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Cryptocurrencies

Cryptocurrencies

Did you invest in cryptocurrency last year? Here are six questions you should ask your tax advisor

Did You Invest In Cryptocurrency Last Year? Here Are Six Questions You Should Ask Your Tax Advisor
Cryptocurrency/courtesy of pexels Cryptocurrency/courtesy of pexels
Did You Invest In Cryptocurrency Last Year? Here Are Six Questions You Should Ask Your Tax Advisor
Cryptocurrency/courtesy of pexels Cryptocurrency/courtesy of pexels

Taxes are inherently difficult to understand. When you add cryptocurrency to the mix, it’s easy to become overwhelmed.

If you bought and sold Bitcoin, Ethereum, or any other cryptocurrency in 2021, you’ll be required to report any profits to the IRS during the current tax season, which has begun. You might not owe anything if all you did last year was buy and hold crypto. It becomes more complicated as you become more active.

“What’s tricky is that there are a lot of really crazy things you can do with crypto, from DeFi to NFTs,” says the author. Pat White, co-founder and CEO of Bitwave, a company that assists businesses with crypto tax reporting, says, “That’s going to be the hard part about 2021 taxes.”

If you own cryptocurrency or dabbled in it last year, you may be wondering whether you can file your own taxes or if you need to hire a crypto tax professional. Accounting for cryptocurrency in your tax return is relatively simple for many people who buy and trade it on online exchanges.

“Any CPA can help you with that if all you’re doing is buying Bitcoin, holding onto it, and selling it six months later,” White says.

If you have crypto, here’s how to start preparing for tax season, as well as how to find a crypto tax pro and what questions to ask an accountant about your crypto.

Start preparing for tax season now.

Start planning and gathering your crypto transaction reports now if crypto will play a role in your taxes this year to make your 2021 tax filing easier. According to the Internal Revenue Service, tax season begins on January 24 and lasts until April 18 for most taxpayers.

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

“In any given year, roughly 155 million tax returns are filed, with 75 to 80 million of them being very simple and being handled by DIY software like TurboTax,” says Chandrasekera.

There are a number of crypto-specific software programs that can help speed up the process. CoinTracker, TokenTax, and CryptoTrader are examples of such programs. Tax can determine your capital gains and losses by calculating the cost basis for your crypto trades. Many of these cryptocurrency tax programs are compatible with traditional tax software such as TurboTax or TaxAct, allowing you to easily import the gains and losses they report to your tax return.

Laura Walter, a certified public accountant and the founder of Crypto Tax Girl, says, “I recommend using crypto tax software.” “There’s a lot out there,” says the narrator. Some are better than others for various reasons, but CoinTracker is the one I use. In my opinion, it simply has the most tools.”

If you do a lot of daily trading or even crypto mining, it might be a good idea to meet with a tax professional who is familiar with cryptocurrency. Take a look at our crypto tax guide to learn more about how to report cryptocurrency on your taxes.

If You’re Working With a Tax Professional, Here’s What You Should Know

As the popularity of cryptocurrency has grown, so has the demand for accountants who specialize in the field. According to Chandrasekera, the IRS only provides a limited amount of crypto tax guidance, which means there may be some “gray areas.”

That’s why working with a tax professional who understands the tax code as it applies to virtual currencies and has experience reporting cryptocurrency gains and losses is critical. Even if you aren’t engaging in complex crypto activities, a crypto-savvy tax advisor can ensure you’re reporting correctly and answer any questions you may have about your specific tax obligations.

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

Because it’s ultimately your responsibility, it’s also crucial to keep track of all your potentially taxable activities, as well as the fair market value of your crypto during those activities. According to the IRS, your records should be sufficient “to establish the positions taken on tax returns.”

If you already have an accountant, find out if they own any virtual currency and pay attention to whether they acknowledge tax code inconsistencies. If you’re looking for a crypto-savvy tax advisor, start by asking friends, family, and coworkers who have purchased or traded cryptocurrency for recommendations. During your search, a quick Google and social media search for accountants who specialize in cryptocurrency could be beneficial. You could also check with your state accountant boards or national tax professional associations, or search the IRS directory.

Once you have at least two or three names, contact them and request a meeting, either in person or over the phone, to discuss your 2022 taxes. They can assess your situation and provide you with an estimate of how much they may charge.

Crypto-Related Questions to Ask Your Tax Advisor

If you bought and sold cryptocurrency last year and working with a tax professional to file your taxes, here are six good questions to ask. The answers to these questions will help you gauge your tax advisor’s understanding of cryptocurrency and how it affects taxes.

1. Have you ever worked with crypto clients before, and how did you go about it?

You can get a sense of their previous experience with crypto taxes by asking them this question, and you can better understand how they plan to account for your crypto investments in your taxes this year by asking them this question.

2. Could you explain the difference between taxable and non-taxable crypto events, as well as where my transactions fall?

Cryptocurrencies are taxed similarly to other assets like stocks and gold. Each taxable crypto event may result in a capital gain (or loss), so you’ll need to know the transaction’s date, cost basis, sale value, and any fees. A tax professional should be able to look over your transaction history and tell you which events are taxable and which are not.

3. How much tax do I have to pay on my cryptocurrency?

The taxable value of cryptocurrency is determined by capital gains or losses, or how much value your holdings gained or lost over time. Your CPA can help you better understand your tax situation if you’re confused or have any questions.

4. How do I get detailed records of my cryptocurrency transactions?

You’ll need to keep track of any virtual currency you receive, sell, or exchange, as well as the current market value of your virtual currency. A knowledgeable CPA can explain how to obtain those records and where to find them.

5. What can I do now if I haven’t reported my cryptocurrency investment in my tax returns for several years?

This year, the IRS is taking a closer look at cryptocurrency transactions, according to Walter. If you’ve gotten away with not reporting your cryptocurrency on your taxes in the past, she warns that this year “might not be the year you’ll get away with it.” You have three years from the date you filed your return to file an amended return, according to the IRS. This can quickly become a difficult task for traders who have executed hundreds or thousands of trades over the years.

6. Are any of my cryptocurrency transactions subject to income tax?

Certain cryptocurrency transactions may be subject to income tax. You must report virtual currency as income on your tax return if you received it as payment for services. Receiving cryptocurrency instead of cash as a source of income, earning Bitcoin by mining new coins, or receiving coins or tokens as a reward for certain activities are all examples of this.

Read More on: Can an Investor Escape Crypto Tax Bills?


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