Despite all of our wishes to the contrary, tax season is upon us. The crypto community has responded to this fact with a mixture of denial and dread. Many virtual currency investors prefer to live under the delusion that we’re still in the good old days of the free crypto market, way back when the IRS just ignored cryptocurrency like everyone else. Unfortunately, however, that is no longer the case – which is why those of us who are not in denial are really dreading filing our returns this year.
Fortunately, there’s hope. Filing your crypto tax returns doesn’t have to be the number-crunching nightmare that most investors expect. While there is no getting around the IRS reporting requirements for cryptocurrency transactions, there are a number of helpful tools out there that can get you started on the right track.
Cryptocurrency is an investment vehicle for everyday people. Most coins are divisible into tiny fractions, so it creates opportunities for people who only have a few hundred dollars available to invest. Unfortunately, however, investing in cryptocurrencies – even just dabbling – can land you in the IRS big leagues along side of heavy hitters like investment bankers and venture capitalists. Why? Two words: capital gains.
Bitcoin and all of the altcoins that followed it are treated as capital assets under the tax code. This means that you pay your crypto taxes based on the capital gains rules, which most of the crypto community has never dealt with before. Figuring out capital gains is challenging, since it depends on several factors like how long you held your coins before trading them or selling them and a complex valuation known as your “cost basis.” At the most general level, your cost basis is what you actually paid for your coins, minus certain fees and costs. However, the IRS allows for some flexibility in how you actually determine your cost basis. So, working with an accountant won’t only save you time this tax season, it will save you money too.
A good cryptocurrency accountant will help you figure out your optimal cost basis by working through each of the accounting techniques allowed by the IRS. A Certified Public Accountant can also make sure you’re claiming all of the credits and deductions that you’re entitled to, ensuring that you’re paying the lowest possible tax bill on your cryptocurrency trades. All in all, hiring a professional is the real easy way to file your crypto taxes.
If you’re a die-hard do-it-yourselfer, there are some good online tax tools that can help you get ready to file your returns this year. Cryptocurrency tax reporting requirements are very broad, and most cryptocurrency transactions must be disclosed to the IRS. Since you sign your returns under penalty of perjury, you are responsible for all of the information that you disclose to the IRS each year. If the IRS detects a discrepancy with your return or otherwise flags it for review, they will most likely send you a demand letter requesting proof. As a result, keeping good records is an important way to make sure you’re ready to defend your tax information is the IRS raises any questions. Depending on your habits, however, this may be easier said than done. While nothing replaces good advice from a professional cryptocurrency accountant, there are some helpful online tools that you can use to get all of your affairs in order this tax season.
Most cryptocurrency exchanges allow users to download a transaction history for all trades performed on the platform. But some coin traders operate across a number of exchanges, making it very difficult to track taxable transactions. Cointracking.info is a useful online service and mobile app that allows you to import account data from any of dozens of cryptocurrency exchanges. This helpful tool can help you organize your trading data and make sure everything is easy accessible when it comes time to file your returns.
Contracking.info can help you get all of your crypto tax information together in one place, but then what do you do with it? Because cryptocurrency is taxed under the capital gains rules, you need to figure out your capital gains and capital losses. Bitcoin.tax is a great way to estimate your crypto taxes. This helpful online tool can estimate your tax bill based on information exported from a compatible exchange.
Online crypto tax preparation tools can help you get a handle on things, but they are no replacement for substitute for good, solid advice from a tax professional. Happy Tax has launched its most recent division, CryptoTaxPrep.com, to fill the growing need for cryptocurrency-trained accounting services.
Cryptocurrency taxes can involve piles of paperwork and enough number-crunching to make your head spin. This is particularly true for high-volume traders, many of whom racked up thousands of reportable crypto transactions last year. This can be enough to make just about any investor want to run for the hills. However, this is the sort of thing accountants deal with every day, and for those who have the training crypto taxes are no big deal. As a result, hiring a professional tax preparer this year is most likely your best bet.
Even if you’re on the fence about hiring an accountant, try to avoid the big self-preparation software options like TurboTax or H&R Block. These programs are generally not well-equipped to accommodate IRS reporting requirements for cryptocurrency transactions, and often they can’t even handle enough data for high-volume traders to properly report their taxable transactions. Both H&R Block and Intuit, the company that makes TurboTax, have been under recent scrutiny for misleading advertising and bait-and-switch schemes as well, so it’s questionable at this time whether their services are truly prepared for today’s cryptocurrency investor.
Mario “The Problem Solver” Costanz is a lifelong entrepreneur and has had built and sold a number of successful businesses in the internet, restaurant, real estate, and income tax preparation industry. He was named to the “One to Watch” section of Accounting Today’s 2017 Top 100 Most Influential in Accounting List. More information and contact can be found at https://CryptoTaxPrep.com and https://linkedin.com/in/mariocostanz.