As if filing your taxes isn’t already stressful enough, when you add NFTs and crypto into the equation, there’s room for even more error. Here are some of the most common mistakes when filing NFT and crypto taxes according to Alex:
- Not submitting all your wallet addresses
If you don’t submit all of your wallet addresses, not only will it be impossible to file your taxes accurately, but eventually it will become known that you have additional wallets by looking at your transactions on the blockchain.
It’s important to be upfront about all your wallet addresses and be sure to report all of them to avoid future problems.
- Commingling wallets (this can create complexities on the reporting side)
Commingling your Web3 wallet with others is not a great idea because this will cause complexities when it comes to reporting, this goes for both personal and business transactions, and will ultimately become an issue.
For example, let's say you and a couple of your friends want to buy a VeeFriends NFT. So, everyone sends you the ETH to make the purchase. This is a bad look in the eyes of the IRS because they might think you received that ETH as compensation and then purchased your own NFT.
This commingling of wallets causes issues from a reporting standpoint as it will likely be difficult to explain, especially when you consider that audits don’t occur six months after a transaction, rather, audits usually happen two to three years later once you have completely forgotten about the transaction.
Instead, Alex recommends creating a separate stand-alone wallet for those specific transactions to make them easier to track.
- Not keeping a proper record of your transactions
It’s important to keep track of all your NFT and crypto transactions. Some people like to keep an Excel spreadsheet with every transaction detail that occurs, but Alex says it really depends on your transaction volume.
Although an Excel spreadsheet is an option, Alex recommends using an automated data aggregator to keep track of all your transactions. The reason being is that if you are manually entering all of your transactions, you are leaving more room for error as opposed to letting the software track it for you automatically.