Crypto Taxes and Accounting

Taxes Are Due: How To Track Crypto Transactions For Taxes?

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August 25, 2021
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    The extended deadline for 2019 individual tax returns is coming up quick. As you prepare your taxes, it's important to remember to report your crypto transactions to avoid costly interest and penalties. You should also start thinking about taking actions to lower your 2020 taxes.

    Let's take a look at why and how to track crypto transactions for taxes, what to do if you forgot to report them, and actions that you can take to lower your 2020 tax bill.

    Why You Should Report Crypto Transactions

    It's tempting to avoid paying taxes on crypto transactions. After all, they are inherently hard to trace and you may owe tax on crypto-to-crypto transactions where you didn't even realize a cash profit! Credit Karma reported that just 0.04% of its tax returns had crypto transactions in 2018.

    Recognizing the problem, the IRS sent warning letters to more than 10,000 taxpayers with crypto transactions who may have failed to report income and pay taxes last year. The agency also introduced a new questionnaire on individual tax returns that specifically asks about virtual currencies.

    Schedule 1 to Form 1040 in 2019 asks: "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?".

    A failure to report taxes could result in pantries and interest on the income that you failed to report. In the most extreme cases, you could face prison time and a fine of up to $250,000. The risk of an audit is low for most people, but there's a high cost to getting caught and most people owe minimal taxes.

    If you have more than $20,000 in gross crypto sales for the year and more than 200 transactions, you will likely receive a 1099-K from your crypto exchange. These gains were already reported to the IRS, which means that you must declare them on your tax return to avoid inevitable fines and penalties.

    How to Streamline Crypto Tax Prep

    Many people preparing their own tax returns may not be familiar with how to record crypto transactions—especially if they don't have experience with stock transactions.

    If you use TurboTax, you may want to consider crypto tax software that integrates with the popular tax prep solution. ZenLedger will automatically aggregate your transactions across exchanges and wallets, calculate your capital gains/losses, autofill the necessary IRS tax forms and send them to TurboTax.

    ZenLedger's new free tier means you can prepare your taxes for free if you have 25 or fewer transactions. If you have margin trading, ICO transactions or other complex tax issues, you can use the more advanced plans to ensure that everything is in order to defend yourself during an audit.

    ZenLedger
    ZenLedger’s Crypto Tax Prep Software - Source: ZenLedger

    These software solutions may also be helpful if you're working with an accountant. Rather than paying an accountant by the hour to calculate the cost basis, you can provide them with the necessary forms generated by ZenLedger or another solution and have them simply incorporate the numbers.

    Aside from reducing your tax prep costs, crypto tax software ensures that everything is accurate and defensible in the event of an audit. You can see exactly how the cost basis was calculated for each trade and avoid penalties and interest that may arise from mistakes made on your tax returns.

    Reporting Crypto Income

    Suppose that you had crypto income in 2018 that you failed to report for whatever reason.

    Should you report that income in 2019? How to track crypto transactions for taxes?

    The IRS can go back up to three years to prosecute cases of tax evasion. If they find any inconsistencies, they can go back up to six years or more to collect what they're owed. You could be forced to pay penalties and interest on any past taxes owed, which can add up to huge sums over several years.

    There are a few steps that you can take to report the past income to avoid any problems in the future:

    1. Determine what you owe. Crypto tax software makes it easy to pull historical transactions across exchanges and wallets and calculate how much you owe.
    2. Amend your tax return. Complete Form 1040X, Amended U.S. Individual Tax Return, with the new income.
    3. Mail in your amended return. Mail in the amended return to the IRS along with any necessary supporting forms and documentation. If you owe tax, include a payment with the return.

    It's always a good idea to correct any mistakes before they become even more costly in the future. While it's possible the IRS will never discover them, there's a very high cost if they do discover them that usually outweigh the benefits.

    Save on Next Year's Crypto Tax Return

    Most people only think about taxes once every year when they're due, but it pays to consider taxes throughout the year.

    Tax loss harvesting is one way to take action now to save on your 2020 taxes. By harvesting tax losses right now, you can offset your capital gains and up to $3,000 in regular income for the 2020 tax year. The best part is that you can immediately re-establish portfolio allocations.

    Another great way to reduce the stress of tax season is to sell part of your crypto-to-crypto transactions into cash to cover taxes. That way, you never run into a situation where crypto-to-crypto transactions generate a large capital gain that disappears before you can realize cash gains.

    The Bottom Line

    The extended deadline for individual tax returns is coming up quick. If you have crypto transactions for the year, it's important to declare them and pay taxes on any gains. You should also be sure to report any losses that could offset some of your taxable income (and harvest your losses in 2020).

    ZenLedger simplifies the crypto tax preparation process by automatically aggregating your transactions, calculating your capital gain or loss and auto-filling popular IRS forms. You can even integrate it with TurboTax.

    How To Track Crypto Transactions For Taxes FAQs

    1. How to track crypto transactions for taxes?

    If you want to track crypto transactions for taxes, you can use one of the many online software services. They allow you to track the status of a crypto transaction by connecting your exchanges and wallets to calculate your gains and losses.

    2. How do I keep track of crypto for tax purposes?

    If you are interested in the crypto space, be it as an investor or a trader, it is of utmost importance to keep a clear record of your activity for tax purposes. Ideally, one could easily back up their activity details in the form of files on personal records (preferably backed up in locations more than 1) to avoid confusion and havoc at the time of tax calculation. Some of the primary data points one should record include-
  1. Type of crypto bought/ sold/ traded
  2. Date of purchase/ sale/ trade
  3. Units dealt with
  4. Bank statements and wallet address (essential for an inquiry or review)
  5. Value of the coin in USD at the time of activity
  6. The total cumulative crypto held
  7. Besides, one can also use third-party crypto tax softwares like ZenLedger for simplified crypto taxation.

    3. How does the IRS know if you trade Crypto?

    The IRS treats cryptocurrency as property and not currency. So when it's sold at a profit, the tax collection agency will assess a capital-gains tax.
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