Bitcoin and other cryptocurrencies pose unique challenges during tax season. While similar to stocks and bonds in some ways, there are important differences that can make a significant impact on the amount of tax that you owe.
Professional accountants can help navigate these complexities, but it can be difficult to find someone with the right experience.
In this article, we will take a closer look at crypto accounting challenges, tips for finding a crypto accountant and what you need to know if you decide to do it yourself.
Bitcoin Tax Accounting Challenges
Bitcoin and other cryptocurrencies can be challenging from an accounting perspective, particularly if you don’t have experience with other capital assets (e.g., stocks). With the IRS cracking down on cryptocurrency tax evasion, it’s important to properly file taxes on any net capital gains or leverage any net capital losses to offset your other tax liabilities.
There are a few core steps to the process:
- Record Transactions: You should keep detailed records of all cryptocurrency transactions, including crypto-to-crypto trades, crypto-to-fiat trades and any cryptocurrencies received through hard forks or other transactions.
- Calculate Gain or Loss: You must add up the gain or loss from all transactions made during the tax year to come up with the net capital gain or loss. These must be further divided into short- and long-term gains or losses.
- Determine Tax Rate: You must determine your income tax bracket to apply the correct ordinary income or capital gains tax on any cryptocurrency net capital gains. This calculates the tax on any net capital gains.
- Handle Tax Losses: You must determine if net capital losses can be used to offset other gains or your income tax. In addition, you can carry forward excess losses to next year to help offset future taxes, if applicable.
In addition to correctly filing taxes, there are steps that you can take to proactively minimize your taxes. For example, tax loss harvesting enables you to realize losses in the current tax year to help offset your other income tax liabilities without changing the overall make up of your portfolio. It’s a great strategy in years when cryptocurrencies move lower.
Finding a Bitcoin Tax Accountant
There are a few basic steps that you can take to find an accountant capable of handling your Bitcoin or other cryptocurrency transactions. When building a list of potential leads, it’s important to seek out Certified Professional Accountants, or CPAs, that are also IRS Enrolled Agents, or EAs, that can represent you before the IRS.
Let’s take a look at four key areas to consider when vetting a crypto accountant to prepare and plan your taxes.
Most accountants aren’t very familiar with cryptocurrencies since most people don’t include them on their taxes. While they are fairly similar to other capital assets, such as stocks or bonds, there are some important differences and ambiguities where it helps to have a domain expert.
Here are some questions to ask a prospective accountant:
- How many crypto tax returns have you prepared over the past three years?
- Have you received any specialized training or certifications involving Crypto Taxes and Accounting?
- Can you tell me about some experiences you’ve had preparing crypto returns and outline the process?
- Have any of your crypto clients been audited by the IRS over the past three years?
The best way to assess domain expertise is having the accountant discuss some specific examples of how they have helped crypto clients. In particular, you should pay attention to how they describe crypto tax law and if they hit on any outside advice, such as tax loss harvesting.
Most people find professional help through referrals, whether through business colleagues, family or friends. If you’re actively involved in the online or local crypto community, you might want to ask around for referrals to accountants that have successfully worked with others.
If you find an accountant online, you can ask them for references that you can speak to on the phone. Online reviews can be useful, but they are much easier to forge, so you should take them with a grain of salt. Case studies are also a good option for those operating a crypto business.
Customer support is extremely important when it comes to tax planning and preparation. If it’s difficult to get a hold of your CPA, there could be big problems if the IRS requests more information or decides to conduct an audit. Your accountant should be both responsive and proactive.
Responsive communication is even more important when dealing with an online or remote accountant. You should have multiple ways to contact the accountant, as well as low-cost, speedy and reliable ways to send important documents without necessarily using expensive overnight courier services.
Tax preparation may be cheap for those with simple tax returns, but often times, cryptocurrency trading can lead to expensive tax preparation costs. If you made thousands of trades, you need to document every single one on IRS Form 8949, and many accountants charge by the page or hour!In some cases, you can lower these costs by coming prepared with pre-filled tax forms.
ZenLedger automatically imports your transaction data from exchanges and wallets and pre-fills IRS Forms 8949 and 1040 Schedule D, which can dramatically cut down on tax preparation time and cost.
Taking a DIY Approach to Bitcoin Taxes
Bitcoin and other cryptocurrency taxes can be challenging, but there are many new software solutions designed to simplify the process. In addition to automatically importing transactions and pre-filling tax forms, many solutions integrate with popular consumer tax prep software, such as TurboTax.
The most common features to look for include:
- Integrations: The software should integrate with all of the crypto exchanges and wallets that you use to import transactions, as well as the accounting software that you use to prepare your taxes if possible (e.g., TurboTax).
- Important Forms: The software should automatically fill IRS Form 8949 and IRS Form 1040 Schedule D, which are the two common forms that you are required to file for crypto trading. In addition, the software may help you file FBAR and other regulatory requirements for international taxation.
- Forks & Payments: The software should enable you to mark airdrop, forks, payments and other crypto events that could change your tax liability.
Some optional, nice-to-have features might include:
- Tax Loss Harvesting: The software should help you determine if there’s an opportunity to harvest losses during the current tax year to help offset your tax liability.
- CPA Integration: The software could enable a CPA to login and access the information if you decide to ultimately hire someone to help out on short notice.
Getting Started On Your Bitcoin Taxes
ZenLedger makes it easy to import cryptocurrency transactions, calculate gains and income, and auto-fill tax forms like IRS Form 8949 and Form 1040 Schedule D with our bitcoin tax calculator. You can even access advanced features like tax loss harvesting and CPA integration, and much more!
Get started for free and see how easy it really is!