"In this world nothing can be said to be certain, except death and taxes." The words of Benjamin Franklin echo through the ages, and yet... Well, tax evasion isn't going anywhere anytime soon. Whether it's individuals failing to declare their earnings, small businesses fudging numbers or behemoth corporations like Amazon manipulating unspecified tax credits and executive stock options to avoid income tax on $11.2 billion of profits, the government's supposedly inalienable right to collect their due is no more "certain" than an everyday citizen's conviction that they'll win the lottery with their next ticket.
Tax Agencies Getting Tough
One area where governments are trying to get tough is cryptocurrency. Recent guidance released by the IRS in the United States, and HMRC in the UK, made no bones about the desire to aggressively pursue anyone operating in the cryptosphere and not fulfilling their obligations at the end of the financial year. These obligations apply to money earned from transactions involving cryptocurrency, whether you're trading one token for another, transacting goods or services with crypto, exchanging crypto for other property - the works. The only activity which appears to be immune from tax, for the time being, is hodling - since there is no capital gains or losses.
It is not surprising that governments are coming after crypto holders. As of 2019, there are 153 million bitcoin user addresses, and Bitcoin - the original and most popular cryptocurrency - accounts for $6 billion of daily transactions, with a current market cap of $145 billion. Factor in the multitudinous altcoins out there and you're talking about a veritable ocean of money creating tax liabilities in various territories.
While regulators have been playing catchup in this niche for a while, they are now eager to get across the message that enforcement operations are underway - as indicated by recent news that HMRC, the IRS and even the Danish Tax Agency are pressuring crypto exchanges to reveal customers' names and transaction histories. Reading behind the lines, tax agencies clearly believe that a large number of crypto transactions have gone unreported, and investors who've left a large footprint are likely to come under close scrutiny.
How to Get Your Crypto Tax in Order
If until now you've been diligently recording your transaction history while hanging on the tax agencies' every word, all the while taking care to ensure every satoshi owed to the treasury is paid, you don't have to make sweeping changes to your process. But if the recent overtures have made you break out in a cold sweat, there are several steps you might want to take.
One, you could speak to a crypto-educated tax attorney, advisor or accountant. Set up a meeting, explain your situation and make clear that you want to fully comply with the relevant legislation. Don't fret over the possibility of receiving a lecture; just be honest about the nature of your dealings in the cryptosphere and figure out your next play. There's a great many qualified professionals in this space, so do some research and make a move.
Two, you could independently review your transaction history and cross-check your wallets. Determine your liability with close reference to the recent policy papers and using a consistent method of accounting (FIFO, LIFO etc). You might find that much of your activity in the cryptosphere doesn't constitute taxable events. If, however, you discover that you owe tax for lapsed financial years, you'll either need to follow step one, detailed above, or stay silent and file a proper tax return for this/next year.
Crypto tax software Blox.io can help you get your crypto tax game right
Seek Specialist Software
Your third option is to start using a crypto tax software, as a rule, from this moment on. You can use the same software to calculate your tax liability in recent years. Again, if you find that you owe tax for years gone by, the ball is in your court. You might want to speak to a crypto tax specialist, you might want to kick the matter into the long grass. Importantly, you'll know what your liability is. No one wants to be ignorant about this question when it's thrown at them by the taxman.
Generally speaking, automated crypto asset management software simplifies the whole record-keeping process. Such software removes the need to carefully scrutinize every individual crypto transaction, as it automatically calculates your taxable gains and maintains an accurate record of previous trades. Simply import your data directly from the exchange and let the platform do its thing. If an exchange isn't supported by the software, don't panic: you can usually import a CSV file. These tools are especially useful for high-volume traders transacting crypto on multiple platforms.
Keeping comprehensive records of all your crypto dealings is a must. But it's important not to become unduly stressed by the aggressive tone of some tax agencies (and remember, some nations are much kinder to crypto holders). It's always possible to optimize your tax results, and some of the better software generates real-time, country-specific reports and in-depth analytics that turn a complex topic into a far more digestible proposition.