Myth #1: I do not have to pay tax on my Crypto
If you have ever been in a conversation revolving around crypto and taxes, you will always hear somebody mention “crypto is not taxable” or “nobody knows how to tax it”. Shockingly, this myth is still around; after all, crypto is older than a decade.
We want to bust this myth once and for all. Crypto assets are taxable!
In the United States(US), the IRS classifieds crypto as property. Therefore, at the disposal of your crypto property, you will need to report your transaction on your tax return. The reality is that the Internal Revenue Service (IRS) guidelines are evolving. However, 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.
However, the IRS did throw all its eggs in one basket and mentioned it is an asset, and as we have all the rules surrounding assets, no new rules need to be added to date. We know this is not how we would want it in an ideal world, as crypto and digital assets are much more complex and cannot only be put in one category. However, this is where case law plays a significant role in eliminating uncertainty; for example, there is currently a couple, Joshua and Jessica Jarrett, better known as the Tezos validator, who took the Internal Revenue Service (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.
Myth #2: You only pay tax 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.
Myth #3: Crypto is the same as money (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.
However, to each rule, there is an exception; not all of the world sees crypto only as an asset. For example, El Salvador & Central African Republic have taken a stance and have declared Bitcoin as a legal tender. Meaning Bitcoin must 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
Income which will generate a taxable obligation will happen when you profit from staking, airdrops, forks and mining, to name a few.
Disposing of your crypto assets may trigger capital gains or losses based on several evaluating factors. However, purchasing crypto is not taxable but will be considered when working out your capital gains base cost.
Myth #4: Nobody can trace any of my blockchain transactions
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.
Myth #5: You only need to rely on software to resolve 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.
Myth #6: You only need to reconcile data on the tax year you are filing
It would have been a different ball game if this was the case, but unfortunately, it is not.
To get the correct base cost for your capital gains or losses and deductible transaction fees, we must import all your data to analyse it.
For example, suppose you started trading in 2016 and only declared taxes in 2022. In that case, all your transactions from all wallets should be organised and summarised to get the correct and accurate transactional data that will be used to calculate your taxes in the applicable tax year.
How can we 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.