If your clients owned Bitcoin or other crypto, make sure they comply and amend previous taxes if necessary
The IRS is increasing crypto reporting requirements and scrutiny.
In mid-2019, the Internal Revenue Service (IRS) sent crypto tax letters to potential Bitcoin and other cryptocurrency holders reminding them of their responsibility to file and pay tax on their cryptocurrency.
The IRS also demanded exchanges disclose trade information by providing the IRS with individuals’ Form 1099s. It is always important to remember that most crypto transactions are recorded on a public ledger and subject to audits as the IRS gains more information over time.
In late 2019, the IRS provided questions and answers on a variety of cryptocurrency tax reporting topics. The tax guidance included information on crypto donations, record keeping, crypto income, accounting methods and other expanded guidelines.
Additionally, as of the 2019 tax season, the IRS added a crypto disclosure check box on Form 1040 Schedule 1. Unfortunately, some tax software packages have implemented a default “no” answer to this crypto question. Please be sure you do not ignore the crypto disclosure as your client may be audited later on with penalties.
Filing crypto tax amendments for previous years is always better than having your clients be audited
Given the increased IRS focus on cryptocurrency, it is always better to amend your client’s previous returns than have them go through an audit. Ask your clients when you fill out their disclosure check box this tax year to confirm if they held crypto in any previous year. While Bitcoin taxes are complicated, the key forms for reporting are the 1040 and 8949.
Crypto tax software can help you by automating all aspects of crypto tax reporting
The challenges of trying to complete clients’ crypto tax calculations manually in Excel are all automated with crypto tax software. Transaction data is automatically uploaded, crypto prices are automatically converted to U.S. dollars, and the information is automatically standardized. Software can automatically calculate different accounting methods, as well as separate long-term holdings from short term holdings. This way you can track crypto capital gains and losses across all years. Conveniently, most crypto software packages automatically create all tax forms.
In addition to automation, crypto tax software provides beneficial support as you help your client complete their taxes. In case of lost data or an IRS audit, software can store transaction records and document your crypto tax calculations. You also benefit from the full support of a team of crypto experts. Like any other tax professional suite, crypto tax software also provides one platform dashboard to organize your clients with crypto holdings.
Zac McClure: Zac co-founded TokenTax after his career as an international financial accountant at JPMorgan, Imprint Capital and Bain. He has worked in over a half-dozen countries and received his MBA from the UPenn Wharton School.
Barrett Strickland: Head of Analytics and Research at TokenTax, Barrett built her career as a lead analyst modeling structured finance deals and portfolios at Moody’s and in investment banking. As an MIT-trained economist, she began her career in research at MIT and Yale.