Guide

Comprehensive Crypto Tax Guide for Tax Professionals

Published
October 11, 2021
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    Welcome to the Future

    Cryptocurrencies, freed from the pages of futuristic sci-fi novels, have gone from the mysterious Satoshi Nakamoto's hobby project to a mainstream investment in just 10 years. Despite the growing popularity of digital currency, IRS guidance and FINRA regulations have yet to catch up. This has created a golden opportunity for Certified Public Accountants (CPAs) to guide crypto-investors through the often murky waters of Federal and State tax compliance. CPAs who ride the wave of this technological leap will establish themselves as a subject-matter expert AND help their crypto-clients secure a lower tax bill. 

    Who Invests in Crypto

    The stereotypical early Bitcoin user was a tech-savvy, privacy-obsessed, middle-aged male with a mild distrust of centralized banking. Today's Crypto-owners are far more diverse! According to a 2019 Harris Poll Survey, 9% of American adults owned crypto, with the ages running the gamut from 18 to 80. This number is expected to grow! In a 2019 study by Bitwise, 76% of financial advisors said that their clients asked about crypto.

    Popular reasons for buying Crypto 

    • Long-term investment 
    • Short-term trading
    • Privacy
    • Futurism 

    How to Find and Attract Crypto Clients

    Ask your existing clients

    Often, clients who hold crypto are unaware of the tax implications of their digital investments. If they are not on the Bitcoin bandwagon, they might have a friend who is. 

    Offer virtual tax prep 

    to expand your potential reach. This is especially appealing to «HENRY» (High-Earning, Not Rich Yet) younger generations who are comfortable with technology. 

    Consider a la carte prep

    Some clients might seek help on the cryptocurrency portion (i.e. sch B, sch D, Form 8949, FinCEN 114 (FBAR), FATCA 8938, and misc income) while maintaining the status quo, such as self-prep, on the remainder of their tax return. 

    Use SEO (Search Engine Optimization) 

    to drive traffic for crypto-tax topics. Maintaining a keyword-heavy blog or hosting free webinars can help establish credibility for your firm and showcase your expertise. 

    Partner with a cryptocurrency social organization 

    such as a Meetup club or Facebook Group. Offer free consultations or an affordable package for tax prep. 

    Use a payment processor 

    like BitPay or Coinbase Commerce to accept popular digital coins as payment.

    The Reality of Crypto Tax Prep

    Tax preparation for traditional investments like stocks, bonds, and real estate is primarily a matter of understanding and applying the relevant tax treatment. Sounds easy enough! But because digital currency is relatively new, cryptocurrency taxation is sometimes a foray into uncharted waters.

    Digital currencies have not found a permanent place in the tax code

    The reality of crypto tax prep

    While the IRS has offered some guidance on the topic, the regulations are not nearly as clear as they could be. There are often gaps in our collective understanding of how to tax this new asset; is it a currency as the futurists believe it should be, or is it property? Currently, the tax regulations are somewhat of a blend, with an emphasis on reporting Mining and Staking income (as you would any fiat currency income) while also recording the gains and losses on disposition of property. Two very interesting applications of this hybrid treatment are coin-to-coin trades and purchases of goods/services with crypto. In both cases, reportable capital gains and losses are incurred. 

    This segues well into the second point...

    Cryptocurrency taxation requires meticulous tracking!

    Every sale, trade, fork, purchase, and gift will eventually make it to the 1040. Exchanges and wallets have yet to begin producing the neat and tidy 1099s that brokerage accounts send each year, so traders have to track basis on their own. In the extremely volatile cryptocurrency market, it is not uncommon for investors to diversify - holding dozens of types of coins (e.g. Bitcoin, Litecoin, Ethereum, the thousands of ERC-20 coins) in dozens of exchange and wallet accounts. Even dedicated «Hodlers» or rookie hobbyists find themselves with hundreds of transactions each year as coins are exchanged for other coins, self-transferred to other accounts, forked into new currencies, or randomly air dropped into their possession. 

    Crypto-owners need experts to help navigate tax season. 

    To further complicate matters, many cryptocurrency transactions technically occur in foreign jurisdiction since the major exchanges (Bittrex, Poloniex, Binance, etc) are spread across the globe. This triggers filing requirements for FBAR and other disclosures. As the IRS threatens to crack down and tighten up, word is spreading within the crypto-community that tax compliance is no longer optional. These potential clients are seeking the help of trained CPAs to amend previous returns and establish a consistent filing record going forward. 

    Smooth Sailing 

    During tax season, CPA firms struggle to find enough qualified staff to handle the numerous engagements, and existing staff are often under enormous pressure to work overtime as the deadline approaches. 

    At first glance, the thought of taking on a new line of work and developing expertise in a new industry sounds overwhelming considering the existing problems that CPA firms face. 

    Offering crypto tax services doesn't have to be difficult; with the right software, such as Zenledger's world-class platform, preparing and filing taxes on cryptocurrency investments is simple and (most importantly) automated. 

    ZenLedger Product Features

    1. Manage multiple clients under a single log-in 
    2. Connect to wallets and exchanges via API zenledger.io
    3. Up-to-date FMV - no more manual lookup of crypto prices 
    4. Completely automated calculations
    5. Basis tracking is built-in 
    6. Detailed audit reports for troubleshooting & transparency 
    7. Customize and edit forms before printing 
    8. OR Export results to CSV for import into your tax program
    9.  No subscription fees 
    10. Thorough documentation for easy onboarding
    11.  Prompt customer support via phone, chat, and email
    12.  Plus, an in-house CPA who can guide you through it all

    Free Account for Tax Professionals

    Set up a free ZenLedger Tax Professional account. Take a look around. Dive into our training materials. Be ready for your first crypto-client in less than you spend on hold with the IRS.

    Glossary

    Glossary

    Address

    A long alpha-numeric string that uniquely identifies a wallet on the blockchain while preserving anonymity of the wallet’s owner. Similar to an account number.

    Airdrop

    Free coins that are sent en masse to random wallet addresses.

    These are normally done to artificially grow a new coin’s user base.

    Altcoin

    Any coin that is not Bitcoin, as they were all created with hopes of becoming the better replacement for Bitcoin.

    Blockchain

    See Ledger below.

    Cryptocurrency 

    A decentralized digital currency. Ex: Bitcoin, Ripple. 

    ERC-20 

    One of the 3000+ altcoins that use the Ethereum blockchain. Popular ones include TRON (TRX), Maker (MKR), & Basic Attention Token (BAT). 

    Faucet 

    A website that uses visitors' computer processing power to mine coins. In return, it splits the mining reward among all of the website visitors. Unfortunately, this is often a scam.

    Fiat 

    Currency that is centrally controlled by a government. Ex: USO, EUR. 

    Fork

    A split in the blockchain where coin holdings are upgraded to a new protocol, so existing coin owners receive an equal amount of the new coin. Can be a hard (old coins become invalid) or soft (maintains backward compatibility) fork. A popular example is the Bitcoin Cash (BCH) fork which occurred in August of 2017 on the Bitcoin (BTC) blockchain. 

    Hardware Wallet 

    A physical place to store digital currency - often looks like a USB stick. Ex: Ledger Nano, Trezor, KeepKey.

    Hodl

    A slang term in the crypto-community that was originally a typo of <<hold>> on an early crypto forum. It is also an acronym for <<Holding On For Dear Life>> which perfectly illustrates the meaning.

    ICO

    Initial Coin Offering. Similar to an IPO, it is the public introduction of a new cryptocurrency which seeks to generate excitement and raise funds.

    Ledger

    Another word for the blockchain. It is a constantly updated, decentralized, and permanent record of all transactions that occur in a certain cryptocurrency.

    Mining

    Cryptocurrency coins are <<unlocked>> when a miner’s computer can successfully calculate an alphanumeric key. The miner will receive a small portion of the coin as a reward for their work.

    Satoshi

    AKA <<STATS>>. Equal to 0.00000001 BTC, it is the smallest unit of Bitcoin. 

    Named after Satosho Nakamoto, the inventor of Bitcoin.

    Staking

    A process of <<locking up>> coins to help verify other transactions. Stakers receive a small portion of a coin in return for their service.

    Token

    Another name of a coin.

    Learn More

    Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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