The crypto investors are always agitated by tax issues, especially after the May fractious market collapse of the bitcoin ecosystem. It can be a headache for accountants to account for all the variables. The crypto ecosystem keeps evolving, which changes the way things are done. Different assets are being moved between different blockchains by the Defi traders. Approximately $68 billion is locked by the Defi ecosystem, making it challenging to price NFTs accurately. Fortunately, a loophole will help crypto investors sort out the tiresome tax issues. Let us know ‘Tax Tip Could Help Crypto Investors’.
Recently, the IRS categorized crypto as property instead of securities. This action will help the investors to save their money by next year when they file taxes. It enables them to bypass a tax rule in their favor. The May bitcoin crash resulted in the coin going down more than 50% in value, yet it had always been so high since November 2021. Getting a way of saving the coin is good news to the investors.
Tax Tip to Help Crypto Investors
- Offsetting capital gain
- Maintain good wallet hygiene
- Have a detailed record of your transactions
- Use one exchange
Offsetting Capital Gain
This means you can reduce the consequences of your taxes. The investors are to sell their securities to offset their liabilities. According to Bloomberg, if you have lost more than what you have gained, you can offset ordinary income on federal income tax by using up to $3000 per year. This means that these kinds of losses can be carried for so many years to offset future gains. To prevent investors from selling their losing securities so as to claim quick tax, IRS has set rules to govern this. If you sell stock within 30 days before the date of the loss day and end 30 days after the loss, you will have to buy similar securities rather than tax gain. This makes it a wash; hence, it is a security, not a property.
Maintain Good Wallet Hygiene
Wallet hygiene helps taxpayers to have a good understanding of transactions from a workflow perspective. This is vital to regular traders. Holding all your digital assets in one place is good but not the best way. You can create a name for each asset and keep them separately in separate wallets. For example, separate Defi transactions from revenues. If you make NFTs, you should have a separate wallet for secondary royalties.
Have a Detailed Record of Your Transactions
Many people think of blockchain as all-seeing and self-documenting because it is digital. However, you can’t ignore record keeping in any digital or analog business. Blockchain is not a bank statement where it is clearly situated if it is a payee, vendor, or even a short description of a sold item. The information on the blockchain is not people friendly. It cannot be understood by normal people, although it can be examined through a block explorer. This can be frustrating to the accountant, and it is time-consuming to start checking and analyzing.
Use One Exchange
It is complicated to use so many exchanges, especially during the payment of the taxes. This is because of several reasons. One is that different exchanges output data in different formats, leading to errors when combining CSVs. The second reason is that it’s a lose-lose situation for everyone involved as it’s so time-consuming and tiresome. This can literally cause headaches when you are trying to pay your taxes.
As they always say, death and tax are the only constants in life with absolute certitude. We all have to die someday and must pay taxes as long as we work. The latter can be frustrating, especially if you don’t have records of your transactions. However, crypto investors are even worse because an average person can’t understand the transactions. It can be a headache to account for your transactions if you are not prepared adequately. However, the tips we have provided above will help you navigate through crypto tax issues more smoothly.
Frequently Asked Questions
- How is tax loss harvest done in crypto?
Crypto tax loss harvesting is when the investors pay their tax bill by selling crypto at a loss so that they can create a capital loss that helps them to offset it against the capital gains. They can then repurchase the asset at a reduced price for later gains.
- Does wash sales apply to crypto?
The IRS considers cryptocurrency as property and not security, and the wash sale rule says that it only applies to security or stock. With that in mind, crypto doesn’t fall under the current wash sale rule.
- Is crypto taxed if you don’t sell?
The IRS has been ensuring that all crypto investors pay their taxes. However, if you buy the crypto and hold on to it, you don’t pay taxes even if its value increases.