3 Tax Tips For Cryptocurrency Investors
From stocks and bonds to real estate and precious metals, there are many ways to invest your money. Today, more and more people are investing in cryptocurrencies, an alternative form of currency that can be sent to others in a more secure manner. Bitcoin, for example, is the most popular and most valuable form of cryptocurrency at this point in time. Of course, as with any investment, taxes are important when you invest in cryptocurrency. Here are a few tax planning tips all cryptocurrency investors need to know.
Understand Gains and Losses
One of the most important tips you need to know when planning for or starting to file your taxes is you only need to pay taxes on your gains, not your losses, so understanding the difference is key.
To determine your capital gains and losses, you need to know the current fair market value and the cost basis of your cryptocurrency.
The fair market value is what the current value of the specific cryptocurrency is. The cost basis represents the original value of the cryptocurrency or what you initially paid for it.
With these figures in mind, subtract the cost basis from the fair market value to determine your capital gains and losses. If you decide to sell or take the profit off your cryptocurrency investment, you would only pay taxes on the actual gains, not the total amount that you ended up selling your investment for.
Just like with any investment, you need to track and keep records of what you purchase/exchange/sell.
Fortunately, most exchanges will keep these records for you, but you should also maintain a personal record of your exchanges and purchases to confirm transactions at the end of your year when filing your taxes.
A spreadsheet saved on your computer is one simple way to track your buys and sells. Or, you can hire an accountant to handle this recordkeeping for you. However, it is best to hire an accountant that has experience with cryptocurrency investing.
Report Your Losses
If the fair market value of your specific cryptocurrency is less than the cost of what you paid for it initially, you can report the loss on your taxes, reducing your total gross income. This decreases the amount of taxes you need to pay on your investments.
Although most investors do not want to take a loss, they are common and unavoidable at times. In addition, they can actually be beneficial at tax time.