The A-Z of Crypto & Tax Deductibles

As the market for cryptocurrencies and other digital assets develops, there is an increased need for market participants to be aware of the tax consequences of their transactions. While many of us first consider what we may owe in capital gains, tax deductions form a crucial and often overlooked part of this equation. Understanding how this affects your daily cryptocurrency activities can be a key step towards owning tax liabilities and keeping a larger portion of your earnings.

This piece will provide a comprehensive guide to crypto tax deductibles in the United States. We will cover the basics of cryptocurrency, its tax implications, and the various tax deductions available to crypto traders and investors. We will also discuss the process for claiming tax deductions related to crypto activities and provide tips for maximizing these deductions.

Overview of cryptocurrency and tax deductibles

Before diving into tax deductibles, it is important to understand what cryptocurrency is and how it works. Cryptocurrencies are decentralized, cryptographically-secure digital money not governed by any central bank or government. It's fungible, meaning it may be bought and sold on several markets.

Despite its decentralized nature, cryptocurrency transactions made by United States residents are still subject to local taxation norms. The IRS treats cryptocurrency as property, which means that any gains or losses from crypto transactions are subject to capital gains taxes. On the bright side, several tax benefits are available to crypto traders and investors which can help minimize tax liabilities.

Eligible Tax Deductions for Crypto Traders and Investors

While tax laws vary by state, you may be eligible for various tax deductions to help lower your tax bill. Some of the most common tax deductions available to crypto traders and investors include:

Here's an example of how capital gains tax would be applied to a cryptocurrency trade:

    • Investment expenses: include trading fees, transaction fees, and software subscriptions for managing your portfolio. These expenses can add up quickly, so keeping track of them throughout the year is important.
    • Home office expenses: If you work from home and use a portion of your home as a dedicated workspace for managing your crypto portfolio, you can deduct a portion of your home-related expenses, such as rent, utilities, and internet service.
    • Travel expenses: If you travel to attend crypto-related conferences or events, you can deduct your travel expenses, such as airfare, hotel, and meals.
    • Losses from the sale of cryptocurrency: If you sell cryptocurrency at a loss, you can use that loss to offset any capital gains you may have realized from other investments. This is known as tax-loss harvesting and can help reduce your tax bill.

It's important to note that claiming tax deductions for crypto activities can be complex, so it's recommended that you work with a tax professional familiar with the finer aspects of tax implications. In addition, you'll need to keep detailed records of all your crypto-related transactions and expenses to support your tax deduction claims.

How to Claim Tax Deductions for Crypto Activities

There are a few steps that must be adhered to get a tax break for crypto-related work:

    • 1. Keep detailed records: include trading fees, transaction fees, and software subscriptions for managing your portfolio. These expenses can add up quickly, so keeping track of them throughout the year is important.
    • 2. Understand the rules: If you work from home and use a portion of your home as a dedicated workspace for managing your crypto portfolio, you can deduct a portion of your home-related expenses, such as rent, utilities, and internet service.
    • 3. Determine your eligibility: Once you've identified the tax deductions you're eligible for, make sure you have the necessary documentation to support your claims. For example, if you're claiming a home office deduction, you'll need records of your home-related expenses.
    • 4. Report your deductions: When filing your tax return, you must report your crypto-related deductions on the appropriate tax forms. This may include Form 8949 (Sales and Other Dispositions of Capital Assets), Form 8829 (Expenses for Business Use of Your Home), or other relevant tax forms.

By following these steps and using tools like Descrypt, you can ensure that you accurately report your crypto-related tax deductions and stay compliant with the latest IRS guidelines.

Changes to Crypto Taxes in 2023

Trading and investing in cryptocurrencies has seen several regulatory shifts and subsequent adjustments in tax benefits in recent years. In 2020, the IRS clarified that all cryptocurrency transactions are taxable and subject to capital gains tax. This means that crypto traders and investors must report all transactions and pay taxes on any gains.

The IRS has also issued new guidance on reporting requirements and enforcement, focusing on increasing compliance among crypto traders. Additionally, the recent infrastructure bill includes provisions for stricter reporting requirements for cryptocurrency transactions.

Among the other actions brought under this new tax umbrella are cryptocurrency transactions, including hard forks and airdrops. This is covered by the IRS in updated tax forms that include questions about cryptocurrency transactions.

One of the huge changes has been the removal of the "like-kind exchange" tax loophole, which allowed traders to defer capital gains taxes by exchanging one type of cryptocurrency for another. This loophole was eliminated for tax years after 2017, meaning traders and investors must pay capital gains taxes on all cryptocurrency transactions.

Traders and investors must stay up-to-date on these changes and understand how they impact their tax obligations. Working with a tax professional is essential, and you can significantly expedite the processing of your tax returns by using Descrypt.

Automating Crypto Tax Reports with Descrypt

As cryptocurrency transactions are taxable and subject to capital gains tax, keeping accurate records of these transactions is crucial to support tax returns and provide clear paperwork during audits. However, manually tracking all these transactions can be time-consuming and any errors can prove to be costly. This is where Descrypt comes in.

Descrypt is a digital tax tool that automates the tracking and reporting of cryptocurrency transactions on tax returns. Here are some ways that Descrypt can help with accurate record-keeping:

    • Seamless Integration: Descrypt integrates with popular wallets and exchanges, automatically allowing users to import their transaction history into the platform. Reports frequently update, ensuring that only the most up-to-date information is provided.
    • Accurate Calculations: Descrypt determines the profit or loss from each trade by comparing the original investment with the current market price.
    • Comprehensive Reports: With Descrypt, users can generate a comprehensive report of all their cryptocurrency transactions, including gains and losses, cost basis, and other relevant information. By splitting trades and actions into manageable sections, filing taxes can be done in a more readable manner.
    • Easy Export: Descrypt allows users to easily export their transaction history in a format that can be imported into tax software or provided to a tax professional. Taxes may be filed more quickly and accurately now that cryptocurrency transactions can be reported similarly to traditional ones.
Wrapping Up

Accurately reporting taxes is crucial for any crypto trader or investor, and taking advantage of tax deductions are a great way to ensure you take more profits home. With the ever-changing crypto tax laws, staying up-to-date on the latest developments and using trusted tax professionals or digital tax tools like Descrypt is essential for accurate tax reporting.

Descrypt is the first step towards accurately reporting your crypto-related taxes. Using this digital tax tool, you can easily calculate gains and losses, generate tax forms, and export data. With accurate record-keeping and automation, you can streamline the process of reporting taxes and ensure compliance with IRS guidelines. Prevent any costly errors by using an automated solution guided by industry-leading principles.

Experience Descrypt now and connect your wallet or exchange to generate a comprehensive crypto portfolio and transaction report. Using Descrypt, you can work towards implementing your tax deductibles and keep your hard-earned gains. Remember to join Descrypt's social media channels on Twitter and LinkedIn to stay informed on the latest crypto tax news and developments. Start your journey towards accurate and comprehensive crypto tax reporting today!