being on the wrong side of tax laws. Tracking your trading history is quite simple as a majority of exchanges have features that would help you export it.
While tracking your trading history is simple, tracking your crypto income, on the other hand, could turn out to be a daunting task. Regulators often treat these two cases differently, however, your earnings in the form of crypto are taxable. Therefore, it is imperative that you keep a record of all the crypto you earned from side gigs and crypto mining as well as the dates you received each. This involves a bit of diligence and commitment as it is easy to lose count of crypto income.
Keep Records Of Crypto You Receive As Income
Get Familiar With Calculations Of Loss And Gains In Crypto Investment
With the advent of various crypto tax calculating software, it has become a tad easier to calculate gains and losses. However, for those who prefer doing this calculation manually, it is not as hard as it looks. To do this calculation manually, you should use the formula below;
Fair Market Value – Cost Basis = Capital Gain / Loss
What Is The Cost Basis?
When calculating gains and losses from crypto trading, cost basis refers to the amount the coin was worth when you acquired it. In other words, it is the value of the coin in your local currency when you bought it.
What Is The Fair Market Value?
In the crypto world, fair market value is the amount in your local currency you sold the coin for in the crypto market.
From the definitions of the two variables, you would agree with me that it is important to note the value of your coin, especially when you acquired it as well as its value when you trade it. However, if you have not paid attention to this, there are various ways to fish out this information since you have a record of the date and time of each trade.
Employ The Services Of Crypto Tax Analysts
As you must have seen, tax reporting is pretty straightforward, particularly for people that have comprehensive records of all their activities. Nevertheless, this might not be the case for individuals that own multiple crypto exchanges accounts or those who have muddled up their records and are uncertain over some details. For these people, the best solution is to employ the services of a crypto-specialized CPA.
Opting for this will make things a lot easier and it would take the workload off you. Nonetheless, prepare to fork out a few hundred bucks to get this done, having someone else help you do your dirty work might not come cheap.
Learn To Take Advantage Of Tax Incentives
In some countries, tax laws are not as stringent as you would expect and identifying the right way to capitalize on this would help you save money. In the US, reporting capital losses could slash the amount you are to pay on your capital gains, particularly if you incurred heavy losses. So, it is crucial to know the nitty-gritty of your country’s crypto tax laws.
As traders, we often revel in the fact that we are part of something that is truly innovative. Regardless of this, we should not forget that paying taxes is our duty and although it is not fun, there are lots of tools and platforms offering you a stress-free way out. When it comes to tax, ignorance is not an excuse.