Imagine that your accounting firm has a new prospective client that trades cryptocurrencies. They may have hundreds of thousands of transactions made throughout the year across different exchanges and come prepared with only a printed version of their trading history. You don’t want to turn them away, but you may not know exactly how to proceed.
Cryptocurrencies have become popular among both investors and consumers, but their unique nature can quickly complicate tax preparation. Unlike a traditional currency, cryptocurrency accounting is considered property by the IRS, which means that they are treated like a stock or bond. Recording transactions and calculating the cost basis for every trade can seem impossible.
Let’s take a look at some of these cryptocurrency accounting challenges and how software solutions can help lessen the burden for both accounting firms and their clients.
Cryptocurrency Tax Challenges
Cryptocurrencies were originally designed to be a digital currency that reduces transaction costs and simplifies e-commerce. While many merchants accept cryptocurrencies, they have become even more popular as alternative assets for long-term investors and short-term traders. There are even futures markets and exchange-traded products built around them.
In the United States, the IRS treats cryptocurrencies as property rather than currency and each transaction is a taxable event. The complications start to surface when you try to determine the cost basis or fair market value, especially with unique events like air drops and hard forks. These issues introduce some challenges for accountants.
Some of the most common account challenges include:
- Transactions: Recording transactions can be extremely difficult when they occur across multiple exchanges or involve air drops, hard forks or other events.
- Cost Basis: Calculating the cost basis can be challenging because each transaction must be valued in U.S. dollars for accounting purposes — even if you received no dollars.
- Fair Market Value: Determining the fair market value is difficult for some cryptocurrencies that experience unusual volatility or large price variations between exchanges.
- Tax Treatment: Investors must determine if cryptocurrency investments are treated as ordinary income or capital gains depending on the amount of time they were held.
- International Tax: Investors may have to pay tax on foreign held cryptocurrencies in both the foreign country and the United States since there may not be tax relief.
These challenges are amplified when it comes to businesses. In some cases, cryptocurrencies are treated as an indefinite-lived intangible asset. This means that declines in market value would have to be included in earnings, but increases in value would not be captured. If they’re accounted for at fair market value, there’s still the challenge of determining that value.
Cryptocurrency Tax Software Solutions to Help
There are many different software solutions designed to help simplify cryptocurrency accounting, including both accountant-facing software and client-facing software. When comparing software solutions, it’s important to consider the total cost, transparency (e.g. audit support), functionality and the availability of customer support.
Traders & Investors
Traders and investors that buy and sell cryptocurrencies for the short-term or long-term should use tools, like ZenLedger, to track their transactions across exchanges and wallets and consolidate that information for accountants. Alternatively, accountants can use the same software to run these reports on behalf of their clients and access everything in one place.
ZenLedger enables crypto tax accountants to import cryptocurrency transactions from multiple exchanges and wallets, calculate gains and losses, and auto-fill tax paperwork, such as Form 8949 and Form 1040 Schedule D. In addition, the accountant version of the platform enables accountants to access all of their clients’ information in a single place.
For financial advisors or non-accountants, many cryptocurrency services enable clients to simplify crypto reporting with existing tax software. ZenLedger, for example, integrates with TurboTax to automatically populate all transactions and ensure that clients are accurately reporting everything to the IRS. This can help eliminate mistakes that could result in an audit.
Businesses & Freelancers
Businesses or freelancers that accept cryptocurrencies must ensure that they’re properly reporting them and incorporating the data into their existing accounting systems.
There are many different payment processors that support cryptocurrencies, including Coinbase, which already integrates with QuickBooks Self-Employed. QuickBooks also supported merchant cryptocurrency payments via PayByCoin, which is a collaboration between Coinbase and QuickBooks. PayByCoin immediately converts crypto payments into dollars and records them.
Many other accounting platforms, such as Xero, have integrations available through services like Zapier. In other cases, merchants may need to manually provide transaction details to their accountant in order to include cryptocurrency transactions in their taxes. This is especially true if they do not immediately convert crypto payments into cash.
The Bottom Line
Cryptocurrencies can introduce significant complexity into the tax preparation process. With the right software, crypto tax accountants can ensure that they’re streamlining the process and avoiding any potentially costly mistakes. They can also grow their practice by becoming local cryptocurrency leaders that could make them a go-to resource for certain clients.
ZenLedger’s CPA Suite makes it easy for the best crypto tax accountants to grow their revenue by supporting cryptocurrencies. In addition to tracking prices, cost basis and auto-filling forms, ZenLedger provides full accounting transparency with audit reports that drill down into the details to support reported numbers. And, you can use a single tool for all clients—no subscription fees.