How To Avoid Crypto Tax Nightmares – Let’s Find Out More!

How To Avoid Crypto Tax Nightmares

Company CEO Matthew Unger says cryptocurrency is not anonymous and, therefore, not taxed. He believes FATF’s “travel rule” will capture nearly every crypto wallet owner on a public chain.

By June 2021, the travel rules system will be established, he predicts. Users can expect their local tax authorities to contact them once the system is in place.

According to Wendy Walker of global tax compliance firm Sovos, tax obligations will never disappear.
Moreover, she says, “taxes that aren’t paid accrue both interest and penalties the minute they aren’t paid,” adding that filing an extension “doesn’t eliminate them because they continue to accrue interest even during extended periods.”

Further, the IRS aggressively pursues unpaid tax amounts through liens on personal property, seizure of assets, garnishment of wages, etc.

However, Jackson Hewitt’s Chief Tax Information Officer Mark Steber says that taxpayers can get on a payment plan with the IRS if they’re unable to pay by Tax Day. Just remember that telling the IRS you weren’t aware your crypto transactions would be taxed isn’t good enough.

Unpaid bills won’t be ignored by the IRS, he says.

Thomas Shea, Tax Partner at EY, additionally points out that, if you trigger a taxable exchange, but do not have the fiat to mask the tax, you can swap extra assets for fiat, essentially a “sell to cover.”

The tax implications of disposing of additional property, on the other hand, should be considered if this route is taken (e.g., taxable gains on appreciated property, potential loss on the depreciated property).

If you have even the slightest doubt that your crypto tax bill may get muddled up, it’s probably better to consult a tax professional. In addition to capital gains, Walker says taxpayers can take advantage of tax credits and deductions to reduce their tax exposure.

The IRS can be difficult to navigate unless you have experience, she says. “So you need someone who does.”

Capital Gains Over Time

A second factor to be aware of is the fact that frequent transactions are the norm for many cryptos and NFT traders. Many investors “buy the dip” in a cryptocurrency, then sell it at a high price, then do it again.

A lot of newbie investors might not be aware that gains on crypto are taxed when you don’t hold it for very long, according to Aaron Sherman, President of Odyssey Group Wealth Advisors. If the asset was held for at least a full year, the gain will be taxed at a long-term capital gain rate, which is lower than the ordinary income tax rate. On the other hand, if the asset has been held for less than a year, capital gains are taxed at the investor’s ordinary tax rate.

Investors are encouraged to hold assets over a longer period of time by the difference in tax treatment between short-term and long-term assets, says Sherman. Because of this difference, day traders of crypto assets could face a large tax bill on any gains.

In the meantime, Feldhammer points out that NFTs may be deemed “collectibles,” in which case they would be subject to a top tax rate of 28% rather than 20%.

Best cryptocurrency brokers in May 2021

Robinhood

Robinhood is a great way to purchase cryptocurrency directly, although the online broker hasn’t started this year off smoothly. You can also take advantage of Robinhood’s cheap trading commissions: $0 per trade. If you want more than just cryptocurrency, you can also trade stocks and ETFs for the same low price. Its slick app makes trading so simple, but those looking for a full-featured trading experience will be disappointed.

Commission: $0

Account minimum: $0

TD Ameritrade

In addition to traditional products such as stocks and bonds, TD Ameritrade offers Bitcoin futures. The digital currency cannot, however, be traded directly at TD Ameritrade. To trade Bitcoin futures, you must meet the account minimum. Likely Charles Schwab will eventually integrate TD Ameritrade with its operations.

Commission: $2.25 per contract

Account minimum: $25,000 for futures

Interactive Brokers

Interactive Brokers allows you to buy Bitcoin futures instead of owning the currency directly. The broker offers Chicago Mercantile Exchange futures trading, with all-in contracts costing $15.01 with five bitcoins per contract. Moreover, Interactive Brokers offers a full range of investment products, so you can buy almost anything that trades on an exchange.

Commission: $15.01 per contract

Account minimum: $0

Charles Schwab

Bankrate consistently selects Charles Schwab as one of the top brokers, and this investor-friendly company offers to trade in Bitcoin futures. Schwab does not require a minimum deposit, but futures contracts require some margin to hold them open. The commission per contract at Schwab is $1.50, and if you make big profits, you will receive a bonus.

Commission: $1.50 per contract

Account minimum: $0, margin depends on contract

TradeStation

The broker offers direct currency trading via TradeStation Crypto, with commission-based pricing for traders. Pricing is determined by your account balance and whether your order is directly marketable. Pricing typically ranges from 0.25 percent to 1 percent of your order. Traders can also buy and sell Bitcoin futures, as well as benefit from volume trading discounts.

The commission is 0.25-1 percent.

Account minimum: $0, but margin depends on the contract

Coinbase

Coinbase is a cryptocurrency-focused platform where you can trade digital currencies directly, including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Overall, you’ll have access to more than three dozen cryptocurrencies. Additionally, you can store your coins in a vault with time-delayed withdrawals for additional protection. The commission structure of the exchange is steep. It charges a spread of about 0.5 percent and a transaction fee, depending on the size of the transaction and the funding source.

A commission of at least 1.99 percent of the transaction value.

Minimum balance: $0