It’s still a changing world out there because of cryptocurrencies. DeFi, NFT, Bitcoin, Ethereum, Altcoins and many other variables amongst limited regulation make navigating the tax landscape challenging. Alex Gailey explains what you might need to know.
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Taxes are inherently complicated. Add cryptocurrency to the mix, and it can get downright overwhelming.
If you’ve bought and sold Bitcoin, Ethereum, or any other crypto in 2021, you’ll be expected to report any profits to the IRS during this year’s tax season, which starts next Monday. If all you did was buy and hold crypto last year, you might not owe anything. It’s when you get more active that it gets more complicated.
“What is tricky is that there are a lot of really crazy things with crypto that you can do, from all the stuff around DeFi to NFTs. That’s gonna be the hard part about 2021 taxes,” says Pat White, co-founder and CEO of Bitwave, a company that helps businesses with crypto tax reporting.
If you own crypto, or dabbled in it last year, you may be wondering if you can file your own taxes or need to bring in a crypto tax professional for some help. For many people who buy and trade crypto within online exchanges, accounting for it in your tax return is relatively easy.
“If all you’re doing is buying some Bitcoin, holding onto it and selling it six months later, then any CPA can help you with that,” says White.
Here’s how to begin preparing for tax season if you have crypto, tips for finding a crypto tax pro, and important questions to ask an accountant about your crypto.
Begin Preparing Now for Tax Season
If crypto will play a role on your taxes this year, start planning and gathering your crypto transaction reports to simplify your 2021 tax filing. Tax season officially kicks off on Jan. 24 and runs through April 18 for most taxpayers, according to the Internal Revenue Service.
If you don’t have a complex tax situation nor a complex crypto trading history, you may be able to easily report your crypto earnings yourself using tax software. Most people in the U.S. have “simple taxes” and can file their taxes on their own, according to Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company.
“There’s roughly 155 million tax returns being filed in any given year, and anywhere between 75 to 80 million are very simple ones and they have been handled by DIY software, like TurboTax,” says Chandrasekera.
There are several crypto-specific software programs that can make the process smoother. Programs like CoinTracker, TokenTax, and CryptoTrader.Tax can generate the cost basis for your crypto trades and determine your capital gains and losses. Many of these crypto tax programs are compatible with regular tax programs like TurboTax or TaxAct, so you can easily import the gains and losses they report to your tax return.
“I recommend using crypto tax software,” says Laura Walter, a certified public accountant and founder of Crypto Tax Girl. “There’s a ton out there. Some are better than others for different reasons, but the one that I use is CoinTracker. It just has the most tools in my opinion.”
What to Know If You’re Working With a Tax Professional
As crypto has grown in popularity, so has the demand for accountants who specialize in the field. The IRS only offers up to a certain amount of crypto tax guidance, which means there can be some “gray areas,” according to Chandrasekera.
That’s why it’s important to work with a tax professional who can interpret tax code related to virtual currencies and has experience reporting cryptocurrency gains and losses. Even if you aren’t conducting complex crypto activities, a crypto-knowledgeable tax professional can ensure you’re reporting correctly or answer questions you may have about your specific tax obligations.
“First ensure they understand the tax law and then make sure they understand your specific crypto tax situation,” says Walter.
It’s equally important to keep track of all your potentially taxable activities, as well as the fair market value of your crypto throughout those activities, because it’s ultimately your responsibility. Your records should be sufficient “to establish the positions taken on tax returns,” according to the IRS.
If you already have an accountant you work with, ask if they own any virtual currency themselves, and pay attention to see if they acknowledge uncertainties in the tax code. If you’re trying to find a crypto-knowledgeable tax expert, start by asking friends, family, and co-workers who have bought or traded crypto for referrals. A quick search on Google and social media of accountants who specialize in crypto could also be helpful during your search process. You could also search the IRS directory, or check with your state accountant boards or national tax professional associations.
Once you have at least two to three names, reach out and ask them to meet either in person or virtually to discuss your 2022 taxes. They can evaluate your situation and give you an idea of how much they might charge.
Questions to Ask Your Tax Pro About Crypto
If you work with a tax pro to file taxes, here are 6 good questions to ask if you bought and sold crypto last year. Answers to these questions will help you assess your tax pro’s familiarity with cryptocurrency and how it factors into taxes.
1. Have you worked with crypto clients in the past, and what does your process look like?
By asking them this question, you can get a sense of their past experience with crypto taxes and can better understand how they plan to account for your crypto investments in your taxes this year.
2. Can you explain what are considered taxable crypto events versus non-taxable crypto events, and where my transactions fall?
Crypto is taxed similar to other assets such as stocks or gold. Each taxable crypto event may create a capital gain (or loss), so you’ll need to know the date, cost basis, sale value, and any fees associated with each transaction. A tax expert should be able to take a look at your transaction history and tell you which events are taxable or non-taxable.
3. What kind of tax am I expected to pay on my cryptocurrency?
Crypto’s taxable value is based on capital gains or losses — basically, how much value your holdings gained or lost in a given period. If you’re confused or have any questions, your CPA can help you better understand your tax situation.
4. How do I obtain accurate records of my crypto transactions?
You’ll need records of any time you receive, sell, or exchange virtual currency, as well as the fair market value of your virtual currency. A knowledgeable CPA can explain how and where to get those records.
5. If I haven’t been reporting my crypto investment in my tax returns for several years, what can I do about it now?
The IRS is taking a harder look at cryptocurrency transactions this year, says Walter. If you’ve avoided reporting your crypto on your taxes in the past, this year “might not be the year you’ll get away with it,” she says. According to the IRS, you have three years from the date that you filed your return to file an amended return. For traders who have executed hundreds or thousands of trades over the years, this can quickly become a difficult task.
6. Do any of my crypto transactions trigger income tax?
Certain crypto transactions can trigger income tax. If you’ve received virtual currency as payment for services, you’ll have to report it as income on your tax return. Examples of this are receiving crypto as income instead of cash, earning Bitcoin by mining new coins, or receiving coins or tokens as reward for certain activities.
IRS Guidance for Virtual Currencies
Here’s the guidance the IRS has issued so far related to virtual currencies and tax reporting:
- Virtual currencies
- Frequently asked questions on virtual currency transactions
- IRS Notice 2014-21: How existing tax principles apply to virtual currency transactions
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