Cryptocurrencies are expanding their reach and garnering acceptance each day. Therefore, tax professionals have to become more familiar with the changes and the intricacies involving cryptocurrencies.
For starters, investors and traders are adding crypto to their investment portfolios and during the tax season, they rush to tax professionals for advice. This is why tax professionals have to learn about tax on cryptocurrency to provide expert advice to their clients.
However, crypto taxes don’t have to be complicated and time-consuming. Also, tax professionals can provide great value to their clients by following a few best practices and by using a crypto tax calculator, which we will talk about later in the article. Let’s look at these practices:
Things to Know About Cryptocurrency Taxes
1. Handle Cryptocurrency Like Property
The IRS looks at crypto and other digital assets as property. Therefore, conventional property tax rules apply to cryptocurrency such as realized capital losses and gains for calculating crypto tax liability.
When the cryptocurrency is treated like property, it is put in the class of stock or real estate for tax purposes. Similar to how you would report capital gains or losses for a property transaction, in the same way, you have to report for cryptocurrency transactions.
2. Understand the Criteria Defining a Taxable Event
First of all, you have to understand that not every crypto transaction is taxable. If you use fiat currency to buy or hold cryptocurrency, you don’t have to pay taxes on it until you sell, trade, or spend the crypto.
If tax professionals understand the following crypto transactions and activities, they’d have less mental load:
- Selling Cryptocurrency: If an investor sells crypto for a profit or loss, they have to report the capital gains or losses, respectively.
- Trading Cryptocurrency: If an investor buys more crypto or trades for other tokens, it is taxable for both short/long term capital gains.
- Spending Cryptocurrency: If an investor uses crypto to buy anything, they have to report for capital gains or losses based on the time of purchase.
- Getting Cryptocurrency: If an investor gets crypto for services or goods, they have to report crypto as income.
- Mining or Staking Digital Assets: Getting cryptocurrency from staking, mining, or another on-chain activity can create taxable events.
3. Learn About DeFi and ICOs Taxation
Understanding the distribution of new crypto tokens and the role of DeFi is crucial. ICOs, similar to IPOs, have varying tax treatments—tokens received may be income upon receipt or subject to capital gains tax upon sale, depending on jurisdiction. DeFi eliminates financial intermediaries, allowing diverse transactions like buying, selling, and earning interest on cryptocurrency. The complexity of DeFi can pose challenges for tax professionals in interpreting tax implications from client transactions.
4. Monitor the Regulatory Landscape
Cryptocurrencies and their regulatory landscape is rapidly evolving. Governments around the world are passing new laws trying to classify digital assets. For this reason, tax professionals globally need to keep them updated on what is changing in the crypto regulatory landscape.
It is quite possible that what is true/legal today might change and become illegal tomorrow. Therefore, tax professionals must look out for official regulatory announcements, and crypto taxation webinars, and keep an eye on pro-crypto tax forums run by crypto tax professionals.
5. Interact with Crypto Communities
Engaging and interacting with crypto users directly can provide a greater understanding of crypto taxes for crypto tax professionals. They can provide insights on the latest tools, trends, and even challenges that the professionals’ clients might face.
Tax professionals can participate in the crypto community on channels such as Discord, Telegram, and Reddit. Also, tax professionals can attend crypto conferences and meet-ups. Crypto tax professionals must engage with crypto users directly to keep their knowledge fresh.
6. Use Crypto Tax Software
Lastly, tax professionals can use crypto tax software to streamline accounting and reporting cryptocurrency transactions. A comprehensive crypto tax software can help a tax professional, especially a new one, ensure the accuracy of the transactions.
The majority of crypto tax software today is equipped to do a variety of tasks efficiently and quickly such as connecting to multiple exchanges, blockchains, and wallets to import crypto transactions. They can also process many complex crypto transactions at a time. Tax professionals can use this software to calculate gains and losses by employing cost-basis methods and generate accurate tax reports efficiently for their clients.
Final Thoughts
With the rise of cryptocurrencies, tax professionals need to keep up with the changes in how they’re taxed. By following simple steps like treating crypto like property, understanding when taxes apply, staying updated on rules, and using specialized software, tax pros can navigate this new territory efficiently. This ensures they provide the best advice and service to clients in the ever-changing world of crypto.
FAQs
- How much tax is paid on crypto?
The taxes you owe on your cryptocurrency depend on how long you’ve held onto it and how much you earn overall. Tax rates can vary from 0 to 37%. Generally, if you hold onto your cryptocurrency for a long time, you’ll pay lower taxes compared to if you sell it quickly for a profit. Additionally, cryptocurrency received as income is also subject to taxation.
- Should I sell my crypto for a loss?
If you owned the asset for less than a year, it’s short-term, and you’ll pay regular income tax rates on it. If you sell your crypto at a loss, the IRS lets you use those losses to lower your taxable income. These losses, known as “realized losses,” can offset other taxable investment gains on your tax return.
