Hello, crypto enthusiasts! Jessica here from Beta Virtual Assistance, basking in the fall sunshine for another round of Tuesday Tips. As we approach the final stretch for USA tax investors to file their taxes, I wanted to share a recent success story that might resonate with some of you.
Last-Minute Tax Woes and Triumphs
I received a call on Sunday night from a gentleman who had purchased our course nine months ago but, in classic procrastinator fashion, hadn’t started his tax reporting until the eleventh hour. The twist? His transactions were all in Defi, and even his lone exchange didn’t connect by API. Despite the complexity, we managed to reconcile everything in record time. So, if you’re in a similar boat, there might still be hope for you too.
The Urgency of Filing, Even with Losses
You might be wondering, why bother reporting losses, especially in a year like 2022 when many crypto investors didn’t fare well? The IRS might not chase you down for unreported losses, but they certainly will if you had gains in previous years. Filing taxes isn’t just about being a responsible citizen; it’s a proactive measure to avoid fines, penalties, and potential legal trouble.
The Power of Reporting Losses
While reporting losses may not be enjoyable, it can significantly benefit you in the long run. Properly documented losses can reduce your overall income, leading to lower income taxes. Even if you can’t directly offset them this year, losses in the USA can be carried over to future years in increments of $3,000, helping you reduce taxes on future gains.
The Cost Basis Conundrum
I’ve emphasized the importance of cost basis time and again. Knowing what you paid for your crypto is crucial for accurate tax reporting. If you bought crypto for $10 and sold it for $15, you report a $5 gain. Conversely, if you sold it for $15 but bought it for $20, you report a $5 loss. This principle applies to larger numbers, but the key is understanding your cost basis and ensuring that it never “goes missing”.
Navigating Defi Protocols and Income Reporting
For those immersed in Defi protocols, distinguishing between a return of capital and income is challenging. Many tax software solutions excel at reporting trades but fall short on income reporting. We recommend using CoinTracking, which not only includes income in your tax report but also guides you on which specific tax form line to on which to report it. However, it relies on accurate transaction data, making it crucial to document movements in and out of protocols diligently.
Defi Protocols and Return of Capital
Whether it’s the Drip protocol, Ooze protocol (yes, Ninja Turtles are involved), My Diamond Team, Prosperity Gems PGV, or any of the other many Defi protocol schemes, tracking the return of capital is vital. Marking these movements as the return of capital or income ensures optimal tax optimization, preventing you from overpaying taxes on capital gains or income
Seeking Assistance for Complex Crypto Tax Situations
If you find yourself entangled in a complex crypto tax situation, don’t hesitate to reach out. Our expertise lies in helping individuals navigate the intricate world of crypto taxes. Whether you need guidance or hands-on assistance, we’re here to support you.
Conclusion
As I wrap up in the sun (I don’t want a sunburn!), remember that filing your crypto taxes isn’t just a regulatory obligation; it’s a strategic move to protect your financial well-being.
Find out more about CoinTracking, our recommended tax software, and what we can offer you here (like 25% off unlimited). You can also download our free report Why Cost Basis is the Holy Grail.
If you have questions or need assistance, reach out. Have a great week, and I’ll catch you again on Thursday!
Did you read our previous post about crypto taxes titled: “Decode Your Crypto Taxes: The Art of Choosing the Perfect Tax Method“
Find out more about this topic by listening to our Audio podcast or watching our YouTube video below.
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