The emergence of cryptocurrency assets have created a conundrum for investors, professionals, finance teams and even more so, for accountants. A lack of government regulation, best practices and procedures from accounting organizations makes it difficult to account for crypto assets and prepare for taxes.
The problem becomes even more difficult when considering many crypto investors fail to disclose all of their assets. This leaves holes in client data and can skew the results of calculations and could even lead to some potential legal issues. Navigating the world of crypto accounting, tax preparation and cost-basis calculations often can leave the average person in uncharted territory.
You don’t need to be a certified CPA or tax professional to know how to prepare your cryptocurrency taxes. In fact, the best thing to help your tax or accounting professional is to have all your assets, accounts, information and anything you may need to be prepped and ready to share. This will ultimately expedite the process and ensure all your assets are accurately accounted for.
Blox would like to lend a helping hand. We have built a guide on how to prepare for your cryptocurrency taxes.
Map & Organize Your Crypto Accounts
It is important to organize all of your crypto accounts, exchanges and wallets. Creating a document and jotting down your usernames, passwords, and even the volume of assets in your accounts will help you stay organized and let your accountant get started on the right foot.
For beginners and professionals looking to organize their accounts, assets and transactions. We recommend signing up for Blox to use our automated solutions to easily and quickly sync with all your crypto accounts. This lets you see all of your assets, balances and account information more easily and organized, too. Additionally, Blox Business users can export their account information to a .CSV file to export and connect to other accounting software, such as Quickbooks.
It is very important to provide your tax preparation specialist and accountant with all of your crypto assets and accounts. Failing to do so can create legal troubles and financial headaches down the road if unchecked.
We recommend noting the following items:
– List of crypto exchanges (Username, password, current holdings)
– List of crypto wallets (Username, password, current holdings)
– Copies of your identification and other legal documents
– Any other traditional tax forms (For U.S citizens, you can learn more here)
Stay Informed On Crypto Taxes
In the next step, we will advise you on selecting a crypto accountant or firm. They will do a majority of the leg work for you. But, it is always great to learn more about the complexities of crypto accounting to better understand the results or when speaking to your cryptocurrency accountant, or tax prep professionals. Take a look at the current state of crypto accounting for 2019.
The world of crypto taxation is rapidly changing. Especially when considering recent updates from the IRS. They are releasing further guidance to address outstanding questions about the treatment of cryptocurrency tax.
Please note, crypto brokers are NOT required to issue 1099 tax forms, but they are required to disclose all assets and transactions to the IRS. Some taxable transactions can include:
– Exchanging cryptocurrency for fiat money (cashing out)
– Paying for goods or services, such as using some Bitcoin to buy an item
– Exchanging one cryptocurrency for another cryptocurrency
– Receiving mined or forked cryptocurrencies
– Cryptocurrency is not treated as currency to determine losses or gains under tax laws.
– Taxpayers must include the fair market value of the virtual currency as taxable income when it is used to pay for goods or services.
– The fair market value is determined as of the date acquired; essentially, it is virtually exchanged for U.S. dollars for tax purposes.
– A taxpayer can have a virtual loss or gain. For example: If they bought the Bitcoins when they were at their peak of $1000 or so, they would have a loss.
You can read more about taxable transactions here.
Prepare & Submit Your Own Taxes
For those with a sense of adventure and a DIY attitude, we are providing you with a basic guide for how to account for your assets and submit your own crypto taxes.
1) Ensure there is no missing data. It is recommended to gather all of your wallet public keys and exchanges CSVs and APIs to understand all cryptocurrency transactions your company has completed.
2) Get a sense of what your existing capital gains are. Look into which method of tax accounting is right for you, such as FIFO, LIFO and several others. However, FIFO is the most common way to calculate capital gains but is not always the most lucrative. Generally in crypto, the oldest tokens held have appreciated the most, selling the “first in” tokens could create a significant tax bill.
3) Make better informed decisions, today. It can prove beneficial to better understand if it is more lucrative to sell more crypto today, or wait for a better capital gains treatment.
For example, if Bitcoin is up from it’s ~$3500 lows to its current value of >$12,000 – that would be great for you. Or, do you sell now and keep that cash safely in the bank?
However, if you purchased your crypto back in August of 2018 and you’re almost a month away from long term capital gains treatment. You could potentially lessen your tax liability by 20% on all the cryptocurrency you’re holding, simply by waiting one extra month to sell. That could amount to thousands of dollars.
4) Does your company have losses to offset the gains they’ve made in cryptocurrency? Many start-ups initially start off with significant losses because of research and development costs, as well as wages and salary expenses. This is not a worry in the short term because most startups face the same financial challenges.
However, you can offset all of your losses on a 1:1 ratio with your capital gains made from the cryptocurrency you’ve liquidated to pay for month-to-month company expenses. This could be hundreds of thousands, if not millions of dollars, for some post ICO companies.
5) Understanding tax liability versus geographic location. Certain geographic locations will affect your tax liability when realizing gain or losses. For example, Capital Gain Taxes in California are some of the highest in the world, while places like Puerto Rico and Singapore, still have no taxes on capital gains for cryptocurrencies.
It is useful to always keep this in mind as your liquidations and long term crypto-holding strategy may be directly impacted by your current tax jurisdiction.
6) Collect and submit all of your IRS documentations. The most important component is to ensure you have all the necessary documentation properly and promptly to the IRS. There are several forms that may be required for specific individuals and businesses such as the 8949 or schedule-D and Form 1120 for corporations. At the end of the day, by doing research and aggregating your information in an organized matter will allow you or your business to better work with accounting platforms, accountants and firms.
7) Try and look at the bigger crypto picture. Do you have capital losses in other places to offset the gains from your cryptocurrency? Are you investing into a major purchase soon, like buying a home or having children? All of these should be weighed against the volatility of cryptocurrencies as well as weighing the value of holding your cryptocurrencies for short versus long term capital gains.
Select A Crypto Accountant or Accounting Firm
If you have decided to not do your own crypto taxes, please read on!
Now that all your assets, accounts and information is in order, you need to find the right crypto accounting, tax prep expert or firm to help you complete the submission process.
Crypto accounting and cryptocurrency tax prep is a very new service for firms and professionals. There are many unique intricacies for cryptocurrencies that are unusual for traditional accountants. We suggest doing a lot of research online and through word of mouth before deciding. This is the best way to find an accountant or accounting firm that are acquainted with emerging crypto accounting procedures.
Take the time to find someone you trust and is knowledgeable about the space.
Blox has generated a list of the top crypto accounting firms and CPAs that you can choose from. Feel free to review the list and find the right one for you.
Submit Your Information & Be Patient
For cryptocurrency accountants and tax preparation professionals, being transparent and being prudent with your crypto assets and accounts is very important. When providing them with all your aggregated credentials, accounts, information and identifications, you speed up the process and make the experience far smoother, for yourself and your tax professional.
If you have more questions about cryptocurrency taxes and accounting, please feel free to contact Blox to learn more!