Key Insights:
Calculating crypto taxes is easy if you record transactions as they occur and do not wait until the last moment.
Beware of the heads under which you pay crypto tax by understanding the tax rules correctly.
It is always critical to understand tax deductions and identify legal loopholes.
The right crypto tax software for you is not always the most expensive one.
Alas, ensure you encash only as much crypto as you need for expenses.
Always seek professional help when required.
Taxes are still confusing even if you spend an entire day understanding your tax liability. Further, the worldwide emergence of new taxation rules on crypto makes matters even worse.
However, if you approach it correctly, you can easily calculate your taxes, pay them on time, and even save some taxes.
This article lists a few innovative ways to simplify crypto taxation.
1. Record Transactions on a Daily or Weekly Basis
It is necessary to understand that recording transactions every day or every week reduces much of the workload around your tax calculations. For those who do their own taxes, it saves time, and for those who hire professionals, it saves money.
Further, regularly monitoring your transactions helps you secure your funds and detect fraud at an early stage.
There are crypto accounting software like Koinly that automatically record transaction logs. Or, if you are privacy-oriented, you can use a spreadsheet like Google Sheets or Microsoft Excel to record daily transactions.
Mt Gox, which was recently in the news, was drained by hackers for several years before they finally realized it in 2014. Had they monitored exchange funds regularly, its customers wouldn’t have suffered for over ten years.
2. Re-Evaluate How You Pay Taxes
Most countries have simple tax forms, and people pay different taxes under different headings, such as personal income, business income, capital gains, crypto taxes, etc.
Often, these heads overlap, and taxes under one head can be paid under a different one at reduced rates. For example, several countries allow people to show personal income as salary, combined salary and professional income, or just professional income, with the first being the lowest rate but the last having the highest amount of deductions for office equipment, travel expenses, etc.
3. Understand Deductions Properly
It is essential to understand how many deductions you can legally avail yourself of when calculating taxes.
Under personal deductions, you can include the cost of health services, education, interest on loans, and insurance.
Under professional income deductions, you can deduct office maintenance costs for equipment like laptops, computers and other office supplies.
Though each country provides a different set of deductions, you can simply avail the list from Google by searching your country’s name followed by the keyword “list of tax deductions.”
4. Expensive Doesn’t Always Mean the Best
Traders with high value and many transactions often need more complex software. But that’s not true for small-time traders, cryptopreneurs, and people simply getting paid in crypto.
Crypto-entrepreneurs often have a complex reporting mechanism where they must hire an auditor for tax purposes.
Low-volume traders or those who use a single crypto exchange can often get a summary of their trades in a given tax year by simply going to account details.
In both of these previous cases, no software is required to calculate taxes or income, so buying tax and accounting software for them might be a waste of money.
For freelancers who are getting paid in crypto and have less than 50 transactions in a given year, a simple spreadsheet software like MS Excel or Google Sheets is enough.
Complex software like Koinly is only required if a person is a professional trader who conducts multiple transactions every day. These software programs are very accurate and take note of every transaction across multiple platforms.
5. Redeem Low to Lower Your Taxes
Most tax laws around the world only make you liable to pay taxes if you convert your crypto into the local currency. Further, with more and more businesses accepting crypto, it is much easier these days to directly use crypto to make daily purchases.
But before doing this, ensure that your local laws do not deem received crypto income. Otherwise, this makes little sense. Also, in several countries, like the USA and India, exchanges need to report crypto transfers directly to tax authorities.