If you’re trading crypto, earning from staking or trying out NFTs, you probably know crypto taxes aren’t simple.
But even though taxes aren’t the most exciting part of the crypto space, staying on top of your tax records could save you big time on both hassle and tax bills. Keeping your crypto records organised from the beginning also offers tax benefits and makes reporting much easier.
Here’s how to keep your crypto tax records organised, reduce headaches during tax season, and, most importantly, stay compliant while possibly reducing your overall tax liability.
Step 1: Know what’s taxable (and what isn’t)
Knowing what’s taxable and what isn’t is the first step to deciding what is needed for record-keeping and getting the right crypto tax advice if you need it. Capital Gains Tax and Income Tax apply to a lot of crypto activities. Here’s a quick rundown of what’s taxable:
- Trading crypto for other tokens, stablecoins, or fiat.
- Earning staking rewards or income from mining.
- Selling NFTs or other digital assets for a gain.
- Using crypto to buy goods or services (yes, even this counts).
Each of these counts as a taxable event and can create a capital gain, capital loss, or taxable income, depending on the transaction type.
Step 2: Set up your record-keeping system
When it comes to crypto, “just look at your bank statement” isn’t going to cut it. You’ll want detailed records of all your transactions, including the following:
- Date and time of the transaction
- Type of transaction (e.g., purchase, sale, staking reward)
- Crypto asset involved (e.g., ETH, BTC, or an NFT)
- Amount in crypto and fiat value at the time of the transaction
- Transaction fees and purchase price (these can often be deducted!)
- Wallet addresses involved in the transaction
Most exchanges let you download a history of your transactions, but you’ll also need to track any off-exchange activity (like wallet-to-wallet transfers or DEX trades).
For staking or mining, note the time of receipt and the market value to report it accurately as income.
Track your costs and deductibles
To reduce your taxable gains, take advantage of allowable costs and deductible expenses. Transaction fees are often deductible when you calculate capital gains or income.
Here’s what you should track:
- Transaction fees on buys, sells, and transfers
- Acquisition costs, like the purchase price and exchange fees
- Any other allowable expenses related to the acquisition, disposal, or storage of your crypto assets
These deductions may seem minor, but over many transactions, they add up. Record these costs and make it easier to report your gains accurately and reduce your tax exposure.
Step 3: Know your tax-free allowances and annual exemptions
Once you’ve set up a good record-keeping system, knowing your tax-free allowances can help reduce your liability even more. In many countries, you’re allowed a certain amount of capital gains or income without being taxed. This annual exemption can make a big difference, especially if you’re a casual investor with limited gains.
For example, let’s say you’re allowed a tax-free allowance of £12,000 in gains per year. If your gains stay below that, you won’t pay Capital Gains Tax. Keep a running tally of your gains and losses so you know when you’re nearing your allowance threshold.
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Step 4: Use tools to keep accurate records and simplify reporting
Tax compliance is more than just tax returns; it’s also about accurate reporting and avoiding unnecessary red flags. Keep detailed, accurate records for a solid audit trail that will keep things smooth if tax authorities come knocking.
Consider crypto tax software to manage these records, especially if you’re dealing with hundreds (or thousands) of transactions. Many platforms integrate with major exchanges and wallets – this simplifies tracking and can generate a tax report with little effort from you.
Having all the information at your fingertips also makes it easier to calculate the correct tax liability for each transaction. Misreported gains and losses are one of the quickest ways to attract scrutiny, so stay on top of records to save yourself time and effort.
Special considerations for different crypto activities
If you’re involved in mining activities, staking, or NFT trading, keep in mind that these might be treated differently for tax purposes:
- Staking rewards and mining income are often treated as regular income and taxed at the standard income tax rate. Record the time of receipt and the fair market value for each reward.
- NFT transactions can be more complex. Each buy and sale is generally a taxable event, and if you’re an artist or creator, your income might be taxed differently (possibly as business income).
- DeFi transactions on DEXs or yield farming platforms can create taxable events, too, especially if you’re frequently trading or claiming rewards.
Step 5: Get professional advice when you need it
Finally, if you’re unsure about the best way to handle your crypto taxes or have a particularly tricky tax situation, don’t hesitate to get professional advice. Crypto tax professionals can help you understand your tax position and make the most of any deductions, allowances, or exemptions.
With Crypto Tax Degens, you’ll have a supportive community guiding you – from accurate record-keeping to maximising deductions. Our crypto tax advice helps you stay compliant and minimise your tax liability so you can focus on growing your investments. Join the Crypto Tax Degens community today, and take control of your crypto taxes with confidence.