What was your journey into cryptocurrency like? What initially caught your attention and why?
I had heard ramblings about cryptocurrency from a friend, but I didn’t really think much of it until I learned about the blockchain side of the equation. Growing up, I have always been super interested in computers and technology, so when I learned about the possibilities that blockchain could open up, I really began taking an interest in learning about all things blockchain. I could see the application of solving the double-spend problem in so many different areas of business, law, finance and community that it was hard to ignore. I was also fortunate enough to be in Los Angeles at the time. The Los Angeles blockchain and crypto scene is very active, so I had the opportunity to hear a lot of super talented people speak on all sorts of projects.
When did your firm begin offering crypto accounting as a service? What specific services do you offer to crypto clients?
I studied public policy and economics in my undergraduate degree, completed a tax law focus during law school, and was working with a tax attorney for a few years when my foray into blockchain and cryptocurrency began. I had the technical background and understanding of the issues, and I was very interested in the technology and investment possibilities at a personal level. The transition into offering crypto tax services in my practice was a very natural evolution for me.
The main crypto tax service I provide is to individual investors who want to have an attorney confidentially review and reconcile their crypto-related transactions and activities. The ultimate result is the preparation of appropriate tax forms that can be incorporated into the client’s tax returns by their own tax preparer. Oftentimes, this also means working with the client’s tax preparer to answer their questions or come to a consensus on certain issues.
What are the top three mistakes you see crypto clients make when it comes to accounting?
1. Ignoring prior years’ transactions or trades. Oftentimes, clients want to ignore, or even worse, are oblivious to the notion that prior years’ transactions or trades matter. This is the case even if we are only reconciling the current tax year. In order to get an accurate result for the current tax year, the reconciliation process must start in the year the coins were acquired, regardless of the number of transactions or sales in that year.
2. Trying to take untested or inconsistent tax positions. Clients want to minimize their tax burdens.Unfortunately, this should not come at the cost of taking untested or inconsistent tax positions. Whether it’s trying to claim like-kind 1031 treatment, or switching between LIFO and FIFO every tax year, these are the positions that would likely make anyone a target for further examination by the IRS.
3. Selling at the peak of the market, but failing to convert some of those gains into fiat. Some clients put themselves in a hard spot when they made trades during the hot market, only to see the value of their portfolios shrink in the coming months. Unless they traded some of their gains for fiat immediately, or offset those gains with corresponding losses in the same year, they ended up with a large tax bill and no assets to pay.
What are the top three challenges when it comes to accounting for crypto?
1. Getting full and complete records and information from the client. It’s usually not
their fault, but getting the necessary information from the client is often a multi-part inquiry. A lot of missing information may not come to light until you find a gap in the reconciliation process, at which point a lightbulb goes off that explains what happened.
2. Reconciling messy trades and transactions. When clients are just pushing buttons, moving coins between exchanges and cold wallets, and back, they often do not take into account the tracking that will need to be done in order to reconcile those transactions after the fact. Having to figure out what the client did, and perhaps why, can often present challenges, especially when the client’s memory is foggy. A little foresight into only making deliberate and meaningful trades can go a long way here.
3. Dealing with the inconsistent data provided by the exchanges. Each exchange provides different schedules and data points, so it can sometimes be difficult to figure out what’s what. This can get especially confusing when dealing with exotic and non-fiat based trading pairs.
What's the future of crypto accounting?
Certainly, there seems to be new software and coin tracking tools coming out now almost every month. Until everyone across the board – especially the IRS and the exchanges – gets on the same page, the efficacy of using one tool or another is subject to trial and error.
At the macro level, as an attorney, there is always going to be a grey area in how to interpret laws and tax governing structures. The extent of that will continue to evolve based on both IRS guidance and Congress.
If small crypto transactions covering consumer purchases are exempted by Congress, that would make a huge difference in the future of crypto accounting, as well as mainstream crypto adoption. Despite not being widely publicized, many retailers have already begun accepting bitcoin and other cryptocurrencies at some of their brick and mortar locations. An exemption of some sort would then pave the way for the Average Joe to buy his $3.75 cold brew without worrying about tax consequences and without needing a tool or app to track gains or losses on the transaction.