USA tax forms with a yellow sticky note that says, “Tax Time!” and a blue clock

Introduction

Hey there, crypto enthusiasts! As the cryptocurrency market continues to ~~recover~~ flounder, it’s time for us to have a serious chat about taxes. Yup, you heard that right. With the extension deadline for US taxpayers creeping up, we need to tackle the nitty-gritty of tax filing, penalties, and why it’s so darn important to do it right. So, grab your calculators and let’s dive into the ultimate guide to crypto taxes!

Why Should You Prepare Your Crypto Taxes?

Alright, let’s get real here. Filing your crypto taxes isn’t just some boring chore like doing laundry. It’s actually pretty crucial, and here’s why:

Legal Compliance

The IRS has its watchful eyes on the crypto world, my friends. So, staying on the right side of the law is a must-do. Right now, it seems they’re focusing on the “bigger fish”, but if they figure out that you haven’t been reporting your crypto taxes (and especially if you owe them money), they’ll be happy to penalize you too! Be warned: willfully not reporting your cryptocurrency transactions and/or lying on the IRS 1040 where it asks if you have any crypto transactions and you say no can result in jailtime and penalties for tax evasion including fines up to $100,000!

notice of penalty left on a car windshield

Avoid Penalties

Nobody wants to deal with penalties, right? Well, by filing on time, you can dodge those pesky penalties for late or incorrect submissions. (More on this below!)

Financial Planning

Accurate tax reporting helps you understand your investment gains and losses. So, when you’re making those big financial decisions, you’ll have a clear picture of where you stand.

Understand the Penalties and Fees

Now, let’s talk about those scary penalties and fees that can rain on your crypto parade.

As mentioned up above, willfully refusing to report crypto transactions or lying about crypto transactions on your tax form can earn you jailtime and significant fines. We recommend you report ALL of your transactions so they have nothing to accuse you of.

Failure to File

Failure to file on time (or at all)? Uh-oh! If you fail to file any kind of report for your taxes by the deadline (and then by the extension deadline if you extended it), you’ll owe 5% of the unpaid tax liability for every month that the tax return is late up to 25% of the balance due. Say it ain’t so! That’s a lot of extra taxes you don’t want to pay when you can solve it by just reporting that you had transactions. But what if you can’t pay yet? Read on.

young normal looking woman standing behind prison bars

Failure to Pay

Let’s say you DID file that you have transactions, but you haven’t paid the tax yet. This is a much lower penalty and infinitely preferable to that nasty 5% penalty for getting caught not filing at all. The Fail to Pay penalty is 0.5% of the unpaid tax liability for each month…..until it is equal to 25% of the tax due. So yeah. You definitely DO want to figure out HOW to pay if you haven’ t yet, but at least it buys you a little time at a lower penalty rate if you need it.

Interest on Unpaid Taxes

Did you know that outstanding tax liabilities can accrue interest? Yup, just like that credit card debt that refuses to go away. So, save yourself the trouble and file those taxes promptly. (Current interest rates are equal to the federal short-term rate plus 3% for most people….that could add up quickly, eek!)

?In general, keep in mind that the IRS WANTS you to pay and is willing to work with you if you find yourself in a situation where you owe a lot and can’t pay. So don’t be afraid to reach out to tax advocate services or the IRS itself to see if you can arrange a payment plan or deal to get you back on track.

Our number one recommendations? File SOMETHING and amend it later if you have to. Pay what you think you might owe (or a little more) so that the interest penalties don’t rack up too much. And ask for help when you need it!

Steps to Prepare and File Your Crypto Taxes

Now that we’ve talked about WHY you want to file, let’s break down the process into some easy-to-follow steps, shall we?

Gather All Relevant Information

Time to do some detective work, my friends. Collect all your records of cryptocurrency transactions, like buy/sell orders, exchanges, and receipts.

Calculate Gains and Losses

Get your math skills ready. Subtract the purchase cost from the selling price to figure out your capital gains or losses. It’s like solving a crypto puzzle! (Note: most crypto tax software will do this for you, so don’t break your brain trying to think too hard!)

group of people in a meeting discussing finances surrounded by graphs of projections and reports

Fill Out the Appropriate Forms

We love forms, don’t we? Use Form 8949 and Schedule D to report your capital gains or losses, and then attach them to your Form 1040. You’ll be a pro in no time!

Seek Professional Assistance

Feeling a bit overwhelmed? Don’t worry, you’re not alone. Consider enlisting the help of a tax preparer who knows their way around crypto taxation. They’ll be your tax superhero!

Resources for Assistance

We all need a little help sometimes, especially when it comes to taxes. Here are some handy resources to make your life easier:

Tax Software

Let technology come to the rescue! Use tax software specifically designed for crypto tax calculations. These can even integrate with popular exchanges, saving you time and headaches.

*** We recommend this one (and if you use our affiliate link, you can save 10% on your purchase!)

professional looking woman holding a large stack of black binders in an accounting office

Online Communities

Join the party! Engage with online communities, forums, and social media groups dedicated to crypto taxation. You’ll find fellow investors who can share their insights and maybe even a meme or two.

Tax Professionals

When in doubt, call in the pros! Certified tax professionals who specialize in crypto taxation are just a phone or zoom call away. They’ll guide you through the rabbit hole of reporting your crypto investments. In fact, we offer help getting your crypto taxes organized (including the income earned and Defi transactions that not every crypto tax software can handle).

*** Set up an appointment here if you’d like to find out more about your personal situation.

Conclusion

Alright, folks, we’ve reached the end of our crypto tax adventure. As the countdown to the tax extension deadline in the USA gets closer, remember to prioritize accurate and timely tax filing to minimize what you owe. By understanding the importance of tax compliance, the potential penalties, and following our step-by-step guide, you’ll navigate this tax season like a champ. And hey, don’t forget to lean on tax software, online communities, or the help of professionals if you need it. So, let’s get those records in order, file those crypto taxes accurately, and show the world that we’re responsible crypto enthusiasts!

*** Do you need help with your crypto tax compliance? Take our mini-course to find out!

*** Want a crypto tax expert to prep your crypto transactions for you and your regular tax accountant? Book a call here to find out more.