Cryptocurrencies such as Bitcoin, Ethereum, and Cardano continue to make a splash in today’s marketplace. As you continue to invest in a diverse portfolio of crypto assets, know that the IRS considers cryptocurrency holdings “property” when it comes to taxes.
This means that your cryptocurrency is taxed as a short-term capital gain using either your income tax rate or a long-term capital gain if you held the cryptocurrency for one year or more.
Those who don’t understand cryptocurrency taxes may easily overpay for professional services annually. This is where a savvy, experienced crypto accountant can help you save a significant chunk of money through their expertise and technical knowledge.
This article will outline only three examples of how a crypto accountant can help you navigate this seemingly complex topic and increase cost savings.
Although the tax-filing process may seem straightforward, things get more complicated for cryptocurrencies. Even if you buy and sell cryptocurrency regularly, it’s never too early to start preparing for the 2021 tax season.
How you acquire and sell your cryptocurrency and the duration of time you hold onto it will directly impact how much money you owe at the end of the year. Each type of cryptocurrency transaction comes with nuances that impact the amount you owe.
For example, here are some types of taxable transactions:
Having access to the right cryptocurrency and tax reporting software such as CoinTracking allows crypto accountants to analyze your trades in real-time, providing you with updated information on profits and losses, unrealized gains, the value of your coins, and more. Reconciling your activity through software is a quick and accurate way to determine your taxable income.
Software such as CoinTracking makes it easy to calculate reports on capital gains, fees, income, donations, and losses for the most accurate number of how much you owe. All of your digital wallet activity is used to calculate your taxes with accurate cost basis amounts.
Tax minimization strategies such as holding period analysis, wash sales, and cost basis methods are second nature for crypto accountants. For example, investment holding periods determine the taxing of capital gains or losses and are an essential way to maximize the more favorable tax rate of long-term gains. Selling something at long-term capital gains rates vs. short-term rates could save you as much as 18% in taxes.
Wash sales occur when an individual sells or trades cryptocurrency at a loss and then purchases the same cryptocurrency within 30 days before or after the sale date. Unlike the rules for trading stocks, the temporary loss generated by selling and rebuying can be used to offset other gains.
Your crypto accountant may also calculate capital gains based on cost basis methods such as FIFO (first in, first out), LIFO (last in, first out), and Specific Identification, all of which can help you save.
With so many nuances surrounding cryptocurrency taxes, leave this process up to our cryptocurrency tax experts. We encourage you to take a complimentary assessment to see how we can help you ahead of the 2021 tax season.
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