Crypto Tax: What Not to Do in 2023?

Crypto tax mistakes that you must consider to avoid in the year 2023 for better

Do you have questions regarding how to manage your cryptocurrency taxes? It's not just you. Most consumers are unaware that Bitcoin transactions are taxable, and even fewer know how to report their transactions correctly.

Since 2014, we've been concentrating on crypto tax, and we've seen it all. In this article, we'll discuss the top 5 crypto tax errors that can result in severe fines and IRS audits. With this information at hand, you can invest in cryptocurrency with assurance and peace of mind. Read to know more about crypto tax in 2023.

Underestimating the IRS's Capability to Monitor Your Crypto Activity

The idea that cryptocurrency is anonymous and untraceable is one of the most pervasive myths. Even though some cryptocurrencies are made to be more secret than others, the IRS has developed sophisticated methods to monitor cryptocurrency transactions. You may be sure that the IRS will find you eventually if you don't accurately record your crypto activity.

Guessing or Averaging Cost Basis

Your cost basis must be calculated to assess your capital gain or loss when you sell or trade your cryptocurrency. The price you paid for your cryptocurrency plus any other fees or costs becomes your cost basis. Some taxpayers make the error of estimating their cost basis or just taking the average amount for all transactions, which can lead to erroneous reporting and possible IRS fines. It's crucial to accurately track your cryptocurrency transactions and determine your cost basis.

You can compute your cost base using crypto tax software, however, even the greatest crypto tax software can make mistakes. 

Misreporting or Ignoring Airdrops

A fun benefit of investing in cryptocurrencies is the possibility of receiving free tokens or coins known as "airdrops" from other investors. They might, however, also result in tax obligations and difficulties for investors. Here are 3 typical problems to keep an eye out for:

The fair market value of the coins that were airdropped at the time of receipt determines your taxable income. This implies that you can still have a large tax obligation even if the value of the coins falls later.

Even though some airdrops are fraudulent or useless, tax software will nonetheless detect them and raise your taxable income. Thousands of airdrops may need to be manually reviewed to fix this issue.

It's vital to check because you can have gotten airdrops without even realizing it. The IRS may impose fines and interest charges if airdrops are not reported.

Not Claiming Capital Losses

It's crucial to keep in mind that, like losses from other assets, losses from investments in cryptocurrencies can be used to offset capital gains. You can write off a capital loss on your tax return if you sell your cryptocurrency for less than you purchased for it. You could save money and minimize your tax liability by doing this. For additional details, see our article on crypto tax loss harvesting.

Not Filing Because You Can't Pay

Some people make the error of failing to file their tax returns because they are unable to pay their debt. This is a serious error that could incur further fines and interest costs from the IRS. It is preferable to submit your tax return on time (or request an extension before the due date) and negotiate a payment schedule with the IRS than to fail to do so.