The October 16th tax deadline is rapidly approaching, and for many people, it’s a nerve-wracking race to find missing documents and complete complicated tax forms. And it’s even more stressful if you’re one of the millions of people invested in cryptocurrency, which adds complexity to already challenging tax preparation.
This guide covers everything from gathering the documents you need to choosing the right tax software to automate the process. So, whether you’ve dabbled in Bitcoin or you engage in complex decentralized finance transactions, you’ll meet your obligations on time.
Understanding the Basics
Tax Day usually falls on April 15th every year, but if you’ve filed for an extension, your new deadline is October 16th. The extension gives you extra time to gather your paperwork and consult professionals, but it doesn’t extend the time to pay any taxes you owe. And missing the deadline could result in penalties and interest accrued on unpaid taxes.
The IRS treats cryptocurrencies as property for tax purposes. As a result, you must report any transactions involving cryptocurrencies on your tax returns.
The most common taxable events include:
- Selling Cryptocurrency – If you sell cryptocurrency for more than you paid, you have a capital gain. If you sell for a loss, you have a capital loss.
- Trading Cryptocurrencies – Trading one cryptocurrency for another is a taxable event, even if you didn’t convert it back to fiat currency.
- Mining & Staking – Earnings from mining or staking cryptocurrency are considered income and may be subject to ordinary income taxes.
- Payments & Gifts – If you pay for goods and services in cryptocurrencies, it’s a taxable event, and you may owe capital gains tax on the transaction.
The amount of time you hold an asset before selling or trading it influences your tax bill heavily. The lower long-term capital gains tax rate applies to assets held for more than one year, while the higher short-term capital gains tax rate (typically equal to the ordinary income tax rate) applies to assets held for less than one year.
Gathering Your Documents
A stress-free tax filing process begins with gathering all the essential documents ahead of time.
Start by signing into each exchange you’ve used over the tax year and download your transaction history, including any trades, deposits, and withdrawals. If you’ve stored or moved cryptocurrencies in hardware or software wallets, you may also need to extract or note all the relevant transaction details, including the dates, assets, and prices.
In addition to gathering data from wallets and exchanges, you must also collect all your traditional tax documents (including those sent from some exchanges).
The most important tax forms include:
- W2 or 1099 Forms – These forms report your wages and other income and are essential if you converted any cryptocurrency to fiat currency during the year.
- Bank Statements – These statements can help corroborate cryptocurrency deposits and withdrawals if you miss specific transaction dates.
- Exchange Forms & Statements – Exchanges may provide forms 1099-K, 1099-B, and other tax-related statements that you can use when preparing your taxes.
- Last Year’s Tax Return – It often helps to have your previous year’s tax return handy, particularly if you have consistent trading or other activity between years.
And finally, if you plan to classify your cryptocurrency activities as a business, you should also collect and categorize your expenses. You may also be able to deduct certain expenses, even if you don’t treat your crypto transactions as a business, such as gas fees.
Computing Your Taxes
Manually computing your taxes involves a deep dive into spreadsheets and transaction histories. And, if you’re using multiple exchanges or wallets, it can be a complex and time-consuming process.
Start by aggregating transactions across exchanges and wallets into a single spreadsheet and organize them by the transaction timestamp. Then, you must match each purchase and sale and compute the resulting capital gain or loss. While the most popular method is “first-in, first-out” (FIFO), you can use any number of accounting methods to match these transactions.
Crypto tax software like ZenLedger can help streamline the process, enabling you to move more quickly and avoid costly mistakes. By integrating with wallets and exchanges, ZenLedger automatically aggregates your transactions and computes your capital gains and losses for the year. And you can even generate the tax forms you need to file!
Crypto tax software is a must-have if you’re scrambling to meet the October 16th deadline. By handling the intricacies of crypto transactions and regulations, you can save time and get a more accurate picture of your tax liability. And, if you’re working with an accountant, ZenLedger can even generate a simple Grand Unified Accounting spreadsheet.
Don’t Forget Your Deductions
If you’re reading this, you likely already know the usual tax deductions and credits. Don’t forget about the deductions that apply to cryptocurrency transactions, though. When looking over exchange-provided statements, be sure to factor in potential deductions to avoid overpaying. Or, if you’re using crypto tax software, ensure that it automatically includes these deductions.
Some potential crypto tax deductions include:
- Transaction Fees – The fees you pay to trade crypto on exchanges are usually deductible, including any platform or gas fees.
- Interest Expense – If you borrowed money to invest in crypto, the interest you pay may be deductible, depending on the loan’s structure.
- Gifts & Donations – Gifting or donating cryptocurrency can offer some tax benefits. While gifts may not be deductible to you, they can help offload assets without realizing gains. And, of course, donations to registered charities are usually deductible.
Filing Your Taxes Before October 16th
The final step is actually filing your taxes before the deadline. While the process may seem daunting – armed with the right information – it doesn’t have to be stressful!
There are three ways to file your taxes:
- DIY Online – TurboTax and other online platforms offer crypto tax options, making it easy to file basic crypto transactions. And software like ZenLedger even provides direct integration to avoid any mistakes in translation!
- Tax Professionals – If you have a complex situation with various types of income, deductions, and crypto transactions, hiring a crypto-savvy CPA or other tax professional might make sense to ensure you’re accurate.
- Paper Filing – Paper filing is still an option for those who prefer a more traditional route, but it’s generally not a good idea because it’s so error-prone. That said, if you file a paper return, be sure it’s postmarked by the deadline.
Before you submit your return, be sure to review all the forms and calculations one more time. And, if you owe money, prepare to make the payment through a direct bank transfer, credit card, check, or other method without delay.
And finally, make sure to store all related tax documents, both digital and physical, in a secure location. Include your transaction history from exchanges, any tax forms like 1099s, and copies of the forms you submitted. If you’re audited, you may require these records to exonerate yourself and avoid costly fines and penalties.
The Bottom Line
The October 16th deadline is rapidly approaching, so it’s natural to feel some sense of urgency. By keeping the tips in this guide in mind, you can ensure that you meet your legal obligation while also avoiding overpaying taxes.
It’s also worth starting your preparations for the current year. For example, you should start gathering your current transactions, engaging with a tax professional for the year, and implementing year-end strategies to reduce your tax bill.
If you’re looking for a way to stay on top of your taxes, ZenLedger can help automatically aggregate all your transactions, compute your capital gains or losses, and generate the tax forms you need to file. You can also access all the information you need to defend yourself in an audit and even track your crypto assets throughout the year on a higher level.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.