Calculating and filing your cryptocurrency & NFT taxes can seem like a daunting task. So much so that some people are beginning to think that going to jail might be an easier option.
Here are three reasons why you should file your crypto taxes:
1) Crypto Tax Rules Have Been in Place Since 2014
Some crypto users believe that guidance on cryptocurrency taxation is unclear. They use this as an excuse for being non-compliant. Unfortunately this is not the case.
In the eyes of the IRS, cryptocurrencies like bitcoin are property (capital assets). Capital assets are subject to capital gains tax. Capital gains taxes have been in existence for decades, well before the invention of bitcoin. In addition, in 2014, the IRS clearly stated that all general tax rules applicable to property apply to crypto. Although there are a handful of unique situations where the legacy tax law and existing generic guidance don’t provide direct authority, there is more than enough tax guidance in place for the vast majority of cryptocurrency users to properly file their taxes.
2) Avoid Tax Audits
The statute of limitations legally limits the IRS’s authority to audit your tax returns. Filing a tax return triggers a stopwatch for the amount of time the IRS has to audit you. The general statute of limitations for auditing tax returns is three years. For example, this means if you file an accurate tax return for the 2021 tax year on April 18th, 2022, the IRS only has time until April 18, 2025 (three years from the date of filing) to come and audit you, if your return gets picked. After this date, the IRS does not have the authority to audit your 2021 tax return.
With that being said, there are two exceptions to the three-year rule. First, if you were to understate your gross income by more than 25%, the statute of limitations is extended to six years. Second, if you don’t file a tax return, the statute of limitations never starts so the IRS can come after you indefinitely.
This is why it is so important to file an accurate tax return — you are starting the three-year stopwatch and protecting yourself from an audit. Filing something is always better than filing nothing. Do not skip filing and give the IRS unlimited time to audit your taxes!
3) Write-off Tax Losses and Increase Refund
The tax code allows you to deduct your crypto trading losses. If you are a hobbyist investor, you can deduct up to $3,000 of income using net capital losses every year (unlimited capital gains can be offset by crypto losses in a given year first). If you have net capital losses in excess of this amount, the remainder can be carried forward to future tax years, indefinitely. When you have capital gains in future years, you can use these carried forward losses to offset those gains. These losses could even increase your tax refund in some cases.
If you have any questions or comments about crypto taxes let us know on Twitter @CoinTracker.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.