It's been over a decade now since Bitcoin has been released. The cryptocurrency landscape today looks a little different than it did back then, significantly due to increased consumer adoption of crypto and other non-traditional finance systems. The cryptocurrency space has evolved to a point where there's no longer much time for tax professionals to prepare for crypto tax reporting in their workflows.
Even though digital assets are still in their infancy in the grand scheme of the financial sector, their adoption rates are accelerating, with institutional and personal adoption growing by the day. Even if you as a tax professional haven't adopted cryptocurrency for your personal or business finance, you're going to have to start understanding how to manage the taxation and accounting aspects of this new digital asset class.
How big is the cryptocurrency tax market?
Recent studies and surveys have found that 59 million Americans own some form of cryptocurrency, a number that continues to grow by the day. Cryptocurrency is essentially a digital currency that is created (often through something called mining) tracked, and traded on the blockchain, which is essentially a decentralized digital ledger. Explained in even higher level terms, cryptocurrency is a novel way of thinking about financial security and transactions, something that can complicate the tax and accounting proceedings that follow.
Because the modern tax and accounting market wasn't built with cryptocurrency in mind, and much of cryptocurrency functions in means that are unique to it as an asset class, making cryptocurrency and digital currencies fit into the traditional tax and accounting box can be a little like shoving a square-shaped block through a round hole. That is, when tax preparers and accountants aren't equipped with the right software tools to translate digital assets into traditional finance terms.
What the crypto tax & accounting space looks like
As digital assets and associated blockchain technologies evolve at a rapid pace - the speed of the internet - by necessity, the tax and accounting solutions designed for the space need to as well. The IRS's guidance on how to properly manage cryptocurrencies in the tax preparation process has been few and far between, but there does exist enough guidance to be able to properly account for and tax all of you or your clients' digital assets.
One thing that is unique to cryptocurrencies is that a variety of different types of transactions exist, all of which can be uniquely taxable. For example, while many may believe that cryptocurrencies are only taxed when digital assets are sold for fiat currency, like the US, this actually isn't the case. Digital assets can be taxed simple when they are transferred or exchanged for other cryptocurrencies, complicating matters for professionals that may be unaware of the landscape even further.
Under the United States' existing guidance, cryptocurrency is treated as "property," meaning that many of the rules that applied to stocks also apply to cryptocurrencies. Cryptocurrency and other digital assets can incur capital gains taxes, and there's also something known as "staking" meaning that certain cryptocurrency holders can receive a form of payment for holding their crypto on a certain platform. While technically different, in terms of taxation, this is often treated like interest on a bank account, meaning that it's also taxable revenue.
The same strategies to minimize tax burdens that exist in traditional finance also exist in the cryptocurrency space. For example, crypto holders and users might hold on long enough to get a better capital gains rate for their taxes, and they might also use any losses from crypto to offset capital gains taxes on their stocks and other assets.
All this is probably starting to make sense to you, but there's another problem: due to the decentralized nature of crypto, and the hundreds of platforms, exchanges, wallets, and more the industry encapsulates, taxpayers often don't receive 1099s or necessary paperwork to properly account for and calculate taxes on their crypto.
Overcoming the hurdles for tax preparers
As a tax preparer, there are two things you need to prepare for:
- Getting the right information and communication from your clients
- Managing that information in the tax preparation process
Some common questions you can ask clients are:
- Do you currently hold, own, or trade cryptocurrency?
- Have you at any point in the past acquired, or traded cryptocurrency?
- Have you ever exchanged cryptocurrency for another or used it for payment for a good or service?
- Have you ever sold cryptocurrency in exchange for cash, like USD?
- Have you ever received crypto as a gift?
These questions will get you started, and in all likelihood, if your client's answer is anything other than no to any of these, then you need to be thinking about preparation bullet number two: how to manage their cryptocurrency taxes. While some tax and accounting firms provide services to clients hourly and offer boutique solutions, the cryptocurrency space has matured to the point where mass-market professional software solutions are available to the everyday tax preparer.
For example, the Ledgible Platform, comprised for Ledgible Crypto Tax Pro for tax preparers and Ledgible Enterprise Accounting for business accounting, offers easily integrate-able solutions for professionals. If you're a tax professional, tax preparer, or CPA, Ledgible Crypto Tax pro can provide automated reporting, client management, and calculate the necessary capital gains, cost basis, and other necessary figures to file taxes on all sorts of cryptocurrencies. In essence, Ledgible Crypto Tax Pro makes cryptocurrencies and digital assets, like NFTs, legible.
The best part is that signing up for Ledgible Crypto Tax Pro is completely free for tax professionals, and there are flexible billing models that allow for preparers to never have to pay a dime to use the solution. If you're interested in getting started with your Ledgible Crypto Tax Pro account or seeing what the Ledgible Platform can offer, you can learn more here.
