This content was extracted from a webinar done back in March 2020 with Clinton Donnelly. Clinton is one of our tax partners when it comes to tax reporting for US residents and expats.
Reporting and filing cryptocurrency taxes is often a daunting task. This is especially true for high-frequency traders and aggressive crypto enthusiasts. The sheer number of transactions that need to be audited accounted for, and reported makes tax filing a humongous task.
We’ll discuss your options when it comes to dealing with crypto tax filing. We’ll quickly touch on:
- reconciling crypto transactions
- the consequences of not reporting your positions
- the method used for US crypto tax calculations
- how professionals and online crypto tax tools can ease the burden of calculating and filing your crypto tax returns
Reconciling Your Crypto Transactions
One of the biggest challenges calculating your crypto taxes is reconciling all your transactions from all wallets, exchanges, and other crypto platforms you’ve used. Looking into each transaction is critical because even the smallest and seemingly insignificant transactions can end up saving you money on tax costs when audited.
Tools such as ACCOINTING.com greatly help in reconciling your transactions. ACCOINTING.com gathers all data from all exchanges and wallets that you have. You can then have a bird’s eye view of your transactions on their dashboard. Internal transactions can be reported inside ACCOINTING.com. Transfers can also be easily classified using this tax tool.
It doesn’t matter if you’re a casual crypto enthusiast or a high-frequency trader – tax tools like ACCOINTING.com are helpful and excellent platforms to reconcile and manage your crypto transactions seamlessly and effortlessly.
2017 Crypto Activities – To Report or Not To Report?
Now, 2017 was a milestone year for cryptocurrencies. Some of the most significant crypto gains happened during this year. Hence, it’s no wonder that transactions, investments, and trading activities skyrocketed during this period.
It’s highly likely that you’ve engaged in several crypto activities during 2017’s crypto values boom. Should you disclose all your 2017 crypto activities to the IRS?
Here’s the thing – IRS is focusing more on the big fish players. This means that they’re after those who transact and trade with cryptos at a high frequency. Middle-sized and large crypto players will definitely be hunted, as seen in the IRS’ ability to identify 10,000 people to whom they previously sent letters. So, if you’re a huge crypto player, you should absolutely report all your 2017 crypto activities.
Meanwhile, small traders who had less than a hundred thousand dollars in 2017 crypto transactions can choose not to report every bit of their activities. Their main crypto activities are enough.
Note that the IRS isn’t really focused on smaller crypto traders and enthusiasts. However, many small traders are actually very conscientious. They want to report even the littlest crypto bits, but that would simply put an unnecessary burden on their shoulders.
Reporting Gains From 2017
It’s 2020 now, you reported some gains, but the IRS identifies that you did not report any income from 2017 when there really was something. They’re now hitting you with penalties. What should you do?
It’s best to consult with crypto tax professionals when you’re faced with this case. What you have here is an understatement of taxes. That’s why IRS is penalizing you now and putting late payment charges on your dues as well. Note that the penalties and late payment fees could add a whopping 50% to the amount you owe to the IRS.
You may also incur an additional 75% of the amount you owe as a civil tax evasion penalty if the IRS strongly believes you’ve engaged in tax evasion due to this.
The buy dates on your reports are critical when it comes to filing your current taxes. Those dates will force you to come clean and report gains that you had in 2017 or 2018. You may discuss any potential consequences and the right steps to take with a professional crypto tax lawyer.
Failure to Properly Report Your Crypto Positions
What could happen if you fail to report your crypto positions? The IRS will audit your case, and you could be paying penalties and interest on top of your crypto taxes.
If found guilty, you can be charged for the following:
- Tax Evasion
Penalties could range from monetary payment of up to $250,000 or 3-5 years in prison. The IRS is closely working with The Department of Justice Tax Division to catch those people avoiding their crypto taxes. In fact, there are several ongoing criminal prosecutions related to cryptos already.
US Crypto Tax Computation Methods
There are calculation methods you can use to determine the price points of your coins at buying and selling time. These include First-In-First-Out (FIFO) and Last-In-First-Out (LIFO).
US tax laws under Revenue Section 1012 dictate that FIFO is the preferred method for crypto tax computations. But the latest IRS guidance from October 2019 states that any method can be used depending on your preference.
Generally, most crypto tax experts recommend using a method that generates the lowest taxes for you. However, you should be consistently using that method for all computations in a single year. You can switch up the method after one year.
How Online Crypto Tax Tools Can Help
As you can see, crypto tax filing can be quite burdensome and confusing. Even small traders could find it a bit confusing to calculate all gains or losses, convert crypto values to fiat, reconcile dates, and all that. As such, an online crypto tax tool such as ACCOINTING.com could be of great help to them.
ACCOINTING.com can help you in the following areas:
- Reconciling all your accounts from all wallets you own and exchanges you participate in
- Manually classifying transfers
- Generating your crypto tax records automatically on the IRS form 8949
- Letting you decide which tax computation method to use (FIFO, LIFO, or others)
With ACCOINTING.com, you can seamlessly consolidate all your data so you can either upload the completed tax report to TurboTax or hand it over to your crypto tax accountant. It has a user-friendly platform and dashboard that won’t overwhelm you as well.
Professional Help with a Crypto Tax Accountant
High-frequency traders and hardcore crypto enthusiasts could become overwhelmed with a mountain of crypto transactions and trades to report. Consider using some help from a professional crypto tax accountant or firm if you’re one of them.
Look for a crypto tax professional with plenty of experience in filing several crypto tax returns. Ask your tax professional the following questions:
- Have you worked on previous cryptocurrency tax returns?
- How many tax returns have you successfully completed?
- Can you calculate capital gains?
If you want, you can generate your tax report through ACCOINTING.com then hand over the results to your accountant. He should know what to do with the report generated by ACCOINTING.com.
For crypto traders with complex situations, they can always consult purely with crypto tax accountants for a higher fee. They’ll get their respective tax returns done, plus get expert advice on how to lessen their taxes as well.
You alone can determine how much work you’ll put through in preparing your crypto tax returns. Online crypto tax tools like ACCOINTING.com can help you consolidate your data and generate your tax reports. You can then turn it over to the accountants who will finish the tedious work of filing your tax returns.
As discussed in this article, penalties, late payment fees, and possible tax evasion charges could become consequences of not declaring your crypto transactions correctly for tax purposes. Hence, be proactive in your crypto tax filing process and seek help from professionals and excellent tax tools like ACCOINTING.com.