Cryptocurrency trading is a complex and often confusing activity. As the value of cryptocurrency continues to rise, more investors are turning to crypto as an asset class.
With all this new money pouring into the space, it’s essential that you understand how to properly account for your profits or losses when filing taxes.
Unfortunately, you’d probably find computing your crypto taxes a frustrating and time-consuming task because of the complexities involved, especially if there’s no one to guide you.
How do I know this? Let’s just say I’ve been a tax accountant for over 17 years and a virtual currency tax specialist for more than five. And I can tell you that poor crypto accounting and its attendant consequences are not rare to me.
I show up to work every day, and there is always that one client on the verge of facing or already facing penalties from the IRS. And can I tell you another thing? Half of them tried first on their own and, of course, discovered that navigating through the deep seas of crypto tax rules, more often than not, would require the help of a professional.
In this article, I’d share the best of the best of what I’ve discovered in the last five years, helping my virtual currency clients overcome prevalent crypto accounting problems.
We’ll also discuss some key things you need to do to ensure your accounting for cryptocurrency is completed accurately and with less hair-pulling frustration. But before we do that, let’s look at the situations that may warrant the need for a crypto accountant.
Cryptocurrency Accounting: Understanding The Basics
In the United States, the IRS considers cryptocurrency as property for tax purposes and an intangible asset, according to IAS 38. This means that accounting principles and tax considerations apply to them. At face value, this seems easy enough. In actual practice, however, it’s complicated.
Here are some common challenges in accounting for crypto:
- Lack of clear guidelines: The IRS has provided some guidance on how to report crypto transactions on taxes, but there are still many gray areas that can make it difficult for individuals and businesses to know exactly how to report their crypto-related income and expenses. For instance, there is no specific US GAAP on crypto assets.
- Volatility in value: The value of cryptocurrency can be highly volatile, making it difficult to determine the cost basis for tax purposes. This can result in confusion and errors when reporting capital gains and losses.
- Difficulty tracking transactions: Cryptocurrency transactions can be difficult to track, as they often take place on decentralized networks and are not recorded in traditional financial institutions.
- International regulations: Cryptocurrency is a global asset, and its tax implications can vary depending on the country you are in. The fact that tax laws and regulations in different countries are not always consistent can make it challenging to navigate crypto tax and accounting on an international level.
The complexities of crypto taxes are growing as the crypto ecosystem, and its use cases continue to evolve. Four years ago, the concept of decentralized finance was just starting to emerge, but now it has grown into a thriving industry with $68 billion in total value locked.
It is extremely difficult to accurately determine the value of cryptos. The task is even more challenging for organizations that have thousands or even millions of transactions. Every transaction has tax implications, so having accurate crypto tax accounting is critical for your legal and tax responsibilities.
All these factors and more make it important to consult a professional accountant or tax advisor to ensure compliance with crypto laws and regulations.
8 Crypto Accounting Situations Where You May Need Help
Accounting for digital currency can be hard to understand. Some people try to figure it out on their own, while others choose to get help from a professional. We have your answers if you’re wondering whether you should tilt to a crypto tax accounting firm.
1.) You’re Dealing With An IRS Audit
Various tax agencies, including the IRS and the ATO, say they will focus heavily on cryptocurrency.
For anyone conducting transactions in crypto or with crypto investments, this raises the risk substantially of a tax audit. In case of an audit or any other correspondence with the IRS, having a tax accountant familiar with the tax laws surrounding cryptocurrency can help you navigate the process and ensure that you are in compliance with all relevant regulations.
Often, trying to navigate an IRS audit without a proper understanding of the regulations guiding your unique transaction and tax situation would usually end up with you aggravating the problem. If you cannot provide accurate documentation during an audit, you end up triggering penalties and fines for yourself.
2.) You Have DeFi Investments
Currently, most tax offices across the globe haven’t specified their tax laws as it pertains to transactions bordering around DeFi, and for the few who have, like the HMRC in the UK, truthfully, the tax laws are as complicated as it gets.
If you’re the average crypto trader or investor without a 2nd degree in law, you may find that interpreting the released guidance and navigating your way around it could easily land you in problems you’re not ready for. Make one mistake, and you’re paying thousands in taxes and probably running into bigger problems with the IRS.
A CPA or accountant specializing in accounting for cryptocurrency is a valuable asset to you in such cases. They can help ensure your tax liability is calculated correctly and that you don’t make errors while filing your return.
3.) You Have Complex Trading Activity
If you frequently trade multiple cryptocurrencies, it can be difficult to keep track of all your buy and sell transactions and accurately calculate your gains and losses.
A cryptocurrency accounting service can help you organize your trading activity and ensure that you are reporting your income accurately to the IRS.
The same applies if you have significant gains or losses from your crypto trades. If you do, it’s important to have a tax professional review your situation to ensure that you take advantage of all available tax deductions and credits. You don’t want to miss out on available deductions and credits, as they can significantly impact your overall tax bill.
4.) You’re Holding Multiple Wallets/Exchanges Or Have Used A Collapsed Exchange
Keeping track of all your transactions can be challenging if you hold cryptocurrency in multiple wallets or exchanges. A crypto tax accountant can come in handy by ensuring that you are reporting all of your income and gains.
The crypto landscape has undergone significant changes in 2022, with many major players, such as Celsius, FTX, Voyager, and others, exiting the market.
This has left many investors with funds trapped on inaccessible exchanges and unable to recoup their losses. The accounting and tax implications of such events can be challenging to navigate. They vary depending on factors such as your location, the company’s bankruptcy filing, and the likelihood of recovering your funds.
Working with an experienced crypto accountant can assist in determining the necessary steps to report to tax authorities and when to do so. Unless you’re absolutely confident in your ability to do your own accounting, taking the risk is really not worth it.
5.) You Have Foreign Transactions
If you have made transactions with cryptocurrency exchanges or wallets based outside of the United States, it’s important to have a crypto accounting professional help you navigate the complex rules and regulations surrounding foreign transactions and reporting requirements.
Failure to comply with these rules can result in significant fines, penalties, and possibly even court charges.
6.) You’re Uncertain Of Your Background In Cryptocurrency Accounting
How confident are you in your ability to accurately report your crypto transactions without errors?
In practice, accountants face numerous challenges for which there is no established accounting standard. One such challenge is accounting for cryptocurrencies. Regular taxes with less complicated legal guidance are a hassle for the majority without a tax background, much more crypto taxes with their numerous nuances and gray areas.
Let’s take a quick rundown of questions you must be able to answer before even considering the rigorous work of doing your own accounting for crypto:
- Do you know what constitutes a crypto asset under the AICPA guide?
- Do you know what constitutes a taxable event?
- Do you know the IRS classification of virtual currencies?
- Do you know how to adjust capital gains/losses based on the adjusted cost basis?
- Do you understand the implication of the gains when traded for business and when traded as a hobby?
- Do you understand what is meant by fair market value?
If you’re unsure about any of these, then your best bet is to hire a specialist in the crypto tax field who can handle the job on your behalf.
7.) You Want To Pay Less Tax
Can a Crypto CPA or tax accountant really help you save in capital gains tax? In my posts addressing common cryptocurrency accounting problems, I discussed this. You can read it here.
The IRS doesn’t provide a ton of information about how to handle bookkeeping or taxes for cryptocurrencies, so there could be some confusion. That’s why it’s super important to work with a tax professional who knows all about virtual currencies and has experience reporting crypto gains and losses.
Even for simple crypto transactions, having a tax pro on your side who knows all about it can make sure you’re following the rules and answer any questions you have about your taxes.
8.) You Want SAVE A HUGE Amount Of Time
You know, if you put your heart into learning how your accounting for crypto, you’d know more than you do now.
But honestly, making any solid or measurable progress would require you to invest a serious amount of time understanding virtual currency accounting and tax laws – knowledge you probably do not need to scale your business (or grow your wealth).
Unless you have excess free time and do not mind an IRS audit every once in a while, I’ll advise you not to go that path.
6 Tips To Make Your Cryptocurrency Accounting Quicker, Easier (and Less of a Hassle)…
With the increased adoption of crypto for conducting transactions comes the need for accurate accounting when it comes to taxes. To ensure that your crypto accounting is completed accurately and with less frustration, there are several things that you should keep in mind.
1.) Keep Track Of All Your Transactions
Keeping accurate records of your transactions is essential for determining your gains and losses. With several factors now contributing to the risk of an IRS audit trigger, you want to ensure your records are up-to-date and accurate should you ever need to defend yourself.
This is why from the get-go, you need to ensure that you’re diligent enough not to arouse the surveillance of the IRS. You also want to ensure you’re transparent about your transactions and holdings in crypto, no matter how small they may seem. This way, you never have to get into problems with the IRS.
Also, if you use your cryptocurrency for business purposes, it’s important to track it separately from your personal transactions. Keep detailed notes on your trades and transactions: This will help you explain any discrepancies that may arise during an audit.
2.) Understand The Tax Laws Guiding Your Transactions
If you’re not going to hire a cryptocurrency tax professional to do the heavy lifting for you, then be prepared to understand the tax implications of different types of transactions. For example, short-term vs. long-term capital gains have different tax rates.
It’s important to understand these so that you can make informed decisions about when to buy, sell, and trade your cryptocurrencies. Knowledge of these details isn’t negotiable if you want to avoid trouble with the law.
Knowledge of your jurisdiction’s tax laws and regulations will also help you stay compliant and avoid potential penalties. This is a challenging task to do as crypto tax laws are constantly changing and evolving.
3.) Use A Reliable Crypto Accounting Software
There are several software options available that can automate the process of calculating your taxes and generate the necessary tax forms for you. These software programs are great because they offer a user-friendly interface and can automatically calculate and report your gains and losses.
However, it’s important to note that while cryptocurrency tax software is a good option, it may not always be the most reliable as it is only as accurate as the data you input. Since you must input your own transaction data, if you accidentally input something wrong, the software will calculate your taxes based on that mistake, and, well, you don’t want that.
Another thing to keep in mind is that crypto laws and regulations are always changing, and this software may not always be up-to-date. This could lead to non-compliance, and no one wants that either. There’s a slew of other things to consider when choosing to rely solely on this software for your tax accounting and bookkeeping. You can learn more about using crypto tax software here.
So, what’s the solution? If you want to ensure compliance and minimize your tax liability, my advice is to consult a tax accountant. They have a deep understanding of tax laws and regulations and can provide you with personalized advice and strategies to minimize your tax liability. Plus, they can help you navigate tricky issues like international tax implications, which tax software may not cover.
4.) Use A Reputable Cryptocurrency Exchange
Use a reputable exchange that provides you with complete transaction records to make your cryptocurrency tax accounting quicker and easier.
Not all exchanges are created equal, and using a reputable exchange can help to ensure that your transactions are recorded correctly and that you have access to the necessary information for tax purposes.
Also, remember to keep accurate records of your cryptocurrency wallet addresses. This is important for tracking your transactions and determining your cost basis. Your cost basis is the original value of the cryptocurrency you purchased, and it’s used to calculate your gains and losses.
If all of these seem novel, then please don’t bother your head. Unless you’re ready to dedicate ample time to learning the regulations surrounding virtual currencies Stressing over your own tax is only bound to lead you to financial mistakes.
5.) Hire A Crypto Tax Expert
Navigating the tax implications of cryptocurrency trading and investing can be a delicate balancing act.
On the one hand, you’re trying to ensure that your calculations are accurate and you’re not overpaying taxes. On the other hand, you don’t want to miss out on deductions and credits that could minimize your tax bill.
One example of this is the 1099-K form that Coinbase has sent out in the past, which omitted cost basis information and caused some users to overpay taxes. Additionally, many traders and investors failed to deduct fees and other costs from their gains, which would have reduced their tax liability.
Truthfully, handling all of these nuances in your tax filing can be tasking. This is why outsourcing this responsibility to a crypto accounting company is always advisable. It not only saves you stress, but it also ensures you’re paying the right taxes without leaving money on the table either.
6.) Keep Up With Communication
It is advisable to maintain constant communication with your accountant as accounting for blockchain-related activities, such as tracking transactions across multiple exchanges, blockchains, and wallets, can become complex. By keeping your accountant informed and updated, you can prevent complications and ensure both parties are on the same page.
7 Tips To Choose The Best Crypto Accounting Service To Calculate Your Gains/Losses For Taxes…
By “cryptocurrency accounting service” I’m NOT talking about a “do it yourself” software like CoinTracker, Koinly or Accointing. I’m talking about using crypto accounting professionals who specialize in accomplishing what you need done.
1.) Hire Experience And Expertise In Cryptocurrency Accounting
Finding the best crypto tax accounting firm near you (or in the United States) can be overwhelming. The good news is you are NOT geographically restricted to the state you live in. Any crypto accounting firm in any of the 50 U.S. states can help you. If you’re not sure where to begin, you can just google “crypto tax accountants near me.”
Your first concern should be experience and expertise and not cost. You want to hire a crypto accounting solution that has been around for a while and has a proven track record of providing high-quality tax services.
To best handle your tax and accounting reporting needs, use a service provider with experience in dealing with cryptocurrencies.
For instance, I’ve helped over 1,137 thousand virtual currency clients during my 17 years as a professional personal and business accountant. This naturally makes navigating the crypto space a lot easier for me.
2.) Read Online Reviews And Testimonials
Look for independent reviews from other cryptocurrency investors and traders to get an idea of the crypto tax accounting firm’s reputation and level of customer satisfaction. Make a list of your top options and then compare their strengths and weaknesses.
Reach out to other cryptocurrency investors and ask for their recommendations for the best crypto tax advisors. Personal referrals from people you trust can be a great way to find a trustworthy tax advisor.
Conducting a quick online search for accountants specializing in cryptocurrency on Google and social media platforms can also be effective. You may also look into the IRS directory or verify with national tax professional organizations for more options or your state accounting boards.
With so many laws, regulations, reporting requirements and potential tax liability surrounding your accounting for cryptocurrency, you can’t afford to make a poor hiring decision.
3.) Hire An Accountant Who’s Acquainted With Cryptocurrency Tax Accounting
You certainly don’t want to be a test case for your accountant’s tax skills. That’s why you want to ask your accountant if they have experience handling taxes and for how long.
While it’s expected that an accountant should ordinarily be able to do taxes, not all CPAs specialize in accounting for taxes. You want to hire a CPA whose strength is taxes and who can exploit the tax laws to help you take advantage of tax-saving opportunities and easily navigate the tax code.
4.) You Want To Hire A Tax Professional Who Specializes In Providing Crypto Accounting Services
Beyond general taxation, you want someone who specializes in crypto, to be precise. Hiring a CPA familiar with accounting for taxes is essential for ensuring accurate tax reporting for your cryptocurrency transactions.
Ideally, inquire about the proportion of their clients who invest in crypto. The more complex your investments, the higher the percentage should be.
A competent crypto accountant should be aware of the different accounting treatments for cryptocurrency. If they don’t first understand the tax law, how do you think they’d be able to understand your specific tax situation? This is even more important if you are involved in mining, staking, DeFi interest, and airdrops.
5.) Consider The Cost
Consider the cost of the cryptocurrency tax accounting company and whether they are reasonable. You don’t want to be overcharged for services, but you also want to ensure that you get quality services.
Different tax advisors have different fee structures, so choosing someone who fits your budget is important. However, remember that cheap is not always the best option, and choosing a quality advisor over a low-priced one is better.
Hiring the services of a virtual currency accounting service may take a few extra bucks but will save you millions in taxes.
6.) Communication is Key
Find a crypto accounting service that is communicative and responsive. Tax reporting can be complex, so it is important to choose a firm whose accountants are accessible and willing to answer your questions and concerns.
7.) Cut To The Chase By Hiring Crypto Tax Made Simple By Result Tax Accountants
You could simply save yourself the headache of doing all the heavy lifting yourself by getting in touch with us today. We are always one call away from providing you with answers and solutions to your crypto tax and accounting questions. Not clear on something? Want some more information? You can schedule a free consultation with me now.
Frequently Asked Questions
Do you need urgent clarification on anything? You can book a FREE consultation call. In the meantime, here are some questions you may need answers to:
1.) Who Is A Crypto Accounting Service Provider?
Cryptocurrency accounting service providers offer a myriad of accounting and tax-related services that help digital asset investors, and traders stay financially organized and tax compliant.
2.) How Do FIFO, LIFO, and HIFO work In Cryptocurrency And Accounting?
FIFO, LIFO, and HIFO are cost accounting methods used in cryptocurrency accounting to calculate the value of your crypto at disposal and capital gains for tax purposes. Here’s how each works:
- FIFO (First-In-First-Out) – The asset that was purchased first is sold first.
- LIFO (Last-In-First-Out) – The asset that was purchased last is sold first.
- HIFO (Highest-In-First-Out) – The asset with the highest cost basis is sold first
Each method impacts the way your capital gains or losses will be computed, and the method you choose will ultimately impact the tax liability. For instance, during a time of rising cryptocurrency values, LIFO may result in lower taxable gains, but if prices are falling, FIFO may be more beneficial.
HIFO (Highest In, First Out) tends to work out best in a scenario with numerous trades, as it can result in substantial tax savings.
3.) How Do I Calculate My Crypto Gains And Losses To Prepare My Taxes?
In the U.S., crypto is considered a taxable asset and hence subject to capital gains tax. The IRS classifies cryptocurrency as property, meaning that any gains or losses from the sale or exchange of crypto are taxed as capital gains or losses.
To determine the amount of tax owed, you simply deduct your cost basis from your proceeds.
Capital Gain = Proceeds – Cost basis
Where: Proceeds = amount you received from the disposal/sale and,
Cost basis = acquisition cost of your crypto.
If you sell your tokens at a price lower than what you originally purchased them for, it results in a capital loss. This loss can be utilized to balance out capital gains from other transactions during the same tax year.
Additionally, if you receive cryptocurrency as payment for goods or services, the value of the cryptocurrency at the time of receipt is considered taxable income. This is known as “mining” or “staking” income and is subject to income taxes under the IRS.
4.) How Are Cryptocurrencies Accounted For IFRS?
According to the IFRS, cryptocurrencies should be recognized as an asset when obtained and measured at cost or fair value if it can be reliably determined.
When the cryptocurrency is held for sale, it should be classified as held for trading and accounted for as a financial asset. If it is used as a means of payment, it should be accounted for as inventory. Any changes in the fair value should be recognized in profit or loss.
5.) How Does GAAP Accounting For Cryptocurrency?
Under the Generally Accepted Accounting Principles (GAAP), cryptocurrencies are recognized as an intangible asset at cost, and any decline in value must be recorded.
Crypto accounting is hard. But you know what’s even harder? Having to deal with the repercussions of non-compliance. With the right crypto accounting firm, you can avoid stress and penalties, and ensure compliance with tax laws.
Contact us today, let’s help you navigate the complexities of crypto taxes with ease and peace of mind.