6 Crypto Questions to Ask Your Tax Accountant

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Taxes are inherently complicated. Add cryptocurrency to the mix, and it can get downright overwhelming.

If you bought and sold Bitcoin, Ethereum, or any other crypto in 2021, you will need to report any profits to the IRS during this year’s tax season, which is officially underway. If all you did was buy and hold crypto last year, you might owe nothing. It’s when you become more active that it gets complicated.

“The tricky thing is that there are a lot of really crazy things with crypto that you can do, from anything DeFi to NFT. This is going to be the hardest part of 2021 taxes,” says Pat White, co-founder and CEO of Bitwave, a company that helps companies file their crypto taxes.

If you own crypto or have dabbled in it in the last year, you may be wondering if you can file your own taxes or need to hire a crypto tax professional to get some tax relief. ‘aid. For many people who buy and trade cryptocurrencies on online exchanges, it is relatively easy to account for this on your tax return.

“If all you do is buy Bitcoin, hold it, and sell it six months later, then any CPA can help you with that,” White says.

Here’s how to start preparing for tax season if you have crypto, tips for finding a crypto tax professional, and important questions to ask an accountant about your crypto.

Start preparing now for tax season

If crypto will play a role in your taxes this year, start planning and gathering your crypto transaction reports to simplify your 2021 tax filing. Tax season officially begins January 24 and ends April 18 for most taxpayers, according to the Internal Revenue Service.

If you don’t have a complex tax situation or complex crypto trading history, you may be able to easily report your crypto income yourself using tax software. Most people in the United States have “simple taxes” and can file their taxes on their own, according to Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company.

“There are about 155 million tax returns filed each year, and between 75 and 80 million are very simple and they were handled by DIY software, like TurboTax,” Chandrasekera says.

There are several crypto-specific software that can make the process smoother. Programs such as CoinTracker, TokenTax, and CryptoTrader.Tax can generate the cost basis of your crypto trades and determine your capital gains and losses. Many of these crypto tax programs are compatible with regular tax programs such as TurboTax or TaxAct, so you can easily import the gains and losses they report into your tax return.

“I recommend using crypto tax software,” says Laura Walter, CPA and founder of Crypto Tax Girl. “There are a ton of them out there. Some are better than others for different reasons, but the one I use is CoinTracker. He just has the most tools in my opinion.

If you are more into things like day-to-day trading or even crypto mining, it might be a good idea to sit down with a tax professional who is familiar with crypto. To dig deeper into the details of reporting crypto on your taxes, check out our crypto tax guide.

What to know if you work with a tax specialist

As crypto grows in popularity, the demand for accountants specializing in the field also increases. The IRS only offers up to a certain amount of crypto tax advice, which means there may be “grey areas,” according to Chandrasekera.

That’s why it’s important to work with a tax professional who can interpret the tax code related to virtual currencies and who has experience reporting cryptocurrency gains and losses. Even if you don’t conduct complex crypto businesses, a crypto-savvy tax professional can ensure you are reporting correctly or answer any questions you may have about your specific tax obligations.

“Make sure they understand the tax law first, and then make sure they understand your specific crypto tax situation,” says Walter.

It is equally important to keep track of all of your potentially taxable activities, as well as the fair market value of your crypto throughout those activities, as it is ultimately your responsibility. Your records must be sufficient “to establish positions taken on tax returns,” according to the IRS.

If you’re already working with an accountant, ask them if they themselves own virtual currency and be careful that they recognize the uncertainties of the tax code. If you’re trying to find a crypto-savvy tax expert, start by asking friends, family, and colleagues who have bought or traded crypto for references. A quick Google and social media search for accountants who specialize in crypto might also be helpful during your research process. You can also search the IRS directory or check with your state accounting boards or national tax professional associations.

Once you have at least two or three names, contact them and ask them to meet with you in person or virtually to discuss your 2022 taxes. They can assess your situation and give you an idea of ​​how much they might charge .

Questions to ask your tax professional about crypto

If you’re working with a tax professional to file your taxes, here are 6 good questions to ask if you bought and sold crypto in the last year. The answers to these questions will help you gauge your tax professional’s familiarity with cryptocurrency and how it relates to taxes.

1. Have you worked with crypto clients before and what is your process like?

By asking them this question, you can get an idea of ​​their past experience with crypto taxes and better understand how they plan to account for your crypto investments in your taxes this year.

2. Can you explain what are considered taxable vs. non-taxable crypto events, and where do my transactions fall?

Crypto is taxed like other assets such as stocks or gold. Each taxable crypto event can create a capital gain (or loss), so you will need to know the date, base price, sale value, and any fees associated with each transaction. A tax professional should be able to review your transaction history and tell you which events are taxable or not.

3. What type of tax do I have to pay on my cryptocurrency?

The taxable value of Crypto is based on capital gains or losses – basically, the value your holdings have gained or lost over a given period. If you are confused or have questions, your CPA can help you better understand your tax situation.

4. How can I get accurate records of my crypto transactions?

You will need records of each time you receive, sell, or trade virtual currency, as well as the fair market value of your virtual currency. A knowledgeable CPA can explain how and where to obtain these records.

5. If I haven’t reported my crypto investment on my tax returns for several years, what can I do now?

The IRS is taking a closer look at cryptocurrency transactions this year, says Walter. If you’ve avoided declaring your crypto on your taxes in the past, this year “may not be the year you’ll get away with it,” she says. According to the IRS, you have three years from the date you filed your return to file an amended return. For traders who have executed hundreds or thousands of trades over the years, this can quickly become a difficult task.

6. Do any of my crypto transactions trigger income tax?

Certain crypto transactions may trigger income tax. If you received virtual currency as payment for services, you will need to report it as income on your tax return. For example, receiving cryptos as income instead of cash, earning Bitcoin by mining new coins, or receiving coins or tokens as a reward for certain activities.

IRS advice for virtual currencies

Here is the advice the IRS has issued so far regarding virtual currencies and tax reporting:

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