Crypto Myth #1: I do not have to pay tax in the United States on my Crypto
In conversation revolving around crypto and taxes, one would always hear somebody mention “crypto is not taxable”. Despite crypto being more than a decade old, this myth is still around.
In the United States (US), the IRS classifieds crypto as property. Once you dispose of your crypto property, you will need to report the transaction on your tax return. New legislation requires brokers and crypto exchanges to notify the IRS directly of crypto transactions, closing a loophole that enabled some investors to hide their gains.
The IRS did throw all its eggs in one basket and mentioned crypto is an asset, and as we have all the rules surrounding assets, no new rules need to be added to date. This is not ideal, as crypto and digital assets are much more complex and cannot be put in only one category.
Case law plays a significant role in eliminating this uncertainty; for example, Joshua and Jessica Jarrett, better known as the Tezos validator, took the IRS to court. They are creating big waves in the crypto industry, setting a possible precedent for how authorities will tax staking rewards. Such cases will set a precedent in the future.
Crypto Myth #2: You only pay tax on crypto assets when you “cash-out”
You are only obligated to pay tax when you cash your crypto out for money (FIAT) is another top myth we have heard a few too many times. The knowledge gap shows us how authorities have failed to communicate clear guidelines to the public.
When you are playing around with crypto or is an avid trader or maybe a miner, the fact of the matter is many different crypto type transactions creates tax obligation. Cashing out to fiat currency is definitely not the only time a tax obligation arises on the taxpayer.
For example, staking, airdrops, forks, and crypto to crypto trades are all taxable events where a taxable obligation arises on the taxpayer to declare his income.
Crypto Myth #3: Cryptocurrency is the same as FIAT-currency
Globally it is the norm that crypto falls under the definition of an asset, not cash, and this is also the view the IRS took.
Yet there are exceptions. El Salvador and the Central African Republic have taken a stance and have declared Bitcoin as a legal tender. Bitcoin must therefore be accepted if offered in payment of a debt in those parts of the world.
In the United States, crypto assets can fall between two categories, namely:
- Income, or
- Capital gains or losses
Profit from staking, airdrops, forks and mining, classifies as income, which will be taxable.
Disposing of your crypto assets may trigger capital gains or losses based on several evaluating factors. Purchasing crypto is not taxable but will be considered when working out your capital gains base cost.
Crypto Myth #4: Blockchain transactions are untraceable
Anonymity is key in the Decentralised finance (DeFi) world, but you need to remember that blockchain is a public ledger. Every transaction is verified, and this makes all the transactions public domain.
Because of the transparency, it would be very easy for the government to track and link these “anonymous” wallets to people. The main reason is that nearly all people’s transactional history is an on-ramp (starting point) via a KYC (know-your-customer). Exchanges are required to follow these KYC rules that regulatory authorities have implemented. In addition, most exchanges have already been requested to report their customer’s crypto activities to IRS.
We have a nagging suspicion that the IRS is partnering with private firms to the like of Chainalysis, which connects real-world activities to blockchain transactions, and enables them to track your transactions.
Being one day subpoenaed as a trader/miner for your public addresses is a reality. You will be faced with a crossroads. Option one is handing over all your information, losing the benefit that comes with coming forward on your own, or deciding if you are willing to lie under oath and incriminate yourself further.
Crypto Myth #5: You only need to rely on software to resolve your crypto tax issues
Like in everyday life, the software does help, but the truth is the software does not cover every single scenario.
Presenting your digital assets and all the transactions is not always as straightforward as one would think, even if it is all theoretically stored on the blockchain; retrieving and presenting the data is a different story.
It depends on the chains, and if you are dealing with lessor-known chains or random multi-chains, the allocation and following of the transactions do get more complicated. That is why we at CountDeFi are here to help.
If your reporting is done incorrectly, it will lead to an inaccurate report and a highly inflated taxable amount. Leaving you in a less than ideal position, have a watch through our video where we explore five typical pitfalls to which anyone can fall victim.
Crypto Tax Software is not a data in report out solution. In many cases tax can be heavily inflated if the necessary manual intervention is not performed – and performed correctly! In order to do this you need to understand the different available crypto tax software solutions. In this video we explore 5 typical pitfalls that can inflate tax and cause low accuracy reports.
Crypto Myth #6: You only need to reconcile data on the tax year you are filing
To get the correct base cost for your capital gains or losses and deductible transaction fees, we need to import all your data to analyse it.
Let’s say you started trading in 2016 and only declared taxes in 2022. All your transactions from all wallets need to be summarised to get the correct and accurate transactional data. This data will be be used to calculate your taxes for the applicable tax year. You can read more about the basics of crypto tax in the United States, here.
How can CountDeFi help?
We are future-focused accountants who are passionate about Crypto, DeFi and going bankless. We deeply understand the blockchain, liquidity & staking protocols, ICOs / IDOs, NFT ecosystem and other DeFi nuances. Partner with us for all on-chain tax and accounting.