How to navigate cryptocurrency tax implications amidst the CPA shortage
Cryptocurrency is a hot topic worldwide, especially with prices of Bitcoin (BTC), Ethereum (ETH) and other cryptocurrencies hitting higher thresholds and resulting in another banner year for investors. While the earnings look good on paper, one factor is often left to consider –– that is, crypto taxes.
It is not uncommon for traders to take advantage of the constant fluctuations, buy the dip, sell the uptrend, and repeat it frequently. Unfortunately, each transaction is considered a taxable event, making the conversation about cryptocurrency taxes a daunting one.
The impending crackdown on cryptocurrency taxation only spurs on the need to start the conversation. This crackdown is far from recent, with 2021 headlines of an IRS chief stating the country was losing trillions of dollars in unpaid taxes each year, with a significant portion being attributed to the crypto market. For this reason, several subpoenas currently exist against Coinbase, Kraken, and Poloniex in the U.S., which obligates these exchanges to share the information with the IRS.
Events like this have since fuelled more recent announcements of the IRS seizing billions of dollars in cryptocurrency that may be related to tax fraud. While some of these actions to evade paying taxes seem extreme, especially in comparison to one’s own calculation errors, it is worth noting that it is always the ones intentionally avoiding taxes that may be affected by the imposing crackdown.
The IRS and crypto investors
The IRS has recognized that more investors are now taking part in the digital currency market than ever before, an action that is one part hype and many parts attributed to the amount of money the government gave out throughout the COVID-19 pandemic. With more discretionary income in the hands of investors, the number of crypto traders in the U.S. hit an all-time high and continues to increase. At present, an estimated 55% of American investors are believed to hold Bitcoin, according to Grayscale Investments.
Recognizing this, the 2021 version of IRS Form 1040 now asks recipients if, at any point throughout the year, they have received, sold, exchanged or disposed of another financial interest through virtual currency. Users must then check the “Yes” or “No” box in response. The IRS further proves their crackdown by placing this question on the form, directly below a taxpayer’s name and address, a location that can’t be missed. The language has also been clarified to specify that only taxable events, including receiving cryptocurrency as payment, airdrops, exchanging different cryptocurrencies, selling assets, earning from mining and staking, would be classified as a “yes” on the updated form.
The impacts of the great resignation
After checking yes comes the more challenging step of crypto tax management, figuring out the balance owing. The IRS has made it known that cryptocurrency/virtual currencies are considered property. Therefore, users must recognize and report any taxable gains or losses, with failure to do so resulting in a potential audit, interest payments, and rare penalties in extreme circumstances. As a result, many have turned to a professional crypto accountant for guidance.
In a traditional, pre-pandemic year, 15% of staff have left one of the big four accounting firms, including Ernst & Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PwC). Although there is no certainty if these stats will remain the same this year, many firms agree that turnover rates will be higher than in previous years.
This year, following another year in the pandemic, has resulted in the profession at large being overworked and underpaid. As a result of the ongoing economic trend labeled the Great Resignation, an estimated 40% of accountants have left the CPA industry, leading to an overwhelming shortage of professionals. Traditionally, as the laws of supply and demand state, with decreased supply comes increased prices, and therefore a lesser chance of an investor getting the help they need with their taxes.
Of course, even those who have the funds to hire a CPA may still have difficulty finding one with the crypto tax expertise to help.
Managing your cryptocurrency taxes
With fewer resources available, the question of paying cryptocurrency taxes doesn’t necessarily mean users should navigate the complex tax landscape alone. Instead, the release of new crypto tax software has simplified the process for users to organize their crypto data and calculate their tax liability.
One of these offerings is Accointing, a cryptocurrency tax software with over 400 integrations, including Binance, BitMex, Kraken and Tron, enabling users to access data in one consolidated location, automatically calculating a crypto trader’s wins and losses and classifying transactions like decentralized finance (DeFi) staking, margin trading and mining.
As a member of their team describes it, “Accointing is an easy to use and beautifully designed platform built to help users handle crypto taxes on their own, without the need for a CPA to process data. Users can file their yearly income and taxable gains to the IRS by giving the output provided by Accounting’s crypto tax calculator to a CPA, or via the dedicated TurboTax output.”
The result is that in a matter of five clicks, users can generate a customized cryptocurrency tax report for their country of location. Investors may also use the “holding period tool” to optimize transactions, recognizing which tokens have been held for a year or more.
With offerings like Accointing, users can navigate the daunting tax landscape of the cryptocurrency world and avoid the battle for a dwindling accounting force.
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